August 23, 2018 | Sourcing Strategy
Strategic sourcing became a clearly defined process about 30 years ago, and standalone tools that could automate some of the manual processes came into existence about 20 years ago. Since then, we’ve come to a point where sourcing consultants must use tools for spend analysis, e-sourcing, contract management and supplier performance management for these activities to be considered “strategic.”
Strategic sourcing is a vital need for companies now, especially with businesses now widely spread across different geographies and supply chain risks higher than ever before. Procurement teams — under pressure to evolve with rapidly changing market conditions and embrace new opportunities (all while maintaining efficiency and costs) — are increasingly aware that traditional sourcing processes don’t get the job done like they did before.
Yet, despite this awareness, and modest measures, the percentage of spend under management at the average enterprise hasn’t really gone up. As of 2018, the average enterprise manages only 62.1 percent of its spend, a mere 1 percent bump over 2017. Compare this with the top 20 percent of companies that, on average, manage 92 percent of their spend (nearly 40 percent more than their peers). What do these best-in-class companies know about strategic sourcing that others don’t? What do they do differently?
How Leading Companies Have Upped Their Game
Getting Spend Analysis Right: Accurate, real-time information on spending patterns is essential for any sourcing strategy to be effective. Most companies are aware of the benefits of spend analysis. However, they still use semi-manual methods to consolidate, cleanse and reclassify spend data from different departments, enterprise systems and locations. They painstakingly resolve differences in terminology, style, etc. in this data. This process takes up a great deal of time and needs to be repeated to identify any changes in enterprise spend (by both supplier and commodity), compromising real-time spend visibility and accuracy, and resulting in value leakage.
Best-in-class organizations realize the tremendous value of automating the entire process in terms of lowering spend and impacting bottom-line profits. They invest in automated solutions that easily integrate with their existing ERP systems and transform the source spend data from all key systems into a single data set. This data is then easily classified and analyzed to support activities in the entire source-to-pay cycle (reducing sourcing cycles, optimizing inventory, assisting in long-term planning, etc.) These solutions provide enterprise-wide spend visibility with in-depth analytical reporting and business intelligence, ideally on cloud-native platforms, helping companies manage spend better and save costs.
Acquiring Market Intelligence: Strategic sourcing is not simply about costs — managing risk effectively is equally vital. Natural disasters, political upheavals or even sudden policy changes often leave companies vulnerable to huge financial losses or even reputational damage. Yet, despite an awareness of this vulnerability, many companies have a reactive, rather than proactive approach to dealing with risk.
However, the top-20-percent companies consider supply market intelligence (SMI) as a top strategic activity. They invest in well-designed, user-friendly business intelligence solutions that analyze data (on cost, KPIs, suppliers, negotiation levers, etc.) and reveal in-depth sourcing and procurement insights. SMI also helps companies closely monitor supply market conditions and promptly address any risk that arises. Armed with the right business intelligence across all spend categories, enterprises are able to take better informed sourcing decisions and reduce risk proactively.
Adopting the Right Technologies: As of 2018, more CPOs (about 47 percent, per a recent study) are focusing on improving their department’s use of technology by investing in new systems and better using their current systems. Making technology adoption a priority is on the rise across companies.
However, it is the best-in-class procurement teams that are focusing on greater adoption of digital, automated business solutions across the source-to-pay (S2P) process. They have realized that seamless and holistic processes, borne via automation and the utilization of new, agile technologies, will create the most value. They are replacing harder-to-use, first- and second-generation solutions with cloud-based ones that are user friendly and more responsive. With unified, seamless e-procurement platforms undergirded by new technologies, top-performing procurement teams are gaining greater visibility into the total enterprise spend, spend under management, and identified or negotiated savings.