Justifying Strategic Sourcing Initiatives: Framing the Business Case

During his talk at Commodity/PROcurement Edge yesterday, analyst Thomas Kase tied the concept of sourcing initiatives into broader supply chain, risk, and finance programs – rather than looking at supplier engagement and negotiation-centric procurement activities in isolation. During his session, An e-sourcing Survival Guide: Choosing the Best Fit Solutions for Your Organization, Thomas explored strategic sourcing first by framing how to justify programs based on multiple means (beyond unit cost savings alone!).

Being a car guy and engineer at heart, Thomas began his discussion with a picture of a Model T Ford, suggesting that if IT decides for you what sourcing tools to use, this is precisely what you’ll get – a basic platform that comes off a production line. Of course this is not exactly ideal for all sourcing activities, although we shouldn’t discount it for some.

When framing the business case for sourcing efforts and tool investment, Thomas suggested a number of places to start (hint: savings is just one element). These include:

  • Cost avoidance (based on quality, reduced risk, supply chain flexibility) and related areas. All too often sourcing tools are looked at as a tool to drive savings, when in fact they can be equally or more important as a tool to avoid direct and indirect cost increases.
  • In the area of direct savings, Thomas pointed out that negotiated savings vs. implemented is often a shiny trap we all know too well. Yet in driving to implemented savings, there is no simple solution that technology alone can enable.
  • Working capital reductions – The intersection of sourcing efforts with finance is an area that is not well practiced or understood by the majority of procurement organizations.
  • Process improvements – The right tool can lead to different sourcing approaches (for example, not only locking in a specific stage gate process, but also enabling the examination of different supply chain scenarios or direct integration and collaboration with design engineering groups/CAD/PLM data into the manufacturing sourcing process at all stages of communication with suppliers).
  • Spend under management – This one goes without saying, but the concept of spend under management is even more accurate when applied to what is sourced (and implemented) than spend going through a transactional automation system (which may not in fact be “managed”).
  • Support for surrounding initiatives – Sourcing efforts can be a bridge to further link procurement with the rest of the business, whether these are driven by finance (e.g., working capital management or supply risk management); HR (e.g., contingent workforce management); or IT (e.g., more effective partnering with strategic hardware vendors to build competitive infrastructure advantage).

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