Attracted by the potentially high cost savings and the direct impact on the corporation’s bottom line, some firms plunge directly into strategic sourcing activities without first fully understanding their spend. While they will probably achieve cost reductions, these firms are not reaping the full rewards of strategic sourcing and these savings may be short-lived.
Why? Firms do not have some of the information critical to maximizing their sourcing efforts. For example, some large firms may have sourcing teams located in different parts of the corporation that are responsible for their own categories and are loosely coordinated, if at all, by a centralized procurement function. No one in the organization may know how much is actually spent on the same supplier or even in the same categories across an organization. Maverick or rogue spending (off-contract buying) may be common, with large segments of spend not under management. Fragmented information and disconnected sourcing processes are lost opportunities for realizing the potential of strategic sourcing. These types of problems are often found in indirect categories, where sourcing decisions are often made outside the sourcing function under the pretext of better knowledge, but typically based on poor evaluation criteria and little knowledge of terms and conditions.
To fully obtain strategic sourcing savings and to truly optimize the strategic sourcing process, firms must have a critical component in place – visibility to the entire corporation’s spend. Without overall spend visibility, strategic sourcing can potentially be a waste of valuable resources and its potential unrealized.
Why is understanding spend before embarking on strategic sourcing so important? Spend analysis adds the “strategic” to strategic sourcing. Sourcing without spend analysis leads to sub-optimization of the sourcing process. Without a complete spend picture, sourcing efforts are likely to lead to optimizing part of a category of spend and neglecting or missing real opportunities for spend reduction and savings.
Magna Electronics is a good example of a company that saved money in sourcing by understanding its spend (Purchasing, 4/9/2009). After putting a good purchasing team in place, Magna Electronics analyzed its spend and discovered that it was buying 75% of its electronics from distributors. While this approach worked well in a growing market, it was not as effective in a downturn. After careful analysis, purchasing begain buying directly from some of the suppliers, as appropriate, rather than totally from distributors. After a year, the cost of the parts in a bills of material was reduced by 25%. This result would not have been possible without a detailed understanding of its spend.