Ralph G. Kauffman, Ph.D., C.P.M.
Ralph G. Kauffman, Ph.D., C.P.M., Assistant Professor, University of Houston-Downtown, Houston, TX 77002, 713-221-8962, www.dt.uh.edu, firstname.lastname@example.org
Thomas A. Crimi, C.P.M.
Thomas A. Crimi, C.P.M., Supply Chain Team Coordinator, Texaco, Inc., Houston, TX 77402, 713-752-3981, email@example.com
Abstract. Strategic sourcing is defined. A process for making the transformation from transactional procurement to strategic sourcing is presented. Key areas that must be addressed to assure successful transformation are discussed. These include: business strategy identification, alignment of sourcing strategies and business strategies, use of a total cost model, varying degrees of supplier relationships, inclusion of value-added services, and transforming the mindset.
What is "Strategic Sourcing?" "Strategic Sourcing" has been defined as "a periodic event that includes the identification and selection of initial commercial arrangements with a selected supplier that either creates or resets a relationship" (Slaight, 1999). Strategic sourcing consists of identifying those purchased items that are important to the achievement of strategic business objectives and then developing and implementing short and long-range plans for procurement of those items. Another way to define strategic sourcing is to identify what it is not. Strategic sourcing is not the procurement of materials and services on an as needed, day-to-day, ad hoc basis.
How Strategic Sourcing Can Benefit An Organization. Strategic sourcing benefits an organization in several ways. Two primary sources of benefit are: (1) improved ability of the organization to achieve strategic goals due to alignment of purchasing strategies with business strategies and (2) improved contribution from purchasing outcomes resulting from the increased support that purchasing processes and initiatives receive from being aligned with business strategies.
Making the Transition. Making the transition from a traditional procurement environment to strategic sourcing requires an organization to take several steps:
This will require:
What are Your Company's Business Strategies? Strategic sourcing means strategic in terms of an organization's business strategies. One of the first steps in moving to strategic sourcing is the identification of company business strategies. Business strategies may be stated in a variety of ways. Some general strategy statements may include: products and product lines, business or process competency development or application, market development, achievement of market share, narrowness or breadth of market segments served, development or application of business processes, development or application of technology, and make versus buy of products, parts, or materials.
Many organizations have business strategy documents that are updated on an annual or other periodic basis. If a business strategy document does not exist for your organization or if it needs interpretation, consult your management for assistance.
Alignment of Sourcing Strategies and Business Strategies. This is the key to success in strategic sourcing. The best sourcing strategy will not be successful if it is not perceived to be in alignment with the business unit goals of the company. This alignment is often the most important factor in securing management's support of a strategic sourcing program. In presenting any strategic sourcing program to management, it is necessary to show how the program supports achievement of the organization's business strategies. Examples and comments on alignment at two companies are provided by John Stephens and D. Larry Moore in an article in Purchasing Today®, January 1998. Following are some general business strategies and ways in which sourcing strategies support them.
Sourcing Strategies to Support Business Strategies. The preceding section identified some general business strategies and some ways in which purchasing strategies can be aligned to support the business strategies. The use of total cost procurement models, appropriate supplier relationships, and seeking value-added services are additional tools that purchasing can use to develop supportive sourcing strategies.
A useful way to simplify this picture is to look at three possibilities: transactional relationships, collaborative relationships, and alliance relationships. A variation of the concept of ABC analysis can be applied to all purchases to sort them into the three groups for relationship analysis purposes.
"A" items are strategically the most important and may also be the greatest quantity and/or dollar volume items. These should be considered for alliance relationships. Alliances usually imply long term commitment, possibly sharing of cost data, and cross investment.
"B" items are less strategically important and likely less volume or dollar intensive but are still important enough that some continuing relationship with a source supply chain is desirable. These items should be considered for collaborative relationships. Collaborative implies that there is a continuing relationship but not necessarily a long-term commitment, and no sharing of cost data or cross investment.
"C" items are least important strategically and likely the lowest in physical and dollar volume. This does not necessarily mean that all low-value purchases are "C" items. Low value purchases that amount to significant volume over a year may be "B" or even "A" items, depending on how important they are to the business and the overall volume. "C" items may also include purchases that are high in unit cost but are not strategically important or are required only infrequently.
C. Value Added Services. Part of considering sources as chains includes seeking out value added services from the chain wherever possible and economically beneficial. Examples include: inventory stocking, planning, and analysis, on-site, off-site, or a combination; supplier integration to reduce costs and improve efficiencies; project inventory planning; packaging design, manufacture, and recycling; provision of transportation services; transportation integration among suppliers; reduction of lead time through use of electronic communication means such as EDI and Internet.
Strategic Sourcing Methodology. Adopting a strategic sourcing methodology is a "key" in making the transition from a primarily transactional procurement organization to a strategic one. Several highly integrated steps should be followed which involve: collection and analysis of spend data, determination of customer requirements, undertaking of market analysis, development of product and service group strategies, evaluation and profiling of suppliers, selection of suppliers, negotiation of agreements with suppliers, planning of implementation, installation of reporting systems, measurement of results including supplier performance, and management of supplier performance.
Transforming the "Mindset." Unfortunately, some business managers have the viewpoint that purchasing and supply is simply a transactional or, at best, tactical function. To effectively make the transition to strategic sourcing, this mindset must be changed. Purchasing and supply management must be viewed by management as strategic. To change this perception, purchasing must develop and sell value-adding programs and services across and up and down the organization. The total cost model can be used to develop strategic supply alternatives that reduce costs, improve quality, or otherwise support the main strategies of the business. Some examples of value-adding programs include vendor stocking, integrated supply, cycle time reduction, investment recovery, e-commerce, and strategic alliances. Management and business units must see bottom line impact from strategic sourcing initiatives to view purchasing as strategic. Solid, measurable results from supply alternative initiatives can be used to illustrate that the strategic sourcing approach does make significant contributions to achievement of overall business strategies and improves the bottom line.
Purchasing itself also must be transformed with regard to mindset and must learn to think strategically. Two articles that provide suggestions on how to do that are contained in Purchasing Today® in February and March 1998. The February article also includes a chart that can be used to determine where your supply management focus is currently: transactional, tactical, or strategic.
Another element in making the mindset transition is the continuous promotion of purchasing itself as a profession. Stress to management and anyone else that will listen that purchasing professionals are uniquely qualified with skills in cost and price analysis and management, supply chain management, use of ERP resources, and e-commerce. Expose management and internal customers to examples of what is possible through circulation of Purchasing Today® and other articles that contain examples of supply management excellence. Highlight the C.P.M. designation as an identifier that indicates the qualification of a person to competently perform purchasing and supply management responsibilities.
Bordon, George G. "Is Your Staff Thinking Strategically?" Purchasing Today, February 1998, 4-5.
Bordon, George G. "Making the Move to Strategic Procurement." Purchasing Today, March 1998, 10-11.
Slaight, Thomas H. "The Future of Purchasing and Supply: Strategic Sourcing," Purchasing Today, October 1999, 43-45.
Stephens, John, and D. Larry Moore, "Purchasing and Strategic Planning: The Link." Purchasing Today, January 1998, 38-39.