Strategic sourcing is not strategic if it doesn't include e-procurement.
It's taken awhile to get there, but Procurement is finally being seen for the value it can provide as an essential business function. A well-run procurement department can increase both an organization’s competitiveness and its profit margins.
No longer limited to cost savings, Procurement is being leveraged at all levels and across all divisions to achieve quantifiable improvements to company goals and objectives.
The Role of Strategic Sourcing
One reason for this advance has been the adoption of strategic sourcing as a guide for developing standardized procurement processes. Strategic sourcing, as defined by CIPS, means “satisfying business needs from markets via the proactive and planned analysis of supply markets and the selection of suppliers with the objective of delivering solutions to meet pre-determined and agreed business needs.” Traditionally, procurement relied on reactive sourcing - responding to requisitions or other business requirements as they came up. As procurement becomes more proactively managed within a company, reactive sourcing turns tactical. While tactical sourcing involves creating a strategy to anticipate needs and plan accordingly, it still deals with them as they arise.
The Two Main Benefits of Strategic Sourcing
Once companies change from merely reactive and tactical sourcing to a strategic sourcing process, there are a number of benefits. First and foremost, there are cost benefits. For example, the United States Federal Government achieved savings of more than 22% in Q2 of FY 2014 due to a strategic sourcing initiative implemented in 2010. Of course, the benefits of strategic sourcing do not stop with cost savings. Strategic sourcing can also help organizations achieve a broad range of business objectives. The previously mentioned initiative also helped the US Government achieve their sustainability and socio-economic goals; in Q2 FY 2014, they purchased 75% of their office supplies from small businesses, and of all of their office supply purchases, 34.9% met their green purchasing requirements.
This is precisely why best-in-class organizations are implementing strategic sourcing guidelines - it moves procurement away from the rote process of requesting bids and choosing a supplier based on price. Organizations now consider a broader range of KPIs. For instance, cost can be taken into account but by looking at the big picture: the total cost of ownership. Supply Chain Quarterly states that a product’s acquisition accounts for about 25-40% of the TCO. Strategic sourcing allows you to consider the factors accounting for the balance of that TCO - transportation, warehousing, maintenance, inventory, etc. Looking at inventory alone shows how these factors might provide additional opportunities for savings. It’s tied tightly to net working capital, so a lower inventory level means better NWC and an improved cash flow. If these KPIs are ignored, then the sourcing is no longer strategic.
Why Strategic Sourcing Depends On E-Sourcing Solutions
Strategic sourcing addresses the overarching strategies needed to truly leverage Procurement. However, it’s nearly impossible to reap the full benefits of strategic sourcing without implementing an e-sourcing solution. Consider this - according to anecdotal evidence gathered by A.T. Kearney, incorporating e-sourcing into a well-managed sourcing plan can result in an increase in savings of 5-8%. Strategic sourcing is a good place to start when creating policies and procedures, but its benefits cannot be fully realized without implementing some type of e-sourcing solution.
How E-Sourcing Achieves Savings
Reasons behind e-sourcing savings are multiple. For one, the BuyIT Best Practice Network identifies a reduction of 33% in process throughput time. This leads to a faster turnaround for sourcing projects, which in turn, frees up buyer time. The benefits of time savings are twofold: you can either use it to bring more spend under management or reduce operational costs since fewer buyers are needed to produce the same output. For example, the aforementioned A.T. Kearney study refers to an organization that was able to reduce its procurement staff by 50% over the course of eight years through e-sourcing.
E-sourcing's ease of use, flexibility, and reach make it easy to place more spend under management. Controlled spend limits maverick spending and allows the organization to negotiate better terms with preferred suppliers. Essentially, e-sourcing gets all buyers on the same page, and this transparency improves company ethics and profits.
Since 68% of best-in-class organizations use e-sourcing according to the Aberdeen Group, it’s easy to find testimonials outlining its benefits. After implementing DeltaBid, one of the e-sourcing platforms on the market, Roman Bogdanovits, CEO of Gaasivõrgud, the Estonian gas distribution network operator, said, “DeltaBid has considerably enhanced the efficiency of our procurement processes for gas line construction and renovation works by making the process more transparent and by creating more competition between suppliers. We saved more than 412,000 USD [in 2013], which represents five percent of our total investment.”
Organizations looking to leverage a strategic sourcing initiative must consider utilizing an e-sourcing solution. The savings in both costs and process efficiency are too great to ignore. With so many options on the market, companies need to find a solution that fits their needs in both budget and functionality. Failing to do so would mean failing to truly optimize savings.