By Mike Loughrin, CEO of Transformance Advisors
Strategic Sourcing Should Be Strategic!
In our prior article, we explored: What is Strategic Sourcing?
We developed a comprehensive and robust definition:
Strategic sourcing is the systematic process to secure critical goods and services in a manner that is aligned with the strategic objectives of the organization. It will leverage long term relationships with suppliers and achieve the best total cost of ownership.
Strategic Sourcing Should Be Systematic!
We also identified a systematic and fact-based approach that has four steps:
- Define Strategic Goals: What are the strategic organizational goals that must to supported? Where is alignment needed in terms of your core strategy, network strategy, strategic initiatives, social responsibility commitments, and other strategic decisions?
- Specify Critical Goods and Services: What are the items making up that large percentage of spending? What are the other items requiring special care? Then, item by item, what are the strategic goals you need to align with during the next step when you evaluate and select suppliers?
- Select Suppliers: Using your specifications for each critical good and service, find and establish relationships with suppliers. See article on Successful Supplier Selection.
- Relationship Management: Maintain and improve your relationship with each supplier of critical goods and services.
Let’s Explore Putting Strategy into Strategic Sourcing
Given our new definition and systematic approach, let’s explore how to get the “strategic” aspect correct.
Define Strategic Goals
This first step in the strategic sourcing process is called Define Strategic Goals
This effort requires understanding various strategic decisions that need to be part of your supplier selection process for each critical good and service.
These strategic decisions include:
- Core Business Strategy
- Network Strategy
- Strategic Initiatives
- Social Responsibility
Let’s look closer at each one.
Core Business Strategy
Your core business strategy plays a extremely important role. As a quick review, there are three basic strategies a business can choose to compete with. They are cost leadership, differentiation, and market focus. You must identify your core strategy at the very beginning. Later, you will assess how important it is for a supplier to be aligned with this core strategy.
Suppliers, of course, have the same three options (or the ever popular “stuck in the middle” disaster when leaders won’t lead). What if your supplier has a different strategy? For example, you choose differentiation by focusing on leading edge products and a supplier is focused on cost leadership. The supplier may be investing in cost reductions, but not investing in the new technology required for keeping your products at the cutting edge of innovation.
Later in the process, you will determine if a supplier needs to align with your core business strategy.
I am not saying they must be aligned. But, I am saying you will need to assess this issue and come up with an answer. Will you want suppliers for a specific good or service to be aligned, or will you feel it is not important for a supplier to share your core business strategy?
In terms of strategic sourcing, do you want suppliers that are local, regional, or scattered across the globe?
Companies like Toyota are global, but they choose to operate regional plants, with regional suppliers, in the countries where they sell their cars. One of Toyota’s goals is to have suppliers positioned within a 2 to 3 hour drive from their assembly plants.
The key point is that, before you start searching for suppliers for each critical good and service, you identify the preferred location for targeting your search.
Another factor is dealing with relativity in terms of the size of the suppliers you seek to partner with. If your suppliers are smaller, you may have more control. But, they may not be able to keep up with your demand and growth rate. If your suppliers are larger than you, they may well have more than adequate resources to support you. But, you may get lost in the shuffle as they choose to serve their larger customers first.
You must determine the desired size of potential suppliers for each critical good and service. In the end, you may not have much choice. But, at least, you will have a better understanding of the risks associated with dealing with a supplier that is much smaller or larger than your organization.
One last assessment involves selecting suppliers that may also be your competition. Or, even more common, suppliers that also sell to your competitors.
The question for each critical good and service is acknowledging the consideration of buying from a competitor. For items, such as common raw materials, this may not be an issue. Other items, such as marketing programs, may involve very sensitive information which must not fall into the hands of your competition.
Your sourcing strategy should also be in alignment with those 3 to 5 strategic initiatives that are the top priorities for your organization.
The assessment needs to determine whether sourcing for each critical good or service:
- Has no impact on any strategic initiative
- Must be aligned with one or more initiatives
- Must integrate with and play a key role in an initiative
The chart on the right is just a sampling of possible strategic initiatives.
It’s fairly easy to see how sourcing decisions could have a significant impact on the success of many initiatives.
Gaining a deep understanding of each strategic initiative and aligning the sourcing strategy is one of the big gaps that can be eliminated for many organizations.
A growing concern regarding sourcing strategy, is Social Responsibility. This includes factors such as labor conditions, resource consumption, environmental pollution, and animal welfare.
Problems at suppliers with poor social responsibility practices have had an extremely negative impact on the image of many organizations.
This assessment needs to determine whether sourcing for each critical good or service must be aligned with your social responsibility goals. Do you want your suppliers to report to you or to an independent reporting organization?
Alternatively, you may not be concerned about certain social responsibility values of a supplier. Rolling the dice is certainly an option for a small and decreasing number of companies.
In deciding which option to choose, a company should recognize that consumers are apt to hold them responsible for lapses at any and all levels in the supply chain. The times are a changing.
For example, one of the big and growing social responsibility issues is reducing your carbon footprint.
Governments, non-government agencies, corporations, and individuals are all taking action to reduce the amount of carbon emissions for which they are responsible.
An independent not-for-profit organization called the Carbon Disclosure Project (CDP) maintains a database of 2,500 organizations in some 60 countries around the world. Each of them measures and discloses their greenhouse gas emissions. Many leading companies have already deselected suppliers who have failed to manage their carbon emissions.
Social Responsibility – Quick Case Study
During a panel discussion at a recent sustainability conference, one panelist shared the challenges with social responsibility and strategic sourcing.
This large international organization has made a commitment to reducing their carbon footprint. They have made numerous public statements and the CEO reports on their progress to the board of directors and at the annual shareholders meeting. It is a big deal and they are committed.
They are making great progress and have invested in a dedicated sustainability team to support all business units. This team has found that carbon footprint reduction efforts almost always provide a direct reduction in operating costs. And in other cases, the publicity of their efforts has led to increased revenue from like-minded organizations that appreciate what they are doing.
But, change can be hard!
In one example of resistance to change, a “sourcing professional” switched from a supplier of electricity that used wind power to another supplier that relied upon coal-fired power plants. The excuse was “I got a lower price; that’s what I’m supposed to do.”
The result of this switch was a large increase in the carbon footprint for this business unit based in Europe. The VP of Sustainability was discouraged, but sought to dig into the cost dynamics of this decision. Many other changes had found that reducing carbon emissions tends to lower costs and create those true win-win scenarios; it was time to see if this situation was different.
Digging deeper showed that a small price reduction was available by signing a long term contract with the coal-fired power plant. This electric utility is losing business and scrambling to find customers.
But, as most us know, price is not the same as total landed cost or the more comprehensive total cost of ownership. Turns out, that switching to coal-fired electricity meant the company would lose tax credits for the wind power they used from the former supplier and then pay a carbon tax for the new supplier. The deal was a loser and should never have been made.
The self-proclaimed sourcing professional had not looked at total cost of ownership and had only considered the purchase price.
Old bad habits are hard to break!
It’s way past time to be making decisions only on purchase price. It’s been said that “using purchase price variance as a performance measurement is one the most foolish things you can do!”
It’s time to put strategy into strategic sourcing.
The first step is to define the strategic goals for your organization in terms of core business strategy, network strategy, strategic initiatives, and social responsibility.
This will be fairly easy if your leadership team does an effective job with strategy development and execution.
For others, the sourcing professional may raise a number of questions about decisions that have not been made or have not been communicated
Regardless of the effort required, you cannot do strategic sourcing without including strategy in the process.
Read What is Strategic Sourcing?
Read Five Steps to Successful Supplier Selection
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