Daily Archives: March 11, 2007

Comparing Apples with Oranges (Value Based Sourcing)

In the winter edition of CPO Agenda, you will find an article entitled Comparing Apples with Oranges which notes that moving from a sourcing process based on minimizing cost to one based on maximizing value means embracing supplier differences.

The article discusses value-based sourcing, a sourcing methodology geared towards getting the greatest value out of a more broadly defined supplier relationship. The article encourages procurement professionals, who it claims have traditionally focused on sourcing goods and services, to look at value beyond the immediate scope of purchase to other capabilities and sources of value and indicates that value-based sourcing implies figuring out what other assets, capabilities, or benefits a supplier can bring to the table beyond the product or service currently being sourced.

It then presents a graph that shows value-based sourcing overshadowing advanced sourcing, and although I agree with the importance of value-based sourcing, I disagree with value-based sourcing overshadowing advanced sourcing – it’s simply another component of Total Value Management, which is the ultimate goal of advanced sourcing, supported by decision optimization, cost modeling, and life-cycle sourcing.

Nonetheless, the article does make some good points about some of the merits of value based sourcing, and since value based sourcing is a part of Total Value Management, I will do my best to summarize the most salient points herein.

Value-based sourcing seeks differentiation. Complementary capabilities help value chain partners bring more to the table than what is initially requested. Value-based sourcing requires a strategic approach where the procurement professional looks first and foremost at the suppliers’ capabilities. Value based-sourcing treats the supplier more as a partner than a vendor, crafting a complex relationship that allows the supplier’s capabilities to be leveraged to full benefit. Finally, just as advanced sourcing requires a sharp understanding of key business issues and value drivers, so does value-based sourcing.

As a side-note, you can still download the Advanced Sourcing and Negotiation Benchmark Report: The Art and Science of the Deal, courtesy of Iasta from Aberdeen. It’s a great report, and if you haven’t downloaded it already, I would suggest you do so. And if you’re still trying to identify figure out where to start, the answer is spend analysis, and Procuri has an upcoming webinar on
Wednesday that should contain some good pointers to get you started.