While purchasing has evolved from the basics of simply buying materials or supplies, the procurement strategy remains somewhat the same: Companies need materials and services to function, and those must be purchased on the open market. When you introduce the notion of strategic sourcing,
“The term has evolved from purchasing to procurement to strategic sourcing and supply chain management,” said Ted Weyn, Managing Partner with Alpharetta, Ga.-based consulting firm HCMWorks. “If organizations are really embracing strategic sourcing, they’ve gotten away from the lower levels of purchasing, but the transactions still have to be managed.”
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Strategic sourcing is a concept that means just what it sounds like: managing purchasing transactions in a strategic manner that allows for ongoing analysis and adjustment -- based on pricing, supplier performance and current needs.
“[Organizations say:] ‘Let the technology manage the transactions; provide us with the visibility so we really can be strategic’,” Weyn said.
The systems on the market that enable strategic sourcing are still often labeled as procurement software, sold within ERP systems, supply chain management systems or standalone products.
Key requirements for procurement software strategy
Any procurement system will track transactions, providing a history of purchases. But this often is not enough to enable strategic sourcing, Weyn explained. Within the procurement system, companies should be able to see not only what was purchased, but all the specs surrounding that purchase. If a company spent $1 million on desktop computers, for example, would that cause the company to lose out on home productivity?
“You can see how whether it be computers, consulting services, office supplies, there are opportunities to make strategic decisions that could provide better product, better service or in the case of direct procurement, better margins by buying smarter,” Weyn said. “But without that level of granularity or detail, you won’t know what you’re spending on.”
Companies should also look at the type of spend involved, according to Jason Busch, managing director at Chicago-based Azul Partners. Purchases may be an “indirect” material spend (toner cartridges or office supplies that support doing business) or “direct” spend for manufacturers (metal, plastics, materials associated with production). There is also a third category that includes services such as consulting, legal or accounting providers.
“That’s one way of looking at the market and defining the scope,” Busch said. “The other way is to look at the transaction itself and the supplier relationship, which shows how much you spend with a given vendor over time.”
Another important function for enabling strategic sourcing is contract management, key for negotiating and managing terms with suppliers, including pricing and performance requirements. Contract management for procurement should support advanced negotiation functions, including methods to collect and compare vendor bids, as well as functions for managing contracts, improving spend visibility and data analysis.
“Steel and aluminum, for example, is important to the auto industry,” Weyn said. “If you save a dollar for each item [using contract management functions], it’s gone from purchase to strategically sourced.”
Contract management is especially important for managing multiple tiers of suppliers and subcontractors, said Busch of Azul Partners.
“In the oil and gas industry, contract management is very big deal,” said Busch. “If you contract with Halliburton to drill your well, they have to manage all the sub-tier suppliers, so those details go into the contract. You want to ensure those sub-tier suppliers are adhering to your code of conduct in terms of materials used and labor laws, for instance.”
Choosing the right procurement software for strategic sourcing
To start, an organization should form a cross-functional committee to help determine what areas this new software would touch. This group should include representatives from the business or operations groups that will use the system, as well as the CIO and IT department responsible for implementing the system. This group must consider overall goals and strategy, gather requirements -- and consider one other often-overlooked issue, Weyn said.
“Change management is required as in all new systems adoptions,” said Weyn. “Without change management as a business requirement, it’s not likely to succeed.”
That’s because at the end of the day, success with a procurement system is all about adoption -- a fact many companies don’t consider enough upfront. Some companies implement systems and see only 10% to 20% adoption.
“We call it procurement through prayer -- plug and pray,” said Weyn. “They spend millions of dollars on a system that they can’t get people to use. It’s important to look at the pain points of the end user.”
Another key consideration is understanding the difference between configurable and customizable. Configurable means that it’s within the existing capability of the system out of the box, so that changing settings will deliver the required functionality. Customization is a different story, though.
“If it’s outside of that configuration capability, that’s customization and that’s very expensive. That’s why requirements gathering is important so you can see the system doing what you want it to do,” said Weyn.