The 5 Keys to Breakthrough Sourcing Strategies

Hello and Welcome

The 5 Keys to Breakthrough Sourcing Strategies ...

And How you can implement them NOW!

A
In fact:

s you read through these 5 Keys and the opportunities they present to you youll easily be in a position to make a difference to your organisation and your career more easily and more often.
Steve Carter Procurement Practitioner and Consultant

It is the lack of knowledge and application of these 5 keys that loses more organisations more money than any other single factor.

Over the years, working with large and small organisations in both the public and private sector, I have seen procurement organisations fail to take full advantage of these 5 keys and as a result fail to get the breakthrough cost reductions and improved service that was available to them. They have had to settle for cost reductions of less than 5% when as much as 20% or more was possible.

Ive made this report as brief as possible but at the same time, Ive given you everything you need to know about the 5 KEYS TO BREAKTHROUGH SOURCING STRATEGIES. No padding or waffle just useable ideas you can put into action immediately!

So, lets get started:

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But first, why should you listen to me? A good question and one that I would ask if I was in your shoes. The reason is that I have been working for more than 20 years with organisations, both large and small, in the public and private sectors. I have done this both as a practitioner (I have held senior line positions in purchasing and supply functions in a major US multinational and a large UK multinational that is now part of the Shell Group) and as a consultant. I started my consulting career with Deloitte Haskins & Sells before moving to KPMG. After 6 years with them, I went solo and have been helping organisations to develop their own sourcing strategies, often as part of a category management programme. Here are some unsolicited testimonials:

Steve has been a huge asset to the Council in his role as interim head of procurement. As well as driving tactical savings, he has successfully introduced the concepts of category management and supplier relationship management, both of which have started to pay off and kick started the Council on its transformation journey. I would have no hesitation in recommending Steve to any organisation that required a high level procurement professional who can deliver both short term, impactful results as well as longer term strategies. Nick Bell, Deputy CEO and Group Financial Director, Essex County Council "... you demonstrated a level of professionalism I didnt believe existed in the consultancy world " Graham Jackson, UK Head of Commercial Services, Compaq Computer " ... thank you very, very much for the magnificent contribution you have made this year and the way in which you have driven professional purchasing practice in this company forwards" Pete Wilkinson, Group Director of Strategic Procurement, AXA UK " ... better value for money than some larger organisations" Denis Mellon, Director of Materials, ICL Sorbus " Over the years I have been involved with a number of companies that carry out strategic reviews but feel you grasped our requirements very quickly and delivered results promptly and professionally. If I need to carry out a similar project in the future I will pick up the phone to you" John Hall, Chief Executive, Ring Ltd "Steve brought critical thinking and strategic clarity to a complex and under-performing area of TfL's business while mentoring the TfL team and impressing a professional client base enough to secure their support for a wide ranging programme of commercial change in one of TfL's most crucial areas of spend. Knowledge transfer has enabled TfL to drive the programme forward for itself now but continued support and training from Crest at critical stages in the project will be material in ensuring long term success" Dave Williams, Group Director of Procurement, Transport for London

The next question I know you want to ask is ... Why would Steve give me this FREE report on the 5 Keys to Breakthrough Sourcing Strategies and How to Implement Them

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You may not have phrased the question quite like that true? But you still knew deep inside that there must be a reason (or catch!) for me to take time out from my busy consulting practice to write this report and build the website that goes with it yes? Well, here is the reason: The reason WHY I wanted you to have this important report was to do a number of important things:-

I only wanted to give the report to people who were serious about
implementing breakthrough sourcing strategies for their organisation, whether this be in the private or public sector (and there are more similarities between the two than are often acknowledged)

This report, I hoped, would show anyone that read through it that I do have
some great ideas practical ideas for improving organisations commercial effectