Procurement - on ‘steroids’ or: improving margins - for real
Why focus on 21st-century strategic sourcing?
As the winds of change sweep through the business world, it is more important than ever for companies to stay ahead of the curve and master the art of supply chain operations. Strategic sourcing, the process of identifying and nurturing relationships with the finest suppliers, is the key to unlocking cost savings, quality improvements, high resilience, ESG performance, and unmatched efficiency.
It is alarming how many companies underestimate the value of investing in personnel and training to establish a solid strategic sourcing process. This leads to a haphazard approach to sourcing, relying on past practices and hoping for the best, which is a suboptimal strategy in today's rapidly changing and highly innovative environment. Experience (“doing as we have done before”) counts today much less than the ability to adapt to new market and technology developments. Take the following example: AI and 3D printing are innovative technologies, where most staff has little to no experience in. A great company assesses these new technologies despite there is no experience inside the firm. And while they are at it, they assess not only their own operation side, but as well the opportunity for improving their sourcing patterns (“do I have to continue buying it from China, or can I print it here”, or “do I have to have a service center located in Ireland or Bangalore, or can I use bots and AI to handle this for 90% less of the cost, but with higher customer satisfaction”).
Back to the main topic: The development of category strategies is essential for effective strategic sourcing. This process involves analyzing market demand, regulatory requirements, technological advancements, and suppliers globally to make informed decisions. Unfortunately, a large portion of companies, about 80%, fall into one of two categories when it comes to category strategies. These companies miss out on significant opportunities for cost savings and performance improvement.
The first category, affecting approximately 30% of companies, involves functional procurement experts who create a detailed map of the current and future demand and market landscape, along with strategies for optimization. However, these plans are never implemented due to a lack of internal support and collaboration.
In the second category, which represents over 50% of companies, there is a complete absence of formal category strategies and sourcing decisions are based on past practices and internal customer requests. In such cases, outsourcing procurement to experienced firms such as IBM, Genpact, Accenture, and ChainIQ could lead to improved results.
The last category, comprising approximately 20% (if at all) of companies, involves well-aligned procurement efforts supported by internal stakeholders, including leadership and peers. These companies recognize the benefits of having procurement manage the supplier relationship and are typically market leaders in their industries.
So, gone are the days when strategic sourcing was a simple matter of procurement and cost control. In a world beset by global epidemics, natural disasters, and political turmoil, companies must forge robust, resilient supply chains that can weather any storm. As protectionist governments impose trade restrictions and taxes, organizations face mounting pressure to source responsibly and sustainably. Strategic sourcing is the answer, offering companies a way to de-risk operations, stabilize revenue streams, and maximize profitability. But strategic sourcing is more than just a means of survival. It is an opportunity to redefine innovation, tapping into the power of the entire value chain to create a competitive edge, impress customers with speed and reliability, and earn accolades from governments, NGOs, investors, and rating agencies.
Excellence in strategic sourcing and supply base management is within reach. By tracking key metrics like supplier compliance, production disruptions, and performance reporting, companies can optimize their efforts and gain an edge in the global race for success.
The secrets of strategic sourcing in the 21st century are yours to unlock.
Want to find out how your organization fairs in 21st-century strategic procurement?
How many questions can you answer with a resounding "yes"?
Procurement of goods and services plays a sizeable portion of our Cost of Sales. Hence, on at least a quarterly basis, procurement (either alone or in combination with the supply chain function) is presenting to the board. We have at least one board member experienced in the topic, who can challenge the teams.
We do 80% of our procurement transactions via automated e-sourcing events (not just catalogue buying, but real e-auction events).
Our compliance rate for sourcing with approved suppliers is over 90% for direct materials and 70% for indirect materials and services.
We have a strategic sourcing process in place, and our procurement professionals are regularly certified both internally and externally. They have been granted a "licence to buy".
We run every year a supply chain innovation day (or week), to familiarize ourselves what is new and fresh. Board members act as sponsors.
Our buyers utilize various tools and techniques such as Porter's Five Forces, global supply market analysis, linear performance pricing, total cost pricing, and cost estimating.
We receive monthly performance reports on our supply chain's performance in areas such as cost, quality, delivery, ESG, and innovation.
70%+ of our direct material volume is sourced from partners that are commercially and operationally linked to our sourcing or ERP systems (electronically).
Our procurement professionals are highly sought-after talents throughout the company.
We have outsourced certain production steps to our supply base, which remain performing to our satisfaction.
If you answered „yes“ to most questions, great! You have your strategic sourcing under control.
Do not read any further; better to focus on other topics.
Size of the prize
If you have identified, based on the answers to the above questions, gaps in your strategic sourcing and supply chain management practices, there is a significant opportunity to improve the resilience, sustainability, and profitability of your organization. Supply chain professionals can make a sizeable contribution to your company's triple bottom line (Profit, People, Planet). To understand the potential impact, it is important to establish specific targets and goals.
I could start talking about a lot of direct and indirect benefits along the lines of innovation, resilience, and market disruption. However, when you need a first guidance, let’s stick with the money trail: In the short-term, establish your current annual cost reduction level over the last 3-5 years and set a X+2% target for the next two years (x equals your current savings level). This represents your gross margin improvement level, and the potential size of the opportunity. Additionally, establish targets for resilience and sustainability, and engage your supply chain professionals in achieving these goals. For a company with CHF 1 billion of external spend, the potential EBIT improvement in the short-term is CHF 20-30 millions p.a.. The long-term gross margin improvement opportunity is CHF 50+ millions p.a. How many head counts would you have to reduce to get a similar perpetuity effect ? Success can be achieved through a focus on developing the skills of your supply chain professionals, led by a competent procurement leader (which there are plenty around).
In the long-term, set joint targets between sales, operations, and procurement for a 5+% gross margin improvement (!) solely based on internal optimization projects. Implement transparent pricing tools to ensure that the gross margin increase is used towards EBIT and investments in the future, such as innovation. Furthermore, supply chain management can play a differentiating role in your sustainability reporting, permeating beyond the supply chain organization.
The opportunities on the triple bottom line are limitless, only limited by your teams imagination and creativity.
How to set up procurement on steroids?
The project plan is to be executed over a 24-month period and will be overseen by the Chief Operating Officer (COO) or Chief Financial Officer (CFO), with the Head of Procurement leading the effort. The first objective is to establish measurable business targets, assess the current status quo through external support, and create a preferred strategic sourcing process that is agreed upon by cross-functional teams.
A weekly task force will be formed with clear objectives, and monthly reports on the project's progress will be provided to the COO and CFO by the Head of Procurement, highlighting key performance indicators such as the number and spend volume of qualified suppliers, percentage of spend covered by approved cross-functional category strategies, cost reduction, and the number of sustainability incidents that have been mitigated or are still open. To ensure continued success, the sourcing compliance rate and the number of suppliers accounting for 80% of spending will be monitored, as well as the reduction of costs and the number of supply chain risks.
The potential for digitalization and automation is very high.
The risk level associated with the project is low, as strategic sourcing is expected to mitigate risk and improve margins.
The cost of the project will depend on the current level of procurement excellence and IT systems within the company.
Watch out for:
It is important to be mindful of the potential for lip service compliance from businesses and functions, as well as any negative reactions from long-term suppliers that may be de-sourced due to the new transparency available. The Head of Procurement is responsible for ensuring that procurement handles its improved role with diligence and a focus on both internal and external customers and stakeholders.
Stay safe. Be bold.
Daniel
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