Strategic Sourcing that Delivers Results
Sometimes smart people ask really smart questions. Recently, a Sr. Purchasing Director at a $3.5B manufacturer asked what we consider to be the most important factor for strategic sourcing projects. After careful consideration, we believe that there are three critical factors for success in strategic sourcing projects that deliver results.
First, here’s our definition of strategic sourcing: Projects that quickly deliver cost savings while ensuring supply and aligning supplier capabilities with the needs of the organization.
- Quickly deliver cost savings – PO-to-PO savings in 3-4 months
- Ensure supply – Only engage with suppliers with the capacity and financial stability to deliver
- Align with the need of the organization – Stakeholder needs and commodity objectives defined up-front
Basic Requirements – 3 Keys to Successful Change Initiatives
According to a 2022 article in Forbes, 70% of all change initiatives fail. Based on our experience, you need three fundamental elements in place to stay on the right side of the 70% fail/30% succeed divide in any project:
- Executive engagement. Organizations are complex, and you’ll need the support of many different leaders and manager. You must anticipate that there will be challenges and be prepared to address them. The fast track for this is to have an executive sponsor who is kept informed of progress and knows that their role is to remove roadblocks should they arise.
- Clear objectives. The definition of “project success” may vary depending on who you ask. One of the great things about actively involving a top executive is that they will demand clear, agreed-upon objectives for the project. This ensure everyone is working towards the same end and understand the value the results will bring.
- Cross-functional collaboration. Frequently, change initiatives fail due to unintended consequences. Involving representatives from every function and, at times, every geography that will be impacted by the change is the first step to preventing unintended consequences.
Critical Success Factors for Strategic Sourcing Projects
1. Interview stakeholders. While a cross-functional team is is crucial for a successful strategic sourcing project, suppliers impact too many parts of the organization to have full representation on the team. For example, in a recent strategic sourcing project for indirect materials, we conducted over 40 interviews with representatives across seven functions and five manufacturing locations to identify service levels currently provided and pain points currently experienced. One of the most common unintended consequences of strategic sourcing is awarding sourcing to suppliers that can’t provide the level of services that the plants depend on or need.
2. Engage commodity experts. Companies typically know the suppliers they have sourced to and a few others that have been market tested or have been actively calling on them in the hopes of winning business. A successful strategic sourcing project not only identifies additional suppliers, but selects suppliers to investigate that align with the company’s current and future needs (capabilities, geography, technology, services, etc.).
In a recently completed a strategic sourcing project for machined and stamped components, we identified 43 potential suppliers, 19 suppliers were found to have the specific attributes and capacity needed and were able to quote the business. Almost all of the aligned suppliers were unknown to the client’s in-house experts.
3. Get cost details. Too often, manufacturers find that suppliers will not provide much cost transparency when quoting. A strategic sourcing project is the perfect time to expand the amount of information you get from suppliers.
One approach that works well is to conduct multiple RFQ rounds with an increasing amount of information required to quote. For example, in today’s environment you might not require anything beyond a price quote in the first round. After narrowing the field to the more capable and competitive suppliers, you can ask for cost breakdowns with limited detail. Once you’ve selected the finalists, you can require more detailed cost breakdowns that provide the information needed to truly understand supplier cost structures and engage in knowledge-based negotiations going forward.
Want to learn more about strategic sourcing? Watch the on-demand webinar Reducing Corrugated Packaging Costs for a detailed example of how these three critical success factors aided one company in turning a 10% supplier price increase into a 20% cost reduction on their $2M corrugated packaging spend.