Charles Dominick of Next Level Purchasing and Soheila R. Lunney of Lunney Advisory Group recently released The Procurement Game Plan: Winning Strategies and Techniques for Supply Management Professionals. In our first post, we set the stage with The Purchasing Professional’s 10 Commandments. In our last post, we covered the first four chapters of the book that discuss organizational role, supply management strategy, talent, and social responsibility — the stage that a modern supply management professional has to act upon. In Part II, we will continue our detailed review with a discussion of strategic sourcing, supplier qualification, and negotiations — the subjects of chapters 5 through 8 and critical skills for strategic sourcing success. This post will focus on strategic sourcing and supplier qualification.
The chapter on strategic sourcing starts off with a short and concise definition of what strategic sourcing is — the rigourous process of identifying the right supplier. Not necessarily the supplier of cheapest or highest quality, but the one that offers the greatest overall net benefit to the organization with respect to the project and organizational goals.
The chapter has a detailed discussion of the steps that is not much different than what you would find in any paper or book on the strategic sourcing process, but does a good job of pointing out that the version of the strategic sourcing process you implement does not matter as the key is that proper strategic sourcing is collaborative and organized process that promotes cross functional teams for unified decision making with the guidance and leadership of executive level supply management. It also gets the implementation right — start with easy wins, move on to bread-and-butter categories, and end with tougher, non-traditional categories that are usually ripe with savings — but does not necessarily get the starting points in each category right. Sure office supplies are easy wins because this is a category you can always take 10% off of, but if it’s a relatively small spend for your organization, it’s not worth it. Sometimes just getting a category under contract that is not currently under contract on a core purchase will save you five or ten times as much. In order to properly segment the categories, you have to start with a proper spend analysis. It does point out the importance of spend analysis for understanding the savings opportunity in each category, but this has to be done before you segment the categories into your three sourcing waves. The reality is that no indicator, including the four great indicators defined on page 74, is enough to guarantee a category has, or does not have, savings. A more detailed spend analysis is always required.
One section of the chapter on strategic sourcing I particularly liked was the skills for future nontraditional category strategic sourcing. In order to be able to gain support of the organizations with the sacred cow spending and work with them to get these costs under control, you are going to have to learn their business — and this is going to require new skills. This point is so important it’s too bad that this wasn’t a chapter in and of itself.
Another section that was great in this chapter was the section that defined the eleven signs of ethical competitive bidding. If you want successful strategic sourcing events, you need the participation of the best suppliers on the market. And the only way you’re going to get that participation is if they believe you are a customer worthy of their product. If they see you doing shady back-room deals, you will not be perceived as a customer-of-choice, and it is likely that they will only participate in your events when they are in financial trouble — which is not a situation you want your supplier in.
The chapter on supplier qualification starts with a section on predicting supplier performance — which is a great place to start. If your prediction is that a supplier will not perform well, and there are multiple suppliers likely to perform well, it probably makes sense to not invite the supplier to your event. If your prediction is that only a handful of suppliers will perform well, maybe you should forget the auction and go straight to negotiations, in order of predicted performance. The three questions it provides are a great place to start. A supplier who does not have a core competency in your category, who does not have experience satisfying requests with requirements like yours, and who does not have the right capacity is not likely to perform well. The third question is more important than you think. If your contract would take up more than 15% of their business, and they are busy, not only will capacity be tight, but if your demand fluctuates significantly, it could have a significant impact on their ability to perform. Inversely, if your requirements constitute less than 1% of their demand, while they may have the capacity, they may not have the incentive to service you timely if a customer that represents 10% of their capacity suddenly needs an extra production run.
The sections on the evaluation of big and small suppliers are also good reads, as suppliers should be evaluated carefully, but I’d be wary of testing the escalation plan (which requires calling points of contact and timing their response) until you are in actual negotiations. If every buyer called every supplier during the initial supplier qualification phase, they suppliers would be overwhelmed and unable to respond to anything or get their jobs done. They’d have to hire more people just to answer phones all day. Their cost to serve would increase, and, as a result, so would your cost. The section on dual vs. single source was always great. The answer to this question is never as easy as it seems.
And the discussion of risk mitigation is equally challenging. However, the suggestions that you get a sample, ask for a money-back guarantee, and conduct a quality audit are all good ones. A supplier confident in their work will generally agree to all this and the added comfort will smooth the relationship. An audit will take time, but as the authors note, choosing the wrong supplier is guaranteed to take even more time, more money, and an endless array of aggravation and frustration. Take the time to get it right.