In Part I, I reminded you that Pierre Mitchell of The Hackett Group invited you to participate in a study that would help you identify where you were on your procurement journey by way of 18 value streams that range from “naive apprentice”, where you’re measuring performance at an elementary (tactical) level, to “expert sourcerer”, where you’re extracting procurement value at a very advanced (transformational) level. Considering that this survey will not only help you identify a path to increased value but that Pierre has promised to share some of the results with all survey participants for free, it’s a survey that’s definitely worth your time as Hackett has the premiere benchmarking data in the space.
I also told you that the first seven value streams were tactical and provided relatively little ROI compared to the ROI that is available through more advanced value streams. The next six value streams are strategic and will generally provide you with good payback over a longer term. They range from:
Costs avoided by receiving ‘no charge’ items and services
through
Early payment discounts, P-card rebates, or other supply chain finance benefits
to
Internal enterprise process costs are reduced via a new supplier solution
Costs avoided by receiving ‘no charge’ items and services
Now we’re into strategic procurement where the “savings” are real and sustainable. By negotiating in more items and services for the same money, you’ve considerably reduced your costs and increased the value that you can provide your end customers for the same price. And while it’s true that the ‘no charge’ items and services could disappear at contract termination, you’ve established with your supplier(s) that you expect a higher level of performance and service, which will make future negotiations, and cost-avoidances, easier.
Early payment discounts, P-card rebates, or other supply chain finance benefits
Now you’re starting to look at the total cost of the buy from an organizational perspective, and not just a unit cost or landed cost perspective. If your supplier’s annual cost of capital is 36%, and yours is less than 12%, you could be saving yourself up to 24% annually, or 2% for each month you shave off the total payment time. This can be substantive and is easily sustainable. Plus, once you get good at managing your working capital and finances, you’ll start to see even more savings opportunities appear.
Internal enterprise process costs are reduced via a new supplier solution
Once you get to the point where you start recognizing that sometimes you don’t know all the answers and that a smart supplier can point out additional opportunities for you to save money, you have not only mastered the art of strategic sourcing, but have reached the point where your sourcing is on the verge of becoming transformational … which is the topic of Part III.