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From tactical to strategic sourcing: Going beyond daily battles to long-term victory

09/11/2019 By

Do you ever feel like you’ve been winning the battles but still losing the war? In the art of war, military strategists are required to look beyond short-term skirmishes, where little if any ground is gained, and instead focus on a vision for victory in the longer term.

That doesn’t mean suddenly pulling your forces from the front or ignoring enemy advances but has more to do with creating a better line of sight between the guys in the trenches and the generals in the tents.

Joonas Jantunen

Joonas Jantunen, Cloudia’s CEO for the Middle East, sees a similar distinction to be made in today’s business procurement wars. Every large procurement function aspires to be strategic, but most are running their operations on short-term tactics.

“Tactics usually mean reactive, frantic responses to short-term needs on many fronts as they arise,” Jantunen explains. “It’s at best low-value, applying quick fixes to staunch the flow of blood, with no larger processes or measurement structures in place.”

Strategic sourcing, in contrast, sets out to align all sourcing practices with an organization’s long-term business objectives, with a view to creating new and sustainable value. Jantunen — whose career, including CPO at Nokia, has spanned nearly 20 years as a procurement industry employee and a consultant — believes that a lot of progress is being made, particularly in Europe and the United States.

Maija Tanner

Maija Tanner, Cloudia’s Sales & Consulting Services Director, confirms that her large public sector clients like hospitals, municipalities and universities in Cloudia’s home country, Finland, are quickly waking up to this too.

“In public sector procurement, it’s the same war on resources and the need to find new value from shrinking budgets and falling headcount, while still maximizing economic and societal benefits,” says Tanner. “And strategic sourcing can be this new value generator.”

But how do you get from tactical to strategic sourcing?

“In making the shift,” Jantunen says, “the recurring mantra for any organization, public or private, should be the same — planning, people and process.”

Getting started — looking inward

The point of departure for most procurement functions is a huge number of suppliers for small amounts of products and services. This low-value tactical end of procurement is what Jantunen calls tail spend, requiring a lot of time and effort and not much expertise. “You’re buying some toilet paper over here and a couple of computer monitors over there. There’s a lot of haggling and waggling and very little value,” he says.

Your move toward strategic sourcing could mean shifting focus away from this low-value procurement, which is typically only 20% of your spend and 80% volume. That would instead leave you to concentrate on the high-value procurement, with the antithetical ratio of 80% spend and 20% volume.

In dealing with this lower spend, Tanner says: “Automate whatever can be automated. Some low-value procurement can also easily be outsourced.”

Then with your focus more firmly on the big spend field, take a good look at the internal lay of your land. Procurement is typically split into a range of categories. These can be anything from facilities management and IT, to office cleaning and security services.

“There are good digital planning tools available to help systematize your approach,” Tanner advises.

Scoping categories — looking at your people

As you scope out these categories, you will naturally need to review your team. Who is involved with each category, and what are their skill sets and expertise? Do you have the right experience in-house? Do you need some strategic new hires?

Strategic sourcing means having dedicated sourcing managers for each category. You need people who understand the operating environment around each industry and who can identify the high-performing suppliers and how to best collaborate with them in order to get the best innovation.

Your internal scoping should also guide you toward a better picture of your larger organization. Who are your key internal procurement stakeholders? What are their requirements and how can you get better buy-in from them?

“All these internal inputs will inform you on how you can better structure your sourcing strategy to get maximum value for them,” says Jantunen. “For example, if you’re working with IT sourcing then it’s not just the people in the IT department you’re serving, but essentially everyone in the company.”

This is part of the process of figuring out how you can involve procurement in addressing your organization’s larger overall goals.

Looking outward — tailoring your source plan

Backed by this more tightly focused internal view, you’re ready to start gathering external intelligence. That means working with your team to carefully study your potential external supplier base. Who are your key target suppliers? At the same time find out what factors affect global supply and what different levers might affect the pricing and quality aspects of your supply.

All the background information you’ve been gathering can now start to formalize into a strategic plan. Using what you know, you can decide on your best strategies.

