By Nathan MacCarter, Impendi CEO
The jolting recovery of global economic activity in the wake of the pandemic has revealed stress lines in global supply chains. Many of these vulnerabilities have been lurking unaddressed for years.
Leader procurement organizations are taking a fresh look at their supply chain solutions and finding that the challenges of the pandemic have joined with political volatility, escalating trade wars, reliance on technologically sophisticated components, intense competition, and demands to make progress on environmental and social issues to create a ‘new-game’ landscape for supply chain management.
Corporate leaders attempting to overcome these challenges face a pivotal opportunity to go beyond fine-tuning their legacy procurement practices by embracing the transformation of procurement into a strategic sourcing function with the aim of aligning organizational goals with its customer value delivery system. Competitiveness, even viability, are on the line.
What is Strategic Sourcing?
Strategic sourcing is an organizational process that formalizes the way information is gathered and used to extract the greatest value from the supply chain marketplace and reduce the risk of disruptions to its customer value delivery system. Strategic sourcing extends beyond securing procurement cost savings to providing execution capabilities that reduce risks of disruption that can adversely impact revenue growth and operating cost trajectories.
To align what the organization buys with its business requirements, strategic sourcing leverages specialized skill sets, technology and playbooks to collect data, conduct spend analysis, negotiate contracts, optimize logistics architecture and manage supplier relationships. As enterprises become more agile, strategic sourcing has evolved into a process for organizing and optimizing the customer value delivery chain.
Strategic sourcing is emerging as the way to confront and overcome pressing supply chain issues. What are these challenges?
Pandemic-driven supply chain disruptions
Pandemic-related issues have tested the integrity, resilience, and flexibility of supply chains, causing many to fail. According to industry sources 55% of companies have downgraded their growth outlooks as procurement and operations executives have moved to deal with unexpected demand surges, supply shortages, inventory placement challenges, reduced productivity, expedited freight charges and funding to buy up and hold parts supply.
Reliable information is lacking from legacy sourcing and procurement systems. In this dynamic, procurement function leaders need real-time information and insights from which to make data-based supply chain decisions.
Elevated political and trade threats
US-China trade tensions dating back to 2018 and the tit-for-tat imposition of tariffs have elevated landed-cost calculations, particularly for companies with supply chains reaching into Asia. Manufacturing and logistics solutions are confronting additional uncertainty as they deal with trade embargos, economic nationalism, and hyper-active government regulators regarding issues like child labor, environmental sustainability and other practices.
Generating high-quality alternatives for critical or specialized components that meet the reliability test in this trade environment is time consuming and fraught with difficulties in verification.
Increased reliance on specialized and critical components
The manufacture of digital and electronic components increasingly requires specialized manufacturing capabilities and skills. Seldom do individual enterprises have the range of abilities to produce everything itself. Automakers, for example, are not equipped to produce touchscreen displays, modern navigation systems or any of the other hundreds of microprocessors that control the electronic features demanded by consumers.
Sourcing a specialized component, complex chemical or precursor material allows organizations to incorporate the latest technology into their products. But they are left vulnerable to a single supplier buried deep in their network. Product design, sourcing, operations, and quality teams need good information and expert assistance in source markets to mitigate the risks.
Demands from a hyper-competitive marketplace
Manufacturing firms won’t get a pass because they are dealing with a more challenging environment. Consumers will continue to want low prices and competitors will ensure they get them. The pressure to operate with greater efficiency and apply capital more frugally to offset the higher component costs will intensify and remain stubbornly high.
Leader firms are stepping back from the brink and considering ways to transform how their enterprise buys for a broad collection of spend categories, logistics architectures, manufacturing assets and trade terms to improve financial outcomes.
Need to make verifiable progress on ESG
Investors are not relenting on demands that corporations work harder to align their business goals with a growing list of environmental, social and governance (ESG) issues. Increasingly, they are shining a light on how supply chains do, or do not, contribute to progress on issues that matter. Urgency is being dialed up during contract renewals as customers ask about diversity, carbon footprint, risk profiles and more.
New ESG officers and CPOs need help navigating and setting achievable targets as they confront a changing landscape that has no accepted system for scoring or benchmarking performance.
Six Rules for igniting a strategic sourcing transformation within your enterprise
1. Draft operations-minded leaders to examine ‘how you buy’ and ‘how you deliver value to customers’.
Business as usual in this new-game marketplace is not cutting it. Realistically, it is beyond the ability of one person or one department to be an expert in every category of spend–especially indirect expenses.
Begin by thinking about who within and outside your organization has a stake in future procurement solutions? Certainly, internal line of business heads and functional leaders in Engineering, HR, IT, and finance have a very direct stake. Successful transformations we have observed have also tapped the wisdom of the C-suite, key customers, supply chain partners and investor groups.
Also, leading edge firms are looking beyond their internal sourcing expertise and market knowledge to find experienced, external minds that can look beyond total cost of ownership and scan for opportunities within the value-delivery system to unlock hidden value. These outsiders are often in the best position to judge the maturity of your buying organization and spot vulnerabilities in the design of your supply chain solution.
2. Establish robust spend analytics to reveal opportunities to capture value, mitigate risk, and prevent backtracking on gains.
