Category Archives: Sourcing Innovation

It Isn’t Always Strategic! Part I

There’s been a lot of debate about The Life and Death of Strategic Sourcing ever since Dalip Raheja claimed that Strategic Sourcing is Dead back in August (with numerous posts indexed at this link), and while most of it has been good, there’s been one major point missing in all of the debate to date:

Sourcing is NOT always Strategic!

That’s right! Sourcing is NOT always Strategic!

First of all, most of what you buy is not critical to operations.Consider all of the following which is bought by most businesses on the planet:

  • office supplies
  • office computing equipment
  • janitorial services
  • HR support
  • print material for marketing
  • electronic discovery for legal services
  • outsourced manufacturing for commodity products

Not Strategic!

  • office supplies

    who gives an albino rat’s behind who made your stapler and copier paper and where they came from

  • office computing equipment

    for 99% of companies out there, as long as it runs Microsoft Office and an internet browser, who made the machine is irrelevant

  • janitorial services

    it’s not too hard to wash a window, sweep a floor, or empty a trash basket

  • HR support

    there are at least six top-tier HR-support agencies out there whose services are essentially indistinguishable

  • print material for marketing

    any print shop that can print 8.5″ x 11″ brochures in 16M colours does the trick

  • electronic discovery for legal services

    there are a number of software packages out there that do exactly the same search on exactly the same file formats and thousands of monkeys who can use them

  • outsourced manufacturing for commodity products

    if you’re manufacturing office supplies, clone PCs, or children’s toys, there are hundreds of factories that can get the job done

Let’s look at the definitions of the word strategic:

  • Merriam-Webster: (a) a careful plan or method : a clever stratagem or (b) the art of devising or employing plans or stratagems toward a goal
  • Wikipedia: a word of military origin, refers to a plan of action designed to achieve a particular goal. In military usage strategy is distinct from tactics, which are concerned with the conduct of an engagement, while strategy is concerned with how different engagements are linked
  • Business Dictionary: Art and science of planning and marshalling resources for their most efficient and effective use

These say that strategy is

  • carefully thought out,
  • goal focussed,
  • efficient, and
  • distinct from its implementation, which is tactical.

Thus, if you simply jump to strategic sourcing techniques, you are not being strategic. If you’re not planning how to efficiently use all of the affected resources, you’re not being strategic. If you’re not thinking about why a certain plan of action is being considered, you’re not being strategic, and, most importantly, if what you are doing does not relate to a major business goal or objective, it’s not strategic.

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How Low Can Strategic Sourcing Go?

In the beginning, strategic sourcing and supporting applications were for the Fortune 500 only, not only because they were the only organizations that could afford the multi-million dollar price tags, but they were the only organizations that theoretically had enough spend to see a significant ROI after the (very) significant product, process, and people costs were taken into account. (And whether or not you agreed with the viewpoint that strategic sourcing was only for the rich and famous, you couldn’t argue that unless you were among the rich and famous, you couldn’t afford the price tag.)

Then the Sourcing 2.0 providers, who said we can use the web to deliver solutions on-demand for a fraction of the cost of the on-premise behind-the-firewall model (which, in the beginning, was six figures instead of seven), hit the scene and strategic sourcing broke into the (high end of the) mid-market. It wasn’t applicable to every category, or to every project in the categories it was applicable to, but made a significant impact in those categories it was applicable when best practices and the right expertise was applied.

Then costs went down, as features increased, and (strategic) sourcing solutions slowly permeated the mid-market, starting with the companies with revenues in the high nine-figures and ending at the companies with low nine figures in revenue. At this point, most of the “leaders” had these solutions, as well as a few of the learners, and the laggards still did not give a damn one way or the other. The market started to saturate. So what was a vendor to do?

Push strategic sourcing down into the small business market. Simplify the solutions, make them true self-serve cloud-enabled multi-tenant applications, and price them so that everyone can afford them. But is this really strategic sourcing?

