Take a Test    Article Library    CEEJ Home    Submit an Article     Contact CEEJ


Article # 0037

AN ENGINEERíS VIEW

OF

STRATEGIC SOURCING

R.L. Langley, P.E.

Introduction

In this discussion, "Strategic Sourcing" is defined as the activity of consolidating certain generally common materials and service requirements across a business enterprise followed by securing written agreements for these needs with a relatively few select suppliers. Done correctly, this effort can result in annual savings of 10-15%, and the author has seen as much as 40% in certain areas. Previously, the author has indicated how engineering technical and analytical expertise can be value added to these efforts (Article #0027).

The Strategic Sourcing Process

The following are typical steps in the process:

Why Strategic Sourcing?

After looking at all those steps, one may wonder about the feasibility of the effort. Itís no small endeavor, but the bottom line is that it can be a win-win for both the client company and their suppliers. As mentioned before, itís not unusual to see evident savings of 10-15% by offering system volumes to a few suppliers, not considering back office savings. In exchange for that, the supplier receives a larger, ratable business demand plus a longer term contract (usually at least three years.) This helps immensely in the suppliersí future business (growth) planning and financing.

Critical Success Factors

The Challenges

The main challenge is the apparent paradox of implementing what may be seen as a "Corporate Driven" effort in this day of decentralization and local empowerment. For good reasons, many field managers and supervisors have a close affinity for local suppliers of goods and services fostered by years of favorable experience. A strategic sourcing effort may be seen as threatening those relationships. Another challenge is the assimilation of new divisions or companies in this day of mergers and acquisitions. If a company that has a well entrenched corporate strategic sourcing paradigm acquires another company that does not, it can create difficulties. Effective communication, clear executive management direction with established policies and known performance metrics for compliance to "the program" can help in this. Finally, in an era of frequent asset divestitures, significant volumes of the selected supplierís business can "go away" at the drop of the hat requiring the supplier to rethink and maybe even have to rebid the agreement. In these cases, both the client company and the supplier need to be reasonably practical for the ongoing mutual benefit.

The Good, The Bad & The Ugly

The Good-Includes overall savings, stable and secure supplier relationships, fixed pricing over a defined period (resulting in better business efficiency and planning models), and lower back office accounting costs (fewer suppliers to deal with.)

The Bad-Includes dealing with major corporate paradigm change issues, some selected suppliers self proclaiming an improper sense of "entitlement" unless managed properly, sometimes putting the small local "mom and pops" out of business, and users that want to "cherry pick" sourced suppliers while maintaining their localsói.e. not totally using sourced suppliers, but purchasing certain goods/services from the sourced supplier if cheaper and convenient while maintaining local arrangements.

The Ugly-When the sourced volumes donít materialize as portrayed, there can be a potential breach of contract issue. Also, unmanaged over a long period of time, "Alliance" arrangements that havenít been under the light of bid comparisons for some time can get overpriced and out of control. In other words, what started out as a good thing can actually turn into a detriment long term if not managed properly.

Pitfalls

Here are some things to consider and watch out for:

Conclusion

Done properly, Strategic Sourcing can result in significant savings for common materials and services purchased across a business enterprise from multiple suppliers. Done improperly, it can result in much needless expenditure and frustration for everybody. Strategic Sourcing isnít for every company. The authorís advice on this matter is to (1) go into this consideration with "eyes wide open", considering all aspects of the matter (2) talk to other companies with similar operations who have successful processes up and running, and (3) talk to others that perhaps have had less than optimal experiences and find out why. The bottom line is donít go into this without recognizing the effort required and balance that with the potential benefit and cultural fit for your organization.

Resources:

Outside resources could include your local chapter of the National Association of Purchasing Managers (NAPM), Institute for Supply Management (http://ism.ws/), and Houston based Resources Connection-Supply Chain Management: 713-403-1960 - (http://www.procurementcentre.com).

Biography:

Robert (Bob) Langley, P.E. holds a B.S. Degree in Chemical Engineering from the University of Oklahoma. For over 30 years he worked for Fortune 500 midstream (natural gas processing) companies as Process Engineer, Plant Supervisor, Plant Manager, Supply and Distribution Operations Manager, Manager of Environmental, Health & Safety, and almost three years as Director of Supply Chain-Services Strategic Sourcing to support midstream operations. He served on the industry (Gas Processorís Association) Legislative and Regulatory Advisory Committee for seven years. Recently he has worked as an independent contractor/consultant in the positions of Sr. Accounts Payables Auditor, Sr. Contracts Compliance Auditor, Buyer, and Assistant Procurement Director.


Article # 0037         TEST QUESTIONS:

1.   "Strategic Sourcing" is defined as the following generally common requirements that keep a business running:

  1. Materials

  2. Services

  3. IRS Forms

  4. a & b

2.   Typical savings from a successful strategic sourcing effort can be

  1. <5%

  2. 5-10%

  3. 10-15%

  4. 15-25%

3.   In assessing annual repeatable spend within a category, the following items can skew the results beyond what is really "sourceable" :

  1. One time capital expenditure

  2. Duplicate accounting entries

  3. Miscoded entries (into wrong category)

  4. All of the above

4.   Engineers can add value all along the sourcing process as well as in implementation, but the following steps are areas that fit particularly an engineering background:

  1. Critically assessing potential sourcing opportunities

  2. Conducting the Bid Process-developing bid specifications

  3. Evaluating bids & getting bidders "apples to apples" on comparison

  4. All of the above

5.   If thereís a problem event between the user and supplier, itís important to realize

  1. The necessity of performing a fact based RCFA

  2. The User is always correct

  3. The Supplier is always correct

  4. The Sourcing Group is always at fault

6.   One of the key functions that many forget to attach or emphasize toward the end of any strategic sourcing effort is

  1. Establishing ongoing Supplier/Agreement Management

  2. IRS Reporting of Savings

  3. Human Resources

  4. Accounting

7.   The biggest challenges of any Strategic Sourcing effort include

  1. Corporate initiated efforts in a decentralized (user) organization.

  2. Integrating acquisition companies into the effort

  3. Supplier hardship in divesting user assets

  4. All of the above

8.   One should consider the vendors ____ in determining the best value.

  1. technical expertise

  2. responsiveness

  3. customer service

  4. All of the above

9.   Which of the following is NOT a typical step in the Strategic Sourcing Process?

  1. Assess Opportunities

  2. Develop Strategy

  3. Evaluate Bids

  4. Have coffee and donuts with the local supplier

10.  If a consultant is used to help set up a strategic sourcing program, one should ____.

  1. Check his references.

  2. Ensure they are paid by commission based on the identified savings.

  3. Keep the consultant "on the payroll" as long as the strategic sourcing program is in place.

  4. All of the above

Take a Test    Article Library    CEEJ Home    Submit an Article     Contact CEEJ