Sourcing strategy is a mental chess game that leaders play before going to market. It’s about understanding what you really want to get from the supply base, analyzing the potential suppliers, and then deciding how to approach the market with the chosen suppliers. Technology can help in this effort. The key is to choose the tools wisely and use them well.
Douglas A. Smock, Robert A. Rudzki, & Stephen C. Rogers
Supply Chain Management Review, May, 2007

Last month, Douglas A. Smock, Robert A. Rudzki, & Stephen C. Rogers authored a great piece on “Sourcing Strategy – The Brains Behind the Game” over on Supply Chain Management Review that should be considered a much-read.

The author’s note that seasoned supply professionals … recognize that technology tools- and their application to a retuned supply base in search of “on-demand” value- revolve around applying electronic and Internet-based tools to the classic strategic sourcing process on various “spend pools” or categories. Important: The process, not the electronic tool (e-tool), is the key to ongoing value mining.

Strategic sourcing is an ongoing effort to accomplish three things:

• To understand
  the analysis of markets, suppliers, internal capabilities, needs, competitors, and industries : Understanding Leads to Strategy
• To decide
  the tactical “go-to-market” part, which is often confused with strategy-determination of which tool to use, e.g., request for proposals (RFPs), auctions, online negotiations, face-to-face interaction
• To manage
  perhaps the toughest to accomplish in a world in which the rules are not constant and the targets and scoring systems are changing as the customer expectations of value and the competition’s actions shift

Furthermore, understanding suppliers within key supplier industries- especially suppliers that are or could be strategic to a firm-is important. Taking supplier relationships to a higher level is a seminal factor in becoming an on-demand enterprise. Face-to-face personal interaction is critical in “knowing” suppliers, but having a way to monitor a supplier’s overall corporate situation is equally vital. And, understanding why things happen with suppliers the way they do means understanding where the vital points exist in the supply chain and who has power over those pivotal points. This effort requires thinking skills.

Although it’s quite long for a magazine article, it’s well worth the read as these are just a few of the insights it offers.

Last Tuesday, I blogged that Aberdeen Took a Tip from Madonna in their latest research study, Direct Materials Sourcing: Living in Materials World, which is due to hit their website in the next couple of days. Before the study, they hypothesized that direct materials sourcing should include the following business processes:

• Standardized Strategic Sourcing Initiatives Company Wide
• Cross-Functional Procurement Teams
• E-Sourcing and E-Procurement Solutions
• Procurement Involvement in Product Development
• Leverage of Outsourcing

The study more-or-less confirmed these hypothesis. Specifically:

• 97% have a formal direct materials sourcing program,
  83% of these programs have been in place for more than five years,
  and 70% more direct materials are strategically sourced
• they differentiate themselves by their appetite for, and usage of, external support,
• 70% have a greater likelihood to utilize e-Sourcing,
• they engage product/design teams sooner in the process, and
• over 50% more of their direct materials spend is
  sourced using LCCS

Furthermore, Best-in-Class enterprises have:

• 98% of direct materials spend under management,
• 28% higher year-over-year cost reductions,
• 63% greater rates of contract compliance, and are
• 55% more likely to track implemented savings

This report is one of the best reports I’ve seen out of Aberdeen in a long-time. It not only includes the standard metrics you’ve come to expect from Aberdeen research studies, but also includes metrics for process, organizational structure, knowledge/data management, technology usage, and performance management broken down by laggards, average performers, and best-in-class enterprises.

And it notes that Any collaboration gap that exists between a procurement department and its internal stakeholders is exacerbated by an increasing reliance upon off-shore suppliers who, in addition to offering potentially lower prices, may also require longer lead-times and different risk management strategies, a point I’ve been trying hard to make as of late.

The report also includes the standard Best-in-Class PACE model, details on services utilized by Best-in-Class companies, a couple of compelling case studies, and required-actions for laggards, average, and Best-in-Class performers to advance up the supply chain food chain.

So, how can you achieve Best-in-Class? The statistics above provide some insights. For starters:

• make sure you have a formal direct materials sourcing program with a pipeline that always exceeds capacity to allow your team to maximize their potential as their capabilities improve
• use center-led procurement and a cross-functional sourcing team
• use best-in-class e-Sourcing and e-Procurement solutions
• collaborate with product design and engineering on NPD from the get-go
• leverage 3^rd party services, outsourcing, and best-cost country sourcing
• use contract management and track compliance and savings
• read the report – it is worth it! (And check back – I hope to have some commentary from the report author, Andrew Bartolini, as soon as he has a moment to spare!)

And remember, plans are only good intentions unless they immediately
degenerate into hard work (shown by a high percent of spend under
management) and a focus on bottom line results.

As close followers of SpendMatters, where I tend to comment regularly (after all, it is the only other Spend/Supply Management blog that you have to read daily), will have observed, on average, I’m not overly impressed with what comes out of ISM more often than not. However, the recent article “Succeeding in a Dynamic World”, which was jointly compiled by the ISM, CAPS Research, and A.T. Kearney, was quite good. (After all, both A.T. Kearney and CAPS in particular are known for putting out great work.)

One of the most interesting sections of the 10-page report (which is worth reading) was section three on critical supply strategies. In a world where it seems that risk and cost is increasing daily, good supply chain strategies are more important than ever. Even though none of these strategies are new, which should be obvious as they have been discussed on the blogs, including this one, countless times, it is nice to see them collected all in one place AND endorsed by the ISM which,  whether or not it deserves to be (as described in “Revamping ISM: A Perspective from Anonymous”* on Spend Matters [WayBackMachine]) is the largest and most influential supply and spend management association in the United States.

The seven critical supply strategies presented in the article were:

• Category Strategy Development Consolidate your supply base for each category into a small number of preferred suppliers that can be efficiently managed while mitigating risk. The strategy for each category should focus on the overall value chain over a three-to-five year time frame.
• Supplier Development and Management Effective supplier development and management should deliver a competitive advantage in cost, quality, delivery/responsiveness, technology, and innovation achieved.
• Multiple Supply Networks The tail of the supply chain needs to be tailored to each developing market and this will require domestic partners to help execute fulfillment and delivery. In addition, good risk mitigation requires flexibility and diversity in your supply chain and supporting networks.
• Internal & External Collaboration In order to extract the significant gains that collaboration can bring, companies will need to enable best-practice multi-lateral collaboration between supply partners, achieve integrated product development, and employ “customer of choice” positioning.
• Talent Attraction & Retention A supply chain is not an abstract network driven by processes and machines, but a real network driven by people. Good supply chains run on good people. Supply Chain Success will be impossible without the right talent, which is becoming rarer every day thanks to the global talent war. Any organization that does not have a good process in place to identify necessary skills, evaluate organizational gaps, and identify, recruit, develop, and maintain talent is doomed to become a second class citizen in the emerging international marketplace.
• Enablement of the Supply Management Organization Although center-led organizations will continue to dominate for the next decade, as global operations become more complex, hybrid center-led models will begin to emerge to maximize value based upon the right mix of responsiveness and centralized control. Successful organizations will need to adopt and utilize appropriate supply chain technologies that integrate functional management and track appropriate metrics.
• Enabling Technology Technology is key in the supply chain organization of the future. The right technology will enable enterprise-wide supply management, external supply chain visibility, and internal and external collaboration.

Although this obviously is not a complete list, as it makes no mention of the emerging importance of Global Trade Management, Supply Chain Finance, or Right-Cost Country Sourcing, just to name a few disciplines, it is still a great starting point and areas that any successful supply chain operation will need to have fully figured out to succeed.