While you can argue that the market was starting to stagnate because it was saturated, you can also argue that the market was starting to stagnate because most of the market wasn’t benefitting from the solutions (to the extent that they adopters of the technology thought they would). And if the latter is the case, you have to ask if strategic sourcing truly exists in the mass market. After all, if the solutions aren’t working, there can only be three reasons:

  1. the solutions being sold don’t support strategic sourcing
  2. the solutions being sold do support strategic sourcing but aren’t being properly utilized
  3. strategic sourcing isn’t possible at a company below critical mass

If we assume that a critical mass isn’t required to effect strategic sourcing, then if a company isn’t getting results, it’s either because the solutions don’t support strategic sourcing or they do but aren’t being properly utilized. I think we can quickly rule out the theory that the solutions being sold don’t support strategic sourcing (when properly utilized) because the basic process has been well understood for a couple of decades now, every big consultancy has their own n-step process, and the foundational solutions have been built and rebuilt so many times that they’re almost commodity. I also think we can’t say that the solutions aren’t being properly utilized because while I’m sure some companies don’t have a clue, at this point it’s well understood what the solutions do and how to use them, especially at any company that’s investing in the right people, process, and technology to improve it’s sourcing.

This leaves one reason why the results aren’t being realized (to the extent they were expected) by the majority of the market — they companies are not at critical mass. In order for strategic sourcing to truly be effective, I would posit that the following two conditions must hold:

  • there is enough spend to warrant a strategic sourcing effort
  • there is enough knowledge to effectively execute one

At most mid-market companies, the knowledge of modern procurement is limited. Procurement is still primarily a back office function, telephone and fax is more prevalent than modern technology, and the level of education isn’t much beyond high-school. You don’t have a room full of MBAs or Engineers trained in supply chain, and most of the buyers, who have no form of certification whatsoever, don’t even belong to any purchasing organizations. And this lack of knowledge to the face that most of the solutions don’t go beyond the help necessary to guide the user through the process, and you can see that most organizations don’t have the knowledge to effectively execute a proper strategic sourcing effort.

Furthermore, even at those few mid-market organizations that have made the effort to recruit and attract the right people, and give them the right training, I would argue that strategic sourcing is a rare event because most categories don’t have enough spend to enable a true strategic sourcing effort. As Dalip Raheja (of The MPower Group) said when he declared that Strategic Sourcing is Dead, it’s not strategic if everyone else is doing it. You can’t just go through the seven steps and have a strategic event. You have to analyze the rationale behind each and every assumption and decision you make for the event to be strategic. (Why are you dual sourcing? Why are you outsourcing design? Etc.) This takes time, money, and, often, specialized consulting and/or tools in addition to your sourcing suite — and, one way or the other, this comes with a hefty price tag. A price tag that’s only worth it if the spend is significant enough to insure (the likelihood of) a high ROI!

As a result, I have to (mostly) agree with a colleague of mine who has said that there’s no such thing as strategic sourcing in the SMB market. While there will be a few categories in the higher end of the MB market where strategic sourcing can be effectively applied, and while you can push the sourcing tools down through the mid-market to the small business market, you can’t push the strategic element. The best you can do is bring true B2B commerce to the average small business. And while this is certainly a good thing, as it drives transactional efficiency and lowers cost, let’s not fool ourselves. True “strategic” sourcing is a rarity.

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It’s Your Turn To Join The Great Strategic Sourcing Debate!

Over the past few weeks, ever since Dalip Raheja of The Mpower Group decided to stir the supply chain hornet’s nest with his posts on how Strategic Sourcing is Dead and how The Sourcing Emperor Has No Clothes, we’ve seen a flurry of activity from the blogging heavyweights who were quick to weigh in with their opinions, including:

