A Holistic Approach to Realizing Sustained Results
Virtually every leading company has implemented strategic sourcing initiatives
in an effort to generate cost savings. Many of these companies have already zeroed
in on the sourcing process and purchased software tools or run hosted e-auction
events that have yielded measurable results. In fact, during a single auction
for power cords, a major home appliance manufacturer recently saved $3 million
(or 30 percent) compared to a previous purchase of the exact same product. Clearly,
these types of sourcing initiatives have resulted in lower costs and in some cases,
enhanced contract terms.
Unfortunately, while they may offer early returns, many sourcing initiatives fall short of delivering sustainable improvements to the bottom line. These initiatives often operate in isolation and are rarely linked to cross-enterprise business metrics or to the transaction and analysis tools required to drive supplier compliance and sustain savings. In addition, many sourcing initiatives to date have focused on small subsets of procurement categories, leaving substantial savings on the table. Primary issues include lack of consolidated spend data or a means to maintain data integrity on an ongoing basis. Limited access to the tools required to systematically analyze and address the enterprise-wide spend base is another limiting factor. Lack of cross-enterprise cooperation and the inability of the procurement organization to establish credibility and trust with end users also limits sourcing initiative success. In the end, "successful" sourcing initiatives often culminate in the creation of a single agreement or contract that is not systematically tied to bottom-line results through any reliable means.
Only by linking best practices across the entire source-to-settle process — spend analysis, strategic sourcing, procurement, settlement, compliance monitoring, and supplier management — will enterprises gain sustained, long-term benefits from their sourcing initiatives.
A Holistic Approach
Today's leading businesses are shifting their focus from strategic sourcing and other procurement point solutions to a more holistic approach. Rather than singling out individual procurement functions for improvement, companies are adopting integrated, cross-enterprise frameworks for supplier relationship management (SRM) to maximize bottom-line benefits.
Such an SRM framework includes all aspects of supplier relationships — from negotiating with suppliers on pricing to empowering suppliers to manage themselves against shared performance metrics. SRM integrates design, sourcing, enablement, purchasing transactions, and settlement with sophisticated analytics. New SRM tools now allow an enterprise to collaborate across internal organizations, as well as share strategic data and ideas externally with all of its suppliers. (See Figure 1).
Figure 1: Integrated SRM Framework
By linking strategic sourcing plans to purchasing execution, an integrated, enterprise-wide SRM approach delivers sustainable benefits, including:
- Reduced costs — leveraging companywide spend volume, contracts, and discounts, and streamlining and automating payment processes.
- Increased visibility — tracking and utilizing critical resources, monitoring supplier effectiveness, and leveraging historical information to improve negotiations and supplier performance.
- Improved efficiency — reducing administration time and costs, standardizing processes, and compressing procurement cycles.
Additionally, a Gartner report estimates the profit impact of SRM approaches, predicting that Fortune 500 companies that fail to adopt cohesive SRM methodologies by 2005 will see profits shrink by close to 2 percent, as the percentage of sales dedicated to purchasing materials rises.
As an example of the potential benefits, one of North America's largest health insurance providers used a new enterprise-wide approach to sourcing and procurement that made it possible for the company to:
- Contract for approximately $30 million in savings.
- Gather, assess, and disseminate better procurement information more quickly.
- Enhance the performance, productivity, and value of its procurement and non-procurement personnel.
- Reduce the supplier base, thereby simplifying and streamlining procurement operations.
- Source key commodities strategically, based on longer-term supplier contracts and mutually beneficial business relationships.
Building a Successful SRM Framework With substantial economic benefits in the balance, leading companies are building successful SRM initiatives by investing in four major areas (see Figure 2):
Figure 2: SRM Framework Capabilities
- Technology
- Domain expertise
- Process
- Organization
Technology
As the foundation for a robust SRM framework, technology integrates, connects, and optimizes sourcing decisions to achieve greater financial impact across the organization. To fully realize the value of an SRM framework, enterprises need SRM technology solutions with the following attributes:
- The ability to manage all spend and enhance profitability for both goods
and services while driving cost reductions throughout the extended supply
chain (using tools such as spend analytics, strategic sourcing, e-procurement,
services procurement, e-settlement, and executive dashboards).
- The ability to connect suppliers and collaborate with internal and external
stakeholders throughout the sourcing and transaction purchasing phases (using
tools such as e-sourcing process management, supplier portals, and electronic
catalogs).
- The ability to optimize supplier performance and improve relationships with strategic suppliers (using tools such as contract management, supplier metrics, and supplier rating programs).
In the past, applying technology meant little more than automating the purchasing transaction process — speeding individual tasks, eliminating the need for data re-entry, reducing error rates and rework, and improving process flow. However, the technology solutions now available to support integrated SRM initiatives offer far more sophisticated benefits. For example, integration between spend analysis tools and transaction systems provide closed-loop monitoring of sourcing efforts as well as an effective way to maintain accurate spend data on an ongoing basis. eSourcing workflow engines organize work streams within and across product categories to produce a coherent sourcing effort. And, supplier-rating capabilities enable enterprises to track purchasing data and product quality and calculate supplier performance metrics.
