In Part I we recapped Sourcing today, in Part II we did a deep dive into the key requirements of the review step as it is today, and then in Part III we did a deeper dive where we explained that while some steps were critical for a sourcing professional to undertake, others, while necessary, were a complete waste of skilled talent time as the majority of the tasks could be automated. Then in Part IV we began our deep dive into the needs assessment phase which we completed in Part V. This was followed by a deep dive into strategy selection in Parts VI and Part VII and the communication step in Parts VIII and IX. And upon review of these steps, we’re still at the point where some tasks have to be done by humans whereas others can be mostly automated. We’re starting to suspect this is true across the entire sourcing cycle, but we can’t be sure until we complete our analysis, can we?
In the next step, the analysis step, we have the following key sub-steps that have to be completed every time (not just sometimes):
- Market Pricing Data
- Historical and Projected Spend
- Cross-Category Materials Spend
- TCO / TLC (Total Cost of Ownership, Total Lifecycle Costs)
In the market pricing step, you collect as much information as you can about pricing for the goods or services you are looking to acquire to be as informed before negotiations as you can be. This could require collecting consumer pricing from retailers, pricing available from GPOs/BPOs, pricing from government contracts (that are public data), import / export manifests (to determine volumes and supply/market dynamics), and pricing from similar product/services on past contracts. It could also involve collecting competitive intelligence through analyst reports, buying collectives, and other avenues.
In the historical and projected spend phase, the organization does deep analysis of historical spend and volumes across the product and services lines, similar product and services lines, and market dynamics. It then pieces all of this together to form projected trends that look at current trends modified with projected demand shifts within company product and services lines and expected uptakes or product line abandonments based on current market dynamics. It collects as many pieces of data that are readily available to try and determine if market shifts are seasonal, responsive to price changes, reactive to new product introductions, or undetermined factors.
In the cross-category “materials” spend phase, the organization makes an effort to identify the the primary components of the spend and how they should influence the spend dynamics of the product or service being acquired. For example, if it’s a metal product where steel is a primary component, they will attempt to identify how the pricing is shifting in other categories where steel is a primary component and compare that to market price shifts. If it’s a service, they will look if the primary costs are related just to talent, to organizational support, or even expenses (such as excessive travel requirements) and compare that to market costs across different divisions of the company. (E.g. extra
IT support is IT support whether contracted by Procurement or IT)
Finally, in the TCO phase, the organization will work hard to identify all the other direct and consequential indirect costs associated with the acquisition. Taxes (and whether or not they are reclaimable and the costs of reclamation if they are), import/export duties, intermittent storage fees, transportation fees, typical loss fees (due to spoilage, waste from mandatory tests, etc.), etc. will be identified and factored in as direct costs. In addition, potential indirect costs such as additional testing, expected loss during local transport, alteration costs for implementation, loss of co-marketing support, etc. will be factored in.
This sounds largely human driven, but, as we’ve discussed during previous steps, sometimes what sounds human driven isn’t. But this is a subject we will explore in Part XI!