  • Tim Cummins’ (of the IACCM) with his post on The Death Of Procurement: Nightmare or Nirvana?
  • Robert A. Rudzki (of Greybeard Advisors) who tackled “Returning the “Strategic” to Strategic Sourcing”, “Returning the “Strategic” to Strategic Sourcing (Part 2)”, and asked “Where Does Strategic Sourcing Fit In?”
  • Steve Hall (of the Procurement Leaders Blog) who addressed the “Rumours of the Death of Strategic Sourcing”, gave us “A CPO’s Story of Strategic Sourcing”, and told us that “Best in Class is an Indulgence”
  • Dave Henshall (of “Purchasing Practice“) who addressed Procurement 2.0 – and Other Labels
  • Steve Hall (of the Procurement Leaders Blog) who also gave us “A CPO’s Story of Strategic Sourcing“
  • Josh Dials (of Iasta) who said it’s time to “Put “Strategic” Back into your Strategic Sourcing” on e-Sourcing Forum
  • Jason Busch (of Spend Matters) who insisted that “Strategic Sourcing Ain’t Dead, Regardless of What the Naysayers Suggest”
  • Joe Payne (of Source One Management Services) who echoed his cry and shouted that “Strategic Sourcing Lives On!”
  • William Dorn (of Source One Management Services) who ranted that “Strategic Sourcing is Alive and Kicking”
  • Ron Southard (of SafeSourcing) who couldn’t help but ask if Strategic Sourcing is Alive or Dead (Part I and Part II) and
  • Sudy Bharadwaj who summarized his research in My 2 Cents.

This flurry of activity was followed by Dalip’s insistence this morning that Yup, Strategic Sourcing is Still Dead, as it would seem that, in his view, we collectively did not do enough to revive the patient.

So now it’s your turn! I’m opening up the forum to anyone who wants to throw their 2 cents into the money pot. Simply send a well worded, well argued, piece to the doctor and I will post it here on Sourcing Innovation. Contributions will be posted in the order they are received, so get yours in soon for a speedy posting. (Just be sure to follow the posting rules and keep the marketing out of the material.)

The Strategic Sourcing Debate, Part VI: Yup. It’s still dead!!

Today’s guest post is from Dalip Raheja of The MPower Group, who declared that Strategic Sourcing is Dead, and who has returned to poke the hornet’s nest once more.

A very special thanks to those who engaged in a substantive debate, whether you agree or disagree with us. I am grateful for your time and kind consideration of our arguments and hope that you will continue to engage in the conversation. That was the Intended Consequence. The Un-Intended Consequence was the tone and tenor of some of the reactions. Let me apologize to those who got quite offended by my writing/language skills. As I have said in almost every conference I have spoken at over the years, I am a 3rd world immigrant trying to make a living here and learn the language at the same time, and that is still obviously a challenge for me.

I did not realize that this was a contest and that the doctor was playing Simon Cowell. Had I known this, I at least would have gotten a haircut and put on a nice suit! But let’s forget for a moment who won or lost, according to the doctor, and let’s look at the substantive points made by a number of the respondents. I will address some of them here, and others in a later post.

Clearly, Tim Cummins (IACCM, The Death of Procurement) and I mostly agree on the substance of the hypothesis. Where we may disagree is how to solve some of these issues. What is unique about IACCM is it represents a very innovative nexus in that it brings both the buy and the sell sides together. Especially if you fundamentally believe at the end of the day that the Intended Consequence for both sides is to establish relationships (commitments according to Tim) which create and deliver mutual value beyond the contracted transaction. In fact, there are organizations where both of these functions (buy AND sell side contracting) have been organized under a single leader and we think that is just a fascinating opportunity to maximize value. We call it the JANUS model (feel free to come up with your own name). We think one of the Next Practices the community should adopt is that the Sourcing/Supply Chain function should be an integral part of the sales process (Mpower Blog). Let that sink in for a while and hopefully you will agree. For a detailed discussion between Tim and me on this topic, you can listen to a recording of the webinar Tim and I just delivered:

It is also interesting to note the most recent post entitled “(The) Strategic Sourcing (Debate Part V): My 2 Cents” where the author states in his opening paragraph:

“It’s called strategic, but it’s not used strategically.”

