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Wednesday, July 8, 2009

What Makes Strategic Sourcing Strategic?

There appears to be a common misconception about Strategic Sourcing. Like many business buzzwords, the term strategic sourcing is overused. It's quite likely that most organizations, espousing their traditional procurement practices, have simply renamed the search for price savings as a "strategic " activity; a old wolf re-clothed in lambskin, as it were. It's hard to believe that an approach to procurement can be considered sexy, but I suspect that there's something of that charm for managements to declare its strategic sourcing program in a "me too" kind of way. Is that possibly a strategy of its own?

For a sourcing program to truly operate in the realm of "strategic," it must have a strategy...obviously. Now what constitutes a bona fide procurement strategy is often a matter for heated discussion but in its pure sense a strategy is simply a long-term plan of action. So in order for a procurement group to become strategic, it must fist create a long-term plan. By long-term, we certainly must mean more than the next quarter or the coming year. After all, a lot of effort will go into strategic planning for the procurement group so it's unlikely that there will be an immediate return on its investment.

The solution, then, becomes one of creating and adopting a process that enables the procurement organization to operate within the scope of long-term objectives; to develop AND implement the activities inherent in the strategic approach.

What do we have today that fits this criteria? Some point to spend analysis as an enforcer of procurement strategy. The team analyzes the organization's current spending patterns, consolidates suppliers for price savings contracts and then watches the dollars tick up on the charts, making sure that all spending goes through these selected suppliers. It seems, though, we're looking at the same elephant noted at the beginning of this rant. Cost savings...improve the bottom line...now! Long-term benefits? You tell me.

If, on the other hand, the organization's strategy is to seek "value" in its acquisitions instead of simply hunting for immediate price reductions, that might shift the emphasis to the long-term benefits of strategic planning. Value can be achieved immediately but in most cases it accumulates over time. Selecting a supplier that can provide insight into the direction of the market through its experiences with other customers, that can develop unique products to help position your organization ahead of the competition, that can lower your total cost of ownership, that can support your organization technically by providing unique engineering solutions and partnering up to fund them, now that's adding value.

This is a long process for any organization...to turn from purchasing to strategic sourcing. That's why it needs to be defined and developed through first rate planning. Moving from purely reactionary procurement to incorporate strategic sourcing requires the development of a sound process. We can begin this process first by defining our objectives and second, by educating our procurement group (and its internal customers) to understand, to seek out and embrace value. Once that investment has been made and new metrics established, there will be no going back. And that's one way to put the strategy back in strategic sourcing.


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