Strategic sourcing is a phrase that is often used, but not always understood. Frequently, when discussing how buyers see the market and determine how they seek to procure from it, we find businesses have a low level of knowledge and understanding of the techniques used to ensure sourcing is strategic in nature and delivers quality and value for money. Procurement, when done properly, is a rigorous, scientific and analytical discipline. It is evidence-based and focuses strongly on developing competitive and comparative advantages for the buying organisation – whether they are public or private sector bodies.
How do organisations approach strategic sourcing?
In mapping the market and assessing it, a classic approach comprises three key steps:
- Obtaining expenditure data and analysing the total annual outlay on the category/supplies/services in question. This includes internal data but can also include external supplier data and composite data on the market as a whole. This provides a basic benchmark for the system. This article here, for instance, shows how Irish consultancy is disproportionately dependent on the public sector relative to other EU states. This is a good example of the kind of external data used to inform an exercise like this.
- Market research is undertaken through interviews with stakeholders within the buying organisation to ascertain their likely requirements from the market. This helps to develop an order of magnitude spend. Understanding expenditure volumes and changes to requirements is critical to manufacturing the right kind of demand from the marketplace and determining the kind of power the buying organisation can wield over potential suppliers (from practically none to quite a lot).
- The final step taken is to look at key players or supply options in the marketplace. This external market research can be quite wide-ranging in nature and can include an analysis of their capabilities and capacity, technology and innovation trends, price and cost data and trends, environmental and regulatory issues and the reputation/profiles of the sector and players in it.
Once this is complete, the buying organisation is in a position to determine how best it can approach sourcing its requirements from the marketplace. High performing organisations focus on white information (open source databases, annual reports, databases, and newspapers). While the use of black (unethical or illegally sourced information) may take place in some sectors, international research shows that such organisations often lack (perhaps because of a willingness to cut corners) the capability to source strategically and commit to the benefits that can be generated by adopting a systematic approach to strategic sourcing.
What kind of benefits derive from strategic sourcing?
A report by Bartolini and Dwyer in 2008 found that companies that establish a link between information on expenditure and information on categories to enhance their approach to purchasing increase savings by 67% and achieve 25% more expenditure under control with contract compliance (to terms) improving by 11%.
What should suppliers be aware of?
Be prepared. A little like the sheep in the cartoon below. Assume, especially if selling into a large, formal tendering opportunity, that it is going to be competitive and accept that you are to a greater or lesser extent something of a pawn in a greater game. This is not to say that all suppliers cannot create advantages for themselves, they can, but only through the development of an acute understanding of their own market, their competition and their comparative strengths and weaknesses. At this stage firms have two options, improve the competitiveness of their offer on quality or on price (both can be addressed over the longer term of course).
Competing to win
Depending on the sector, a strategy to compete on a price basis can be counter-productive in the longer term. We have seen this for instance in the plant hire sector over the past ten years where many firms have subsequently struggled to replace aging plant because fee income was too low to facilitate this following the crash. The alternative is to focus on quality improvements. Firms can choose to do this through internal improvements and this is generally seen as a very positive thing for firms to undertake. For shorter-term requirements, collaboration is the best and quickest route to closing competitiveness gaps so firms can move from the pack to becoming strongly placed to take on the top of the market.
This video below featuring Michael Porter may help suppliers interested in this area start to focus on developing a competitive edge.
We have written additional useful material for suppliers to consider in the below links:
