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2020 Predicaments in Strategic Sourcing: How to Make It More Strategic

01/20/2020 By and

(Editor’s note: Spend Matters’ analysts are taking on the new year by looking at their areas of procurement technology to see what’s broken and what can and should be fixed this year. Here, analyst Magnus Bergfors lays out the predicaments faced in strategic sourcing. And for our PRO subscribers, his other post today offers his predictions for 2020.)

Strategic sourcing as a concept was introduced in the 1980’s and heavily influenced by consulting firms such as McKinsey (which gave us the famous Kraljic matrix) and A.T. Kearney — and is a process that is designed to help procurement organizations successfully source or renegotiate products and services in a deliberate manner. There are many, many versions by now, but in general it consists of five steps that typically cover:

  • Needs/demand analysis, category/commodity analysis or opportunity assessment. This is the initial step to understand what needs to be sourced and how it relates to existing spending in that category (e.g., what are the volumes, do we have a baseline, etc.) before analyzing the supply market.
  • Market assessment. This step looks at the market to understand the available suppliers and the competitive environment.
  • Strategy development. This step focuses on how to get the best possible deal and best possible performance from that supplier and even the broader category. What is our negotiation strategy, what are the critical decision criteria? How many suppliers do we need, do we run a multi-round RFP/RFQ or can we run a reverse auction, etc.
  • Strategy execution. This step deploys the decided sourcing strategy. The RFX is run and the negotiations (online or offline) are conducted and a supplier is selected and awarded.
  • Implement result. The final step is then to implement the outcome of the strategy execution, onboard suppliers, design/implement P2P channels, and ongoing supplier management processes.

While this process can, if properly applied, deliver billions in savings, there is a larger problem. This approach is binary — you either run a strategic sourcing project or you don’t — and it’s very episodic in that once you have implemented the strategy, you then move on to the next project. This is the proverbial “drive-by sourcing” and “three bids and a buy and a cloud of dust.” This means that the follow-up and management of the contract is ignored.

Now you could argue that downstream execution (P2P and ongoing supplier management) would be part of sourcing implementation, and in the best of worlds it is. But let’s face it, we don’t live in the best of worlds. At best, a handful of high-value, strategic contracts/suppliers get managed, and the rest are managed on an exception basis — when something significant happens to raise attention. A side-effect of this is also the never-ending discussion of savings and the finance organizations relatively low confidence in procurement’s savings reporting, after all, if procurement reports negotiated savings and never follows up, there will be major differences to what finance sees on the bottom line. And then we haven’t even gotten into cost avoidances or revenue increasing activities.

As a result of these concerns, another concept called category management has emerged. It has its roots going back to the Kraljic matrix (which profiles various spend/supply categories and then tailors the resulting supplier sourcing/management strategies), but the term “category management” really originates in retail, where the idea is to treat your categories as individual business units. Applied to procurement, it becomes a process to continuously manage your category, and in the words of our friends at SIG, “conduct continual analysis to stay ahead of trends, risk, demands or supply changes” (from The Guide to Understanding Category Management). In the same article, SIG also had the handy graphic below to illustrate some of the main differences between strategic sourcing and category management.

Now, I’m aware of the large number of debates regarding strategic sourcing and category management and how, depending on your definitions and perspective, one is viewed as a subset of the other. Personally however and for the sake of the argument of this article, I agree with the view layed out in the graphic above, and I think it’s a good way of getting to one of the major shortcomings of many of today’s e-sourcing solutions.

E-sourcing solutions were among the first specialized procurement technologies to emerge in the market in the late 1990’s, and since then there have been no shortage of vendors in the market. Some have gone out of business, some have been acquired, some have acquired others, some have broadened their offerings to include adjacent capabilities like CLM or SXM or even P2P. And, even if the standard e-sourcing functionality is pretty well defined by now, each year new providers enter the market with, at least in their own minds, a new perspective of the market. There is still some differentiation possible in supporting capabilities like supplier discovery, project management or optimization beyond the core capabilities of creating and managing sourcing events (RFIs, RFPs, RFQs or reverse auctions), but at the core the solutions are pretty much the same.

Yet when you look at these capabilities you soon realize that these are not strategic, they are at best supporting the tactical execution of a strategy designed and documented somewhere else, if there is any strategy at all. There is limited support for things like TCO modeling and category profiling, not to mention classic management consultant models like SWOT and Porter’s five forces.

Another issue is perhaps more tactical in nature but relates to the category management theme; almost all sourcing solutions in the market are built for general purpose sourcing. This means that they lack category specific capabilities or aren’t efficient to use for some categories. There are exceptions to this since there are some sourcing tools built for direct materials sourcing or logistics, but then the issue is that they have not been made suitable to easily use for anything else. There are also sourcing capabilities in some services procurement or even P2P solutions that are suitable for some categories. But if these are used, the issue becomes a fragmented solution landscape with a lack of visibility and questions around which tool is used for what.

So the fact of the matter is that the available e-sourcing solutions in the market doesn’t really support category management, neither the strategy development nor the tactical execution with category specific functionality.

Now it’s time for our 2020 Predictions in the PRO post about what we think needs to happen!