Strategic Sourcing is one of the most misused procurement labels in the industry today. There are an endless number of purchasing activities, which are lumped under this title, but very few should actually be considered as Strategic Sourcing.
Is that a problem? Well yes and no. Labels are about helping people communicate with each other but when procurement professionals believe they are taking advantage of the true power of strategic sourcing and they are not, it undervalues their potential within their own organisations and also fails to elevate professional status of our profession.
The Defintion of Strategic Sourcing
So allow me to offer a definition, which I have been using for years and continues to guide my team’s strategic sourcing programs, Strategic Sourcing is:
“A disciplined, systematic process for determining the best cost of externally purchased materials, goods and services while maintaining or improving levels of quality, service and technology.”
Let’s break this down and then I would challenge you to ask if it fits what you and your team is actually doing and if there is an opportunity to improve your program.
The first buzzwords that jump out are “disciplined” and “systematic process”. Strategic Sourcing must be repeatable. For the most part, all professional services firms that offer sourcing services have a model and despite what we might tell you, they are all very similar. The trick is to pick one and imbed it so that it can be replicated, taught and the categories you strategically source can then be managed to a consistent process. Without this, each sourcing event will be a one-off and make it very difficult to improve your deals the next time you source that category.
What Does “Best Cost” Mean?
The next key is “best cost.” Best cost is rarely the lowest price; it is the appropriate total life cycle cost factoring in the desired level of quality, service and technology. RFQs almost always focus on the lowest price and rarely do a good job of factoring in all the other parameters, which impact our company’s satisfaction with that good or service. “Externally purchased materials, goods, or services” should be the most widely recognized part of this definition, but can be challenged under the right conditions.
We wrap up this definition when we analyse the key non-cost component to the phrase. Strategic Sourcing projects must maintain or improve on what the predecessor of that product was purchased to do. Lower cost is critically important, but lowering, quality or service levels below what is required won’t work. Having said this, strategic sourcing is an excellent tool to lower service levels if you are paying for a Mercedes when all you require is a Ford.
Issuing RFQs Does Not Equal Strategic Sourcing
Let’s face it, if you are simply issuing RFQs based on stakeholder-provided requirements, you are not running a strategic sourcing program.
‘What if I utilise a Three Quote process?’
Nope, not strategic souring either, in fact going direct and developing a supplier relationship is often much more strategic. Next time we will introduce four principles that underlie this definition and provide further guidance to the principles which make a sourcing program Strategic.
Tags: Strategic sourcing
Really wonderful post. I look forward to more.