Towards a New Procurement Portfolio: The Rise of Alternative Strategic Sourcing Models and Priorities

I’ve had an interesting couple of weeks talking to a wide variety of practitioners, consultants, and vendors about the area of strategic sourcing. There’s a tremendous amount of activity underneath the surface right now on what’s become known, in a classical sense, as the e-sourcing market, activity potentially missed by technology research reports, evaluations, blogs, and studies.

E-sourcing largely grew up as an online version of offline strategic sourcing processes, mirroring the steps taken in these originally consultant-led processes. As we look at the market today, e-sourcing of course includes reverse auction, RFI, RFP, bid analysis, and related capabilities, but it also brings along other process, category, and workflow oriented components, including category management, basic analytics, basic supplier management capability, etc.

While e-sourcing has grown up far beyond its reverse auction roots, I’m beginning to see alternative sourcing models and priorities taking shape like never before inside both mid-size and large procurement organizations. These include the following:

Advanced sourcing or sourcing optimization – We’ve written about advanced sourcing extensively in the past and my personal view is probably best captured in this essay, titled “Reaching the Limits of Reverse Auctions and Strategic Sourcing: When Collaborative and Quantitative Approaches Would Have Delivered More.” The paper is old but not dated. More important, I’m personally seeing evidence that advanced sourcing models are finally starting to move past just innovator and early adopter organizations as well as past logistics and packaging (two popular categories).

Group purchasing organizations (GPOs) and consortia models – Earlier this week on Spend Matters PRO, I wrote about the applicability of these models for both mature and less mature organizations, as well as how these models have evolved over time past the simple promise of savings through leverage. GPOs and consortia are, finally, getting the look they deserve by more organizations outside of the healthcare sector, and across more categories. Some organizations that we’ve interviewed even see them as a potential alternative to business process outsourcing (BPO) models for indirect procurement. Regardless, GPOs are here to stay – and you’ll be hearing more about them even if you “bring your own contracts” to them and are looking for value outside of just unit cost savings.

Commodity management – Someone remarked to me over a pint this week that CPOs love to talk to commodity traders (even junior ones) because they always learn something new. I couldn’t agree more—although in some CPG companies, a number of procurement heads are also experts at trading and have these organizations either work closely with procurement or report directly through them. Yet I sense that commodity management strategies are beginning to go mainstream outside of food and CPG companies. Yesterday, someone even forwarded me a pitch from a commodity management tech vendor they got in their inbox along with a third-party analyst report (not ours) justifying the sector and need. Finally! This is a big topic, and we’ve covered it in numerous posts and papers (see here, here, here, and here).

Demand aggregation and rebates – While this area can be a subset of others (including commodity management), the general concept of rebates is something we’re hearing more and more as appealing (whether they’re driven, on the most basic level, by card programs, or more strategically by negotiating specific order volume thresholds with targeted vendors). Rebate programs and incentives can also help align the goals of strategic sourcing efforts by forcing an organization to make good on its promises of consolidating spend and buying off a common contract. In other words, it’s a useful complement (for both direct and indirect categories) to traditional e-sourcing and strategic sourcing models.

Supply chain and sourcing intersections – I just finished a draft of an informal paper featuring three cases studies where sourcing and supply chain activities have become one. These are truly fascinating use cases for a new type of sourcing role that considers the full overlap of the following types of criteria and data in arriving at optimal sourcing and supply chain decisions: production scheduling, logistics, distribution/warehouse facility location, quality, localization, demand variability and forecasting, profit/margin requirements, inventory carrying costs, total landed costs (tax, tariff, duty, etc.), raw material cost (including different materials for different sites and the ability to share / mix material between sites – or not), part and component costs, supply risk and insurance / re-insurance costs & considerations. All I can say is: wow. A new sourcing order is here inside the most advanced procurement organizations today!

My tea leaves show that more and more procurement organizations will begin to look at the sourcing function as an area that requires a portfolio approach to get right. My prediction: strategic sourcing and e-sourcing will only be a typical element (among many) of most sourcing “portfolios” by 2020.

For the latest on sourcing strategies and sourcing providers and to learn from our team, we encourage you to become a member of Spend Matters PRO. See Sourcing (indirect, direct and services), Commodity Management (strategy, hedging, and risk), Category Management (process, structure, and knowledge), and related Vendor Intelligence (reviews, analysis and commentary) coverage.

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