This is the fifth in a series of posts by Matt Holzapfel on salient topics in procurement analytics; click to read Post 1, Post 2, Post 3 and Post 4.
The year is winding down, which means prediction season is in full swing. One safe prediction is that buzzwords will continue to dominate the business world. ‘“Strategic sourcing” is one buzzword that has permeated the procurement function for the past 20 years, but is often hard to describe. Almost every large procurement organization claims to be strategic, but what actually makes an organization strategic? These next two posts will answer that question and provide recommendations leaders can use to enable strategic sourcing practices.
Strategic sourcing as a way of operating
A common distinction between tactical and strategic sourcing is that tactical sourcing reacts to short-term business needs, while strategic sourcing systematically aligns sourcing practices with long-term business objectives. Strategic sourcing relies on a holistic view of the business along with processes that promote long-term thinking.
Strategic sourcing managers need on-demand access to critical pieces of information about the business to make strategic decisions. The five essential pieces of information are: spend analytics, commodity trends, product quality data, supply data, and sales performance. Procurement leaders need to make it a priority to ensure sourcing manager have easy access to this information if they expect their organization to act strategically.
1. Spend analytics
Half of CPOs believe that the most basic spend analytics do not meet their needs. This pain is undoubtedly felt the most by sourcing managers who are responsible for making spend allocation decisions and identifying savings opportunities. Sourcing managers who can’t quickly analyze spend data beyond a surface level will make decisions based on assumptions and anecdotal evidence, which often overemphasize recent events or long-standing biases.
2. Commodity trends
Sourcing managers know if their suppliers use market-based or cost-based pricing. This informs sourcing managers of the underlying trends they should be monitoring to communicate cost forecasts to colleagues. Categories with market-based pricing can be monitored using industry reports, while categories with cost-based pricing can be tracked with commodity pricing reports of input materials. This information enables sourcing managers to proactively address changes in the market before they impact profit margins.
3. Product quality data
Sourcing managers understand the importance of quality to total cost of ownership, and value the input of Quality Engineers into supplier selection decisions. Unfortunately, these conversations between procurement and the quality team may not be fact-based if data about product issues is scattered throughout service centers across the world. Procurement leaders should take ownership of making this data more accessible to ensure these issues are quickly addressed before new business has been awarded.
4. Supply data
The relationship between procurement and supply chain is one of the most important in a company. Customers expect products to be available and delivered on time, so it is critical that procurement and supply chain partner closely to ensure the company can fulfill customer promises. This means procurement should have the same access to information about lead times and product availability as supply chain, and review this information regularly to ensure the right suppliers are being rewarded.
5. Sales performance
It is far too common for procurement to finish awarding the business from one RFQ and then start thinking immediately about the next RFQ. Acting strategically requires a commitment to understanding how products are performing in the market, and using this knowledge to identify suppliers whose product roadmaps align with evolving customer preferences.
Ensuring all of this data is readily accessible for sourcing managers can be challenging. Data is scattered throughout the organization, and is often modified before it reaches the end viewer. Procurement leaders must overcome these challenges to enable sourcing managers to make long-term oriented decisions that are based on a holistic understanding of the business. Fortunately, this is becoming easier as enterprise software providers (including Tamr) emphasize usability in their products. In our next post, we’ll discuss the processes that procurement organizations should adopt to maximize the value of this information and become more strategic.