Within private sector procurement, there are a number of advanced technologies that are beginning to reshape how we think about the role of “buying.” Perhaps the best place to start is in the world of sourcing itself. When I first started in the profession, top performing private sector organizations were moving to embrace standardized sourcing processes involving any number of steps (5, 7, 9). We can thank AT Kearney, McKinsey, FreeMarkets and other firms for introducing these rigorous approaches. Without quoting from a textbook, the general philosophy of these programs involves:
- Starting with data/category analysis including the aggregation of spend from various stakeholders, business units, etc.
- Developing a perspective on the supply market through research
- Coming up with a general sourcing strategy for the program in question (e.g., in certain cases a “make/buy” analysis might apply for buying parts and assembling them in-house versus a finished component or product)
- Conducting an initial request for information (RFI) to understand the high-level capabilities of suppliers to meet specific needs
- Creating lot structures (groups of items/SKUs/services) and issuing a formal RFP
- Conducting a direct negotiation with suppliers including an “apples to apples” comparison process which may or may not have involved the use of technology (reverse auctions were the first common “online” format used)
- Analyzing the various submitted bids and weighting different criteria (if applicable) beyond price
- Awarding the business
- Implementing the contract and savings (probably the most under appreciated area, but that is a topic for another day)
Without question, such strategic sourcing processes work. They are bound to yield savings (of some sort) and reduce the category and supply risk for an organization – private or public sector – provided each step is followed in sequence with managerial and expert oversight. But this traditional approach breaks down in a few key areas.
The Limits of Strategic Sourcing
First, basic strategic sourcing forces a certain premature rigor in how one structures a given bid. A sourcing manager might believe she has created the right lotting structure for a specific effort (e.g., 10 lots with 10 SKUs each) based on maximizing the potential for competition based on her understanding of what suppliers can deliver. But in reality, suppliers are often far more capable, clever and creative around proposing alternative solutions and capabilities than we give them credit for. Forcing them down a certain path too early is in effect cutting out a potential route to savings or other benefits. Second, the process limits the type of analysis that can be conducted on the back-end after a bid.
Traditionally, we have been able to “weight” the results of different RFI responses in a basic manner either in Microsoft Excel or in a strategic sourcing tool. But weighting only allows us to compare basic factors together at a single point in time. Nor does weighting let us run alternative scenarios based on weighing supplier responses against an internally defined set of constraints (e.g., “give me the low cost solution that awards at least 20% of business to diversity/minority suppliers, gives no more than 50% of a lot allocation to a single supplier and limit the percentage of the award to suppliers using off-shore parts or materials to no more than 75% of the total award value”).
Pinpointing the Challenge
When we begin to look at sourcing approaches from this perspective, it is clear that traditional approaches have limits for a variety of reasons:
- We are traditionally (without new technology) incapable of flexible data collection efforts (e.g., letting suppliers bid alternative approaches and suggest different ways of solving for a problem – such as substituting material or providing a shipment in less than container load quantity)
- From an internal perspective, the limits of our analytical abilities to look at bid submission break down as we begin to apply a combinatorial set of constraints against submitted bids. The boundaries of Excel show up quickly here especially if we want to analyze alternative award scenarios
- Sourcing activities inherently stay limited to procurement under a strategic sourcing approach – it makes it difficult to think about supply chain (e.g., inventory) or finance (e.g., working capital) implications at the same time as a negotiation or award decision takes place. Hence, our understanding of total cost is limited to a procurement standpoint rather than a broader one
But there is more than hope to overcoming these challenges. I previously wrote on the topic that if we can take a different approach to sourcing we become capable of “inviting and breaking down the gathering and analysis of the true economic costs (price and non-price) of different decisions [which] can help serve as a foundation for collective understanding and change inside a company.”
Moreover, “These newer models can also be a catalyst to incorporate related problem sets (and opportunities) into a sourcing decision for the first time. For example, sourcing optimization can make organizations more risk aware of decisions that prioritize reduced-unit cost at the expense of geographic concentration of suppliers, distribution facilities, etc. in global markets, which might be prone to specific or general risk types (e.g., natural disaster, labor concerns, political upheaval, etc.).” The best news of all? These advanced sourcing approaches are in use today by early adopters in the private sector.