The ideal SRM technology includes a flexible, open architecture that enables enterprises to implement single-solution components for rapid return on investment, while also providing a framework that integrates legacy and third-party data. With this architecture, companies can now obtain a complete picture of supplier relationships and make decisions based on relevant hard data and analytics. As David Hope-Ross, a senior analyst with Gartner, says vendors "are taking what was little pieces and parts and making something whole out of it." This ability to analyze data from multiple sources offers a new kind of visibility into supplier relationships, one that better supports sourcing decisions and, ultimately, drives profitability.
As an example, a U.S. state government entity has selected an integrated source-to-settle
solution to improve control over its statewide sourcing process and to better
leverage its purchasing power and supplier relationships. Through the use of
multi-party bidding, improved supplier selection, increased contract leverage,
and links to transactional purchasing that will reduce off-contract purchasing,
the state expects to reduce their costs for goods and services by 5 to 10 percent,
which could yield from $10 million to $20 million in annual savings.
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Appliance Manufacturer Plugs |
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One of North America's leading appliance manufacturers faced a number of procurement challenges, including leveraging multiple operating units' volume and supply bases, and dealing with a weak market and tighter cost pressures. During an eight-month program with Accenture, a best practice strategic sourcing methodology was introduced and applied, resulting in $76 million in annual cost savings and a significantly leaner supplier base. |
Domain Expertise
The cornerstones for realizing the sustainable benefits offered by a holistic SRM approach are deep domain expertise and change management capabilities. The most sophisticated technologic tool-set in the world is useless if not accompanied by a comprehensive understanding of best practices, process design, and implementation. Domain expertise also demands insight into market dynamics and total cost drivers, as well as surefooted proficiency in tactical sourcing processes. Perhaps most critical to the success of a holistic SRM initiative is a company's ability to successfully manage the organizational and process changes required to support a new SRM initiative and ensure that the enterprise-wide benefits are achieved.
Process
Processes that support all aspects of a company's sourcing and purchase of materials and services — not just isolated product categories — are key to a holistic enterprise SRM framework. These high-level processes — including strategic sourcing, transaction execution, and embedded analytics (see Figure 3) — require a company-wide approach to obtaining all direct and indirect materials and services at the lowest total cost. Most people are familiar with the fundamental components of the sourcing process, including:
Figure 3: Strategic Sourcing to Settlement Process Flow
- Formalizing commodity management strategies and methodologies, including standardized workflows and approval processes
- Determining sourcing strategies and priorities
- Identifying, evaluating, and developing relationships with strategic suppliers to meet sourcing priorities
- Negotiating and implementing favorable contracts with selected suppliers
But often overlooked is the fact that the sourcing process must be integrated
with the more tactical transaction execution system to maximize the benefits
from strategic sourcing — without this critical link, many benefits of
strategic sourcing are left unrealized. In addition, companies need powerful
analytics to track and report on supplier performance and purchasing spending
patterns and maximize the benefits gained from long-term, strategic partnerships.
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British Airways Lets Sourcing Take Flight |
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British Airways, which operates extensively in countries
all over the world, overhauled its relationship with the 30,000 suppliers
that accounted for its $6.5 billion procurement budget. The company wanted
to develop strategic sourcing capabilities and claim industry leadership
in e-procurement. With a comprehensive approach, the company rationalized
its supplier base, implemented
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Organization
Finally, organizational support for a holistic SRM framework is required to ensure success. Enterprises must line up the right organizational elements — the people, the structure, and the measurement tool — to buttress their companywide SRM initiatives in order to yield maximum, long-term profitability.
- People — Realizing the full potential of strategic sourcing
requires that an organization and its people evolve and embrace the SRM approach.
For example, purchasing staff may need to expand their skill sets from order
processing to supplier evaluation or from auctioneering to negotiation management.
And, staff skilled in particular processes may need to embrace working in
cross-functional or inter-organizational teams. Without an organization's
key resource — its people — on board, true change will elude even
the most technologically advanced, market-savvy enterprise. Every employee
must be willing to adopt fresh approaches to old problems if an enterprise-wide
SRM framework is to generate ongoing benefits.
- Organizational Structure — Removing physical and cultural barriers
between purchasing and other functional areas is crucial to a successful SRM
initiative. For example, a new, cross-functional team could drive sourcing
best practices throughout various departments to achieve greater impact. Conversely,
if the organizational structure is not supportive of an SRM initiative, the
benefits will fail to touch the bottom line.
- Measurement — Equally important, a company needs best practice target settings and performance monitoring processes, so that it can track and sustain the benefits of its SRM initiative. Incentive programs are difficult to use effectively without being supported by the proper metrics and scorecards. As an example, collaboratively monitoring supplier performance and results through a supplier-rating program can enable suppliers to self-manage and improve key aspects of their own performance.
Conclusion
For many companies, implementing strategic sourcing initiatives represents significant progress. However, leading enterprises have recognized that these one-off initiatives only skim the surface of their potential for improving efficiency, supplier performance, and — ultimately — profitability. Market leaders are integrating strategic sourcing solutions with an enterprise-wide SRM view; recognizing that sustained success demands an investment in the key areas of technology, process, domain expertise, and organizational structure. And, by combining deep business process knowledge with best-in-class technology solutions, these leaders are reaping increased profits — again and again — throughout the enterprise.
