Strategic Sourcing versus Traditional Purchasing: And the Impact on your Bottom Line

By Tom Beaty, President & CEO, Insight Sourcing Group

Recently, after hearing the positive—yet unexpected—outcome of a transportation strategic sourcing effort by Insight Sourcing Group, a senior executive asked the project leader a million-dollar question:

How in the world did you get 15 percent savings from a supplier we've been using for more than 15 years, let alone more than 25 percent from their biggest competitor?

While the results were compelling, the executive in question was surprised and somewhat angry that a long-term supplier he viewed as a partner had been willing to yield such significant savings.

The answer to his question was simple: process. Specifically, the Strategic Sourcing process used to deliver these savings was vastly different from the process in place for decades prior at this multi-billion-dollar manufacturer.

The Key Differences

1. Poor procurement data often hinders traditional purchasing. By contrast, strategic sourcing professionals are willing to perform "pick-and-shovel work" to get the data necessary to achieve best-in-market results. Spend visibility is surprisingly elusive, and you cannot effectively manage what you cannot track and monitor. Given that many companies spend 30 to 80 percent of revenues on the purchasing of materials and services, increasing spend visibility, coupled with a more effective sourcing process, can truly be strategic.
2. In traditional purchasing, the typical mantra is 'get three bids and go with the lowest.' Strategic sourcing assesses the supplier market and internal needs, develops multiple sourcing strategies, identifies qualified suppliers regardless of location, and engages in a rigorous Request for Proposal (RFP) effort. Next, a fact-based, multi-round negotiations process is launched with as many as 30 suppliers or more, which results in a comprehensive contract and smooth implementation.
3. Traditional purchasing uses volume as the primary price lever. Strategic sourcing, on the other hand, explores more than 20 different sources of leverage (including volume) to craft the most appropriate strategy to achieve best-in-market total costs.
4. Traditional purchasing processes are often designed to 'keep incumbents honest' and are not viewed by competing suppliers as objective. This results in a loss of best-in-market cost visibility as incumbents do not believe they will lose the business and competing suppliers do not feel they can really win. As a result, competitive salespeople will often not invest their limited internal equity to put their best pricing and terms on the table.
5. In traditional purchasing, RFPs are either high-level or so onerous as to be nearly punitive. In strategic sourcing, however, RFPs are designed to engage suppliers and to provide them as much clarity about the opportunity as possible. This way they do not have to "hedge" when making proposals and can be as aggressive as possible without fear of the unknown or misinterpretation of ambiguous requirements. Supplier concerns are addressed up front, and punitive elements (such as negative contract language) and long lists of granular questions are not included in the first round unless they are critical to the down selection process. This is done out of respect for the suppliers' time and to enhance supplier engagement. Further, the process is supported by deep analytics, which includes using a tight bid format to enable comparative bid analysis and eliminate ambiguity.

The proof that these differences exist is in the end results. Across all industries—from airplane manufacturers and mutual fund companies, to apple-pie makers and entertainment companies—strategic sourcing can generate recurring cost savings of 10 to 50 percent and have an EBITDA or profit impact of 10 to 30 percent or more.

Purchasing has been an area of underinvestment by businesses for years. Purchasing is often understaffed and the resources are pulled into day-to-day tactical activities, leaving precious little time to focus on strategic sourcing. In other cases, true sourcing skills and expertise do not exist within a company.

The good news is that historical underinvestment means the opportunities are rich, with the potential to make a significant EBITDA impact for companies that choose to embrace strategic sourcing.

Insight Sourcing Group can start the strategic sourcing process by analyzing your company's spend and making an assessment. For telecommunications sourcing initiatives, Advocate Networks partners with Insight Sourcing Group to assess, source and optimize carrier communications spend and manage telecom expenses. For more information about Insight Sourcing Group, visit www.insightsourcing.com. For more information about telecommunications sourcing initiatives from Advocate Networks, please contact Rob Stewart at (678) 987-5926 or rob.stewart@advocatenetworks.com. For the full article, click here.