For example, depending on the category, will you go straight in with RFQs or scout the market a little bit more by first sending out an RFI? Are you going to do an auction, and how many negotiation rounds would makes sense? How long will your procurement cycles be? Based on these plans, now would be the time to implement an e-sourcing software tool to create and input your supplier requirements, and to invite suppliers into your system.

Measuring and managing suppliers

Jantunen recommends digital selection software to initially evaluate suppliers.

“It will be fast, efficient and fair,” he says.

Digital systems keep the process completely transparent by opening up the system to share all comparable supplier information with sourcing managers and other stakeholders.

“You just couldn’t get this kind of visibility with Excel sheets, emails, phone calls and personal handshakes,” says Jantunen.

Still, no matter how much automation is put into place, both Tanner and Jantunen agree that for strategic sourcing to happen, people-to-people partnerships are still of top importance. But first it’s time to start formalizing relationships, creating requirements and expectations mostly through contracts. Find the digital contract management system that’s right for you and start setting up performance measurement mechanisms that can be based on supplier activities and deliveries.

Looking beyond procurement — advanced planning

“As you start getting into real people-to-people relationships with your suppliers, the idea is to find ways to go beyond just procuring things from them,” Jantunen explains.

You want to start building different supplier relationship plans and engagement strategies designed for both parties to share more. That means encouraging suppliers to think more about how they can actually make a difference to your business, for example by rethinking their own approach.

“Special systems and processes are also being designed to nurture supplier relationships so that cooperation works well and suppliers are also motivated to deliver their best goods and services,” Tanner says. “And it’s not just a one-way street. Suppliers ready to reinvent themselves can become well-positioned as preferred suppliers.”

“When these relationships are developed and managed correctly, new value starts to generate on both sides,” Jantunen says.

“But it’s not just value from cost-savings related to contract management and economies of scale,” adds Tanner, “new value is coming from better quality, better market intelligence, and most importantly, better opportunities for innovation.”

For example, innovative sourcing strategies can be set up in public or private sector to positively impact environmental targets such as CO2 reduction goals. This could be by stipulating only locally sourced goods, requiring lean transportation times and delivery routes, or the use of low-carbon green fuels and green packaging. Particularly in the public sector, strategic sourcing can also be in support of government-level strategies for a more inclusive society in areas like social welfare services.

Tanner cites a case from the city of Oulu in North West Finland, which in 2018 won a public procurement innovation award for the procurement of child protection services. The city used a new method called “Dynamic Procurement System” — an impact-oriented approach, hinging on continuous communication with the market during the entire process.

According to Tanner, the innovation came from a system that allowed multiple service providers to join more flexibly than usual in the public tendering process. In fact, it was set up in such a way that new service providers could join at any time during the contract period.

“This kept the playing field competitive, encouraging greater competency levels with the best alternatives to choose from throughout the project lifespan, and by definition delivered outsized value to the community.”

In the private sector, Jantunen can cite brave and positive decisions taken by large global organizations like Nokia, already some time ago, to engage much more deeply with their top-tier strategic suppliers, by creating supplier programs with the aim of openly sharing business-critical details.

“This level of engagement often requires a mental shift on the part of top management on how they see these buyer/supplier relationships,” Jantunen says. “But by sharing current competitive details, pain points and sometimes future unannounced strategies, both parties are better positioned to understand each other’s businesses in ways that go beyond the traditional buy/sell approach. This opens them up to joint brainstorming on their business processes and products that can truly change the bigger landscape for both parties.”

Delivering day-to-day value

Even as your journey toward strategic sourcing shifts to a more business-as-usual approach as a procurement leader, Jantunen stresses the need to always be asking: What is the market doing? Are we up to date? Do we have the right people and systems in place? Then continuously apply that knowledge to get the best value.

Along the way, you will still have many tactical battles to fight, but your machinery of war will be more transparent now, backed by a broader view, and aligned with more far-reaching objectives. And as your procurement field starts shifting from a cost center to a real driver of business, you can be sure that the generals in the executive tent will be smiling.