Strategic sourcing, for the most part is seen as a procurement function, and typically, a transactional process leveraging tools such as RFx and Reverse Auctions in a tactical manner. Some large consulting firms, who offer services, treat Strategic Sourcing services similarly and mainly are utilized as “staff-augmentation”. For manufacturing organizations, where materials can be 60%-80% of the cost of goods, sourcing of direct materials needs to be approached as a Supply Chain challenge. Take the direct materials at the point of consumption and work backwards in the supply-chain several tiers, and understand costs. When the Supply Chain is worked cooperatively with suppliers, an organization can ask the question “How we reduce each others costs without adversely impacting each other’s margins”?

No disagreement with what he has to say. He does go on to give some examples of exceptions and while I don’t agree with all his examples, I would be very happy to agree there are many examples of pockets of excellence and we should find them and extract the Next Practices. However, I still maintain that to make the kind of dramatic change we need to make, mere CPR at this stage may not be enough.

In the post titled “Where does Strategic Sourcing fit in?”, the author shares a very similar professional background as mine (been there/done that, speaker and advisor) and has clearly posted a very thoughtful, measured response and I could not agree more with the gist of what he has to say. He lays out three questions, which he writes are even more fundamental, and I am happy to concede his point for a minute. What becomes obvious is we both end up in the same place … it hasn’t worked, it ain’t working, and it needs fixing right away.

“Do your senior executives understand the enormous potential of modern supply management (only one element of which is strategic sourcing)?”

I concur with this totally and this is exactly the argument we are laying out. What the author calls the “enormous potential” is what we are referring to when we talk about the destroyed value. And it is very clear senior executives do not understand that their Sourcing/Supply Chain organizations can help them get at this value because they only see their Sourcing organizations focused on cost/TCO.

“Do your senior executives understand how to achieve that enormous potential — i.e., how to build the transformation roadmap and how to support it?”

The quick answer is no. The more detailed answer is almost all organizations assume if they keep investing in their infrastructure (the consonants), they will get the results. And if the past few years have proven anything, it’s that this misses the whole issue of the vowels … how will these practices and the latest gizmos and technology be Adopted, Executed, Implemented, Optimized and Utilized?

“If the answer to the first two questions is ‘no’, are you prepared to take a leadership role in helping your senior executives achieve the necessary awareness? If not, then debating the ‘strategic sourcing is dead’ question is moot at the company level.”

And this gets at the crux of the issue because in a large majority of the cases, the answer to number three is a resounding NO!!! Furthermore, the follow-up question is why are we still where we are after 25 years? Until we understand that issue, I’m not sure how we go about determining how to fix it. Our research suggests that the biggest reason is the singular focus on cost (TCO etc.) gets in the way of senior executives achieving the necessary awareness because cost is but one element of their decision criteria and that is why we must fundamentally alter the sourcing process and initiate the process with their decision criteria while not abandoning cost.

The author then goes on to say:

 

  • Believe it or not, 25 years after the birth of strategic sourcing, many companies of all sizes still are not aware of “true” strategic sourcing.
  • Equally astonishing, a surprising number of companies believe they are using strategic sourcing, but in fact are not.
  • Perhaps as a reaction to the need for “quick wins” in the current business environment, some companies who previously used a true strategic sourcing process have since “dumbed down” their process into a tactical ghost of what it used to be.
  • As noted above, trying to introduce and embed strategic sourcing without the supporting pillars of a transformation roadmap is likely to generate only short-lived benefits.

 

And to all of the above, I have a simple one word response … AMEN!! And that is exactly why we are issuing the clarion call to acknowledge that it hasn’t worked, it ain’t working, and we need to fix it right away. It was also very heartening to see a reference to a Transformation Roadmap because that is exactly what we have been recommending and delivering to clients for more than a decade. I will agree we are going further and saying the current approach and process (even with the latest technologies, decision optimizers, risk simulators, etc.) ain’t gonna work; and, we can either keep trying to fix it or we can all agree that we need to apply a fresh perspective and come up with something totally different.

