How strategic sourcing and procurement can help
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How strategic sourcing and procurement can help weather the perfect storm

The outlook for the global economy continues to show uncertainty, with muted or even nonexistent growth in key markets. Fears of recession loom as interest rates and energy costs remain high, even as the rate of inflation starts to ease. Markets continue to exhibit capacity constraints and talent shortages, and the lingering impact of COVID-19 remains. All of which create a hostile operating environment for companies, driving a cost-conscious agenda and the need to do more with less.

This economic volatility has created a platform for procurement to take center stage and deliver increased value. The survival of many businesses now relies on a sharper focus and greater reliance on accelerating cost out and developing leaner, more robust supply chain relationships. A more strategic approach to category management, sourcing, and supplier management is required.

The challenges facing CPOs

The procurement function faces the same market conditions as companies as a whole and isn't immune to capacity constraints, talent shortages, or internal cost reduction targets. Successful delivery against this backdrop therefore requires chief procurement officers (CPOs) to implement more effective target operating models, determine which processes and roles can be automated, and identify the priority areas for investing in talent.

It also necessitates creating clarity in the spend data and building an understanding of the nature of supplier relationships at the outset, as these insights will inform the strategies and plans that follow.

In complex or mature organizations, spend data sources are often inaccurate or incomplete, prolonging or complicating the process of gathering the spend and usage information required to identify focus areas and areas of noncompliance. Technology has a leading role to play in solving this problem. Tools that rapidly enrich, organize, and cleanse information will accelerate and enable the process. These include spend classifiers, contract terms extraction engines, invoice reconciliation tools, and generative AI that develops insights and conclusions from limitless data sources, with the potential to identify fraud from anomalous transaction data or build negotiation strategies based on market data, contracts, and historical payments.

Category management, strategic sourcing, and supplier management strategies can then be used to optimize the cost base and create effective supply chain structures from a solid foundation embedded with data, technology, and AI capabilities.

Strengthening category management and sourcing strategies

Effective category management demands in-depth knowledge and understanding of complex markets and supplier priorities. It encourages a more holistic view of cost and savings that goes beyond the traditional approach of deriving savings through unit or contract price reductions, such as via competition or spend/contract/supplier consolidation, optimization, or displacement.

A partnership-based sourcing mindset is crucial to unlocking additional gains based on removing cost through restructuring or redesigning processes, products, or supply chain structures, accessing supplier innovation, or delivering against noncommercial goals such as corporate environmental, social, and governance (ESG) commitments.

It relies on the creation of a shared vision for procurement across the business in the form of category playbooks jointly created with all stakeholders that set out the plan, the priorities, and the approach. In this way, category managers and their stakeholders determine the sourcing roadmap, how to evaluate suppliers/products/services/market risks, and how to monitor and analyze supply chain trends to flag potential disruptions and develop contingency plans.

This approach to category management is an effective way to optimize third-party costs and develop robust third-party relationships fit for the current operating environment. Jointly developing and executing category playbooks (based on all levers) is significantly more effective than reactively renewing contracts, responding to purchase requests, and identifying cost-saving opportunities at the end of the sourcing process. It also boosts compliance, standardizes processes and procedures, and enhances visibility of the sourcing process.

Category management does however require deep subject matter expertise and strong stakeholder management. It's important to focus your best talent on these activities. In terms of the wider operating model, a holistic category view will also inform the volumes and types of activities that may be handled by more junior resources, such as execution only against pre-agreed terms, low-value spot buys, or one-time tactical purchases. It can also guide alternative delivery models that are more effective for a segment of the spend, including delivery centers, hubs, outsourcing, or offshore/nearshore.

From a process efficiency standpoint, category playbooks can identify where the purchasing approach differs and/or aligns to the overall corporate purchasing policy. Not all spend, relationships, or negotiations have equal value, and objectives may differ. A full six-step strategic sourcing process won't be required for every engagement. It may only be applied to strategic, operationally significant, and higher-value engagements, with streamlined processes for low-value, low-risk transactions such as self-service catalogs and marketplaces.

In the same vein, ongoing supplier management activities that take place post-signature for the life cycle of the contract – including performance management, relationship management, innovation, continuous improvement, and service development – are likely to be limited to suppliers that meet certain criteria, for example, tier one, strategic, or operationally significant.

These principles can create an effective, leaner organization that aligns roles and skills to tasks, and applies right-sized processes to lower value items, using cost-effective resources (or automation) to execute.

Start with your end goal

A company's third-party costs are usually one of its most significant expense items, second only to staffing, premises, and direct materials. Despite this, many companies continue to focus resources on sales, operations, production, and direct procurement costs, with indirect procurement run as an administrative function.

In times of stable economic growth, the shortcomings of this approach can be offset by increasing revenue. But in today's environment, a failure to apply the right level of focus and expertise will overinflate costs relative to the market and burden the company with unnecessary operational inefficiencies. Traditional approaches that focus on driving down the unit/contract price in isolation no longer work because suppliers face the same challenge of rising costs.

When considering the future state of procurement and how to prepare for it, the starting point is to clearly define the required outcomes, such as cost out or lean and stable supplier relationships, and identify where the biggest returns will be delivered and the investment required. Ask yourself:

  • Which core categories should be focused on? The optimal model may be to implement full category management in key spend/risk areas and apply an alternative model to lower priorities. The relevance of a particular partnership or the sensitivity to a specific risk will differ by product, service, and category
  • Are there core categories where the service component would make implementation a challenge? Capacity or capability gaps in strategy development, sourcing support, or execution support can be overcome by partnering with service providers
  • Does the existing organizational design and triage processes match the right work (by cost, complexity, and skills required) to the right resource at the right location to maximize impact and return on investment? Can efficiencies be created by process simplification, elimination, or automation? Which activities can be replaced or assisted by technology or moved to a more cost-effective delivery model?

Any change, however incremental, should be considered in the context of laying (or building on) the foundations of the overall procurement operating model. Advancements in technology are redefining both the delivery capabilities and the roles of procurement professionals, as well as the speed, cost, and fitness of the underlying processes. The opportunity should be taken to review and validate the model as a whole.

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