Without an accurate view into spending, procurement organizations can’t plan, prioritize, or measure savings initiatives effectively. At best, only 60% of companies feel they have adequate visibility into their spend. Even fewer have visibility into their savings initiatives. Spend analytics not tailored to reflect the operational realities and nuances of your business don’t build credibility among stakeholders and, ultimately, have lower adoption rates.
When spend analytics fails to get traction it is often due to poor categorization. Best practice firms take the time to use their category and industry expertise to bring greater accuracy and granularity to their data. Hundreds of Impendi project engagements have confirmed that deeper, higher quality taxonomy of spend leads to better opportunity identification, saving monitoring, and later rooting out savings leakage from overcharges, missed discounts, non-compliant spend, unapproved items, etc.
Supported by best-practice analytics, strategic sourcing initiatives can go beyond benchmarking. From our client experience, we find that for every dollar of price savings, we find two dollars within demand side levers such as specification rationalization, inefficient processes, usage requirements, eliminating redundancies, etc.
3. Establish sound governance over the entire procurement lifecycle, applying executional excellence and transparency at all stages.
Savings leakage occurs when there is a gap between negotiated savings and what’s realized. The average company loses more than half its savings through a lack of compliance. Without the tools and processes to track savings initiatives and identify the sources of leakage, forecasted savings may never hit the bottom line.
Transformed procurement organizations establish governance that includes executives as well as front-line category managers within a project management office using frequent stage-gated action planning over the procurement savings lifecycle. Frequent open dialogue on projects allows issues to be resolved rather than shoved under the rug to fester into roadblocks. Broader stakeholder governance also ensures that opportunities carefully consider barriers to change, implementation requirements, and stakeholder obstacles.
Mature strategic sourcing organizations automate the reconciliation process between contractual terms and purchasing activity, so they can detect and quantify savings leakage, identify root causes of the leakage and claw back lost savings due to non-compliance, overcharges, and missing entitlements. Without this, there is real risk that identified savings never materialize.
4. Pursue organization development that embeds best-practice strategic sourcing competencies and skill sets.
What worked 10 years ago may not be working in this new-game environment. Leading procurement organizations are stepping back to evaluate how well their current buying practices measure up to new marketplace demands by working with inside and outside experts to conduct a clear-eyed maturity assessment about where their processes are falling short of best practice.
Taking a long-term view, leading firms are examining off- and on-shoring decisions, procurement control systems, supplier qualification practices, bid policies, organization design, supplier relationship management, savings project monitoring, and department training.
From this assessment, true strategic sourcing firms are asking themselves what supporting systems and enablers are needed for the new-game environment. They then work hands-on with procurement departments leaders and stakeholders to develop separate strategies for each spend category, structure data exchanges with suppliers, create more competitive bid environments and implement action plans that close the gaps in their sourcing practices.
5. Bring definition to corporate responsibility and begin incorporating these values into your strategic sourcing DNA.
Given the array of environmental, social, governance (ESG) issues, making real progress starts with the hard work of translating general statements of support into specific organization objectives. This, of course, necessitates the deep involvement of leaders at the top of the organization.
Transformed strategic sourcing organizations seek to align their corporate responsibility goals with their supply chain infrastructure by breaking ESG down into its component and subcomponent parts so they can apply metrics to their supply chain networks and obtain a baseline for their ESG spend profile.
Breakout leaders soon discover the reality that obtaining accurate and reliable data on issues like sustainability is a challenge. Third-party ESG databases are rapidly coming on stream but data integration and automating evaluations remains a challenge. Undeterred, leading organizations are establishing intelligence partnerships to gather end-to-end KPI data and establish category-level strategies for ESG.
Admittedly, few firms today have a full range of ESG executional capabilities, but leaders are working hard to modify landed-cost tools to include new elements like cost of carbon offsets and the risk of change assessments; model alternate supply and transportation scenarios; evaluate supply chain member compliance; and develop true triple bottom line performance statements.
6. Address vulnerabilities and prepare your supply chain solution to weather future shocks COVID-19 was not a one off.
In its wake, companies needed to urgently develop short-term tactical plans to mitigate the risks to human health and protect the functioning of global supply chains. For enlightened leaders, the crisis pointed to a longer-term strategic need for businesses to build resilience, so their value chains could meet future challenges.
To make supply chains more resilient without weakening competitiveness, leaders need to first understand their vulnerabilities. Enterprise supply chain reliability is based on how quickly an incapacitated node can recover or be replaced by alternate sites at a time when an entire industry faces a disruption-related shortage.
Identifying hard to replace services or materials buried in the second and third tiers of the supplier ecosystem involves much time-consuming and expensive work. Assessments of the ability of supply chains to support growth is improved by senior operations executives with successful track records diversifying and de-risking supply chain operations during challenging periods. Equipped with data-based insights, they can find opportunities to relocate parts of their supply chain, diversify their suppliers, develop inventory recovery plans, or bring some production back in-house.
Leading organizations are using this crisis to take a fresh look at their supply networks, take steps to understand their vulnerabilities, and then take actions to improve resiliency. Leaders must find ways to utilize global capabilities to create competitive advantage and do risk reduction that is adapted to the new threats and realities in supply change management.
Impendi has unique insights into the ‘new-game’ in procurement and is already assisting clients to write new rules at their organizations. Our engagement leaders bring deep category expertise, extensive industry operating experience, and learning from hundreds of client engagements to ensure that opportunities to extract value from the supply chain are ones clients ‘can take to the bank’.