So please join the debate, and yes, debate implies a conversation. All I ask is that we keep the confrontations constructive and stay away from the name calling, innuendo, and disparaging comments. We will be the first ones to admit that if we are now right, then obviously we too have been wrong in the past. And if you are truly a committed defender of the status quo, our best wishes to you. I will respond to some of the other commentary in a later post. I will also provide my reading of the Doctor’s TVM and Gartner’S DDVN.

Thanks, Dalip!

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(The) Strategic Sourcing (Debate Part V): My 2 Cents

Today’s guest post is from Sudy Bharadwaj, ex-analyst extraordinaire of the Aberdeen Group, former VP of MindFlow, former CMO of Informance, and, most recently, a star at Inovis.

There is lots of debate in the blogsphere about what is strategic sourcing — whether or not it’s dead, alive, or a zombie. Over the past several months, discussions with consulting firms, large/small enterprises1, and technology vendors has revealed a few items:

“It’s called Strategic, but its not used Strategically”

Strategic sourcing, for the most part is seen as a procurement function, and typically, a transactional process leveraging tools such as RFx and Reverse Auctions in a tactical manner. Some large consulting firms who offer services, treat Strategic Sourcing services similarly and mainly are utilized as “staff-augmentation”. For manufacturing organizations, where materials can be 60%-80% of cost of goods, sourcing of direct materials needs to be approached as a Supply Chain challenge. Take the direct materials at the point of consumption and work backwards in the supply-chain several tiers, and understand costs. When the Supply Chain is worked cooperatively with suppliers, an organization can ask the question “How we reduce each others costs without adversely impacting each other’s margins”?

The Starting Point

One area missing in many Strategic Sourcing processes is a clear understanding of objectives of the process, the organization, or even a sourcing event. Is the focus on cost? A quick answer can be yes, but further details shows that enterprises are balancing cost with quality, supplier performance, and a host of other factors. A large consumer goods company recently awarded contracts which were 10% higher than the previous year to a different supply-base, due to very poor supplier performance the original supply base the prior year (late shipments). The objective of that sourcing event was shifting to more reliable suppliers while keeping the cost of the category within 15% of the previous year. Therefore, a 10% increase in costs actually exceeded expectations.

How are some enterprises leveraging Strategic Sourcing? They are leveraging strategic sourcing initiatives in other areas of their business.

Examples:

Product Design Process Understanding cost structures, supplier capabilities and/or metrics when in the design process and adjusting as needed pays large dividends, since changes later on during the product lifecycle can results in much higher costs or longer innovation cycles. A consumer electronics manufacturer recently had to eliminate a product launch, due to the fact that a critical component, which was cost-effective at lower volumes, was more expensive at higher volumes, thus causing the product’s profitably to fall below acceptable levels.

Manufacturing Knowing which suppliers adversely affect production can be key in understanding qualitative factors (such as cost) vs. quantitative factors such as quality. If a specific supplier is 5% less expensive than others, but, due to inconsistent quality, causes lower yields, is that 5% in savings costing 10% in other costs such as product re-do’s, overtime, or waste?

Supply-Chain Strategy. By having extended supply chains, organizations now off-load much of development and manufacturing of their products to third parties. Should organizations take back some of this manufacturing, perhaps a final assembly step, in order to drive cost savings, perform better customer satisfaction (by offering custom final assembly), or achieve other objectives?

Is Strategic Sourcing Dead?

For some organizations, it may as well be, since top-performers leverage Strategic Sourcing in manners described above, or in other ways, thereby outperforming their industry peers. These top performers also take a multi-year view. For example, in year 1, develop an understanding of the cost structure of key materials or components. In year 2, leverage this knowledge and work with those suppliers who can attack the key parts of cost, lowering the overall cost of a product, thus increasing profitability, or maintaining profitability as the organization faces price-pressures. In year 3, the organization may start to drive out cost by (1) aggregating specific key components across it’s supply-base, (2) taking positions on these components in commodity markets, and (3) requiring the supply-base to purchase these components from the commodity positions.

Thanks, Sudy.

1 Primarily Manufacturing firms in a variety of industries: Hi-Tech, CPG, Process, Oil & Gas, Pharmaceuticals, Discrete Manufacturing, etc.

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