Dear procurement professionals,
We are starting to consider the best practices of determining sourcing strategies based on Purchasing chessboard of A.T.Kearney in this article
In the case of low supply and demand power, the first basic strategy involves professional steering of demand. Manage spend first of all requires detailed knowledge of who is buying what from which supplier. Based on this, one can then consider the possibility of offsetting low demand power by bundling demand, either within the company or across company boundaries. These considerations should be backed by an uncompromising analysis of whether the demand in question is actually justified. The approaches for cutting costs and adding value within this basic strategy are demand management, co-sourcing, volume bundling and commercial data mining. These approaches and their underlying methods are briefly described below.
Demand management
Demand management achieves savings by reducing a company’s demand from selected suppliers and taking full advantage of optimized contracts. Demand management encompasses the following strategies.A1. Demand reduction: Objective analysis of the justification for a particular demand. (E.g., is it really necessary for someone to fly or could air travel be replaced by video conferencing?)
A2. Compliance management: This primarily involves the increased use of master agreements and preferred suppliers, as well as compliance with company wide policies (e.g. travel policy).
B1. Contract management: Even the best contracts are of little use if nobody is familiar with them. Contract management has the aim of creating transparency with regard to existing contracts throughout the company, as well as consolidating contracts, thus achieving better terms for all internal customers.
B2 Closed loop spend management: The aim of this holistic approach is to permanently observe all areas of potential value leakage (e.g. unutilized payment terms) and take appropriate measures when required.Co-sourcing
Co-sourcing is an approach that can be used when a single company does not represent any significant demand power in the market of a particular sourcing category and suffers disadvantages as a result. In co-sourcing,
demand is pooled across sourcing categories or with other companies. Cosourcing encompasses the following methods:A3. Procurement outsourcing: Responsibility for purchasing is delegated to an outsourcing partner with significantly greater demand power.
A4 Sourcing community: Several companies, each with low demand power join forces in order to achieve sustained savings. Sourcing communities go beyond mere volume bundling arrangements: they are able to pursue complex strategies because they can share resources, e.g. analysts or infrastructure, with the other members of the sourcing community.
B3. Mega supplier strategy: Its primary aim is to make both the company and the supplier aware of how large the mutual business actually is. Instead of negotiating on the level of individual sourcing categories (for which the company has little demand power), all purchases from the same supplier are negotiated together.
B4 Buying consortia: Buying consortia are loose cooperations of firms aimed at obtaining advantages on the sourcing market. In contrast to sourcing communities, they are of limited duration (i.e. until the end of the respective project).Volume bundling
Volume bundling is one of the traditional purchasing approaches, whereby savings are achieved through realization of benefits from economies of scale on supplier’s side. Although this approach is well known, one often forgets how much a company using it can realize by receiving supplier’s concessions. Especially in the case of high fixed cost products or those requiring long set-up times, the scale effects can be considerable: e.g., if fixed cost accounts for 30 percent, doubling the volume should make price reductions of 15 percent possible. Volume bundling encompasses the following methods:
C1. Bundling across product lines: Bundling similar bought-in parts for all product lines, e.g. a white goods manufacturer consolidates sourcing of all electric motors.
C2 Supplier consolidation: Bundling similar bought-in parts from one competitive supplier and cutting out the others. This specifically means eliminating smaller suppliers and strengthening ties to bigger or strategically important ones.
D1. Bundling across sites: Bundling across individual company locations can be used specifically for those sourcing categories that could be supplied by the same supplier on global or regional markets.
D2. Bundling across generations: Bundling across product generations is especially important for project-driven businesses. Concessions are obtained from the supplier for the current project on the basis of binding or non-binding promises for the subsequent generation.Commercial data mining
If our company only knew what we already know! There is enormous potential hidden in accumulated commercial data – often slumbering in SAP or Oracle systems. With the aid of targeted sorting and intelligent analyses, it is possible to create transparency, identify potential through standardization
and enable rapid realization of cost savings. The use of commercial data encompasses the following methods:
C3. Master data management: Classification of all material/supplier master data through the application of standardized logic, consistent link-up of master data to the ordering system and avoidance of loosely worded purchase orders.
C4 Cost data mining: In this case, existing data on a sourcing category is analyzed in depth in order to identify any savings potential.
For instance, this may include comparing the discount rates within a corporate group.
D3 Spend transparency: Creating transparency for all spending within the company in the form of a spend cube. The main axes of the cube are sourcing categories, suppliers and sites, which can be sliced and diced across all dimensions.
D4 Standardization: Replacement of custom specifications by standardized parts and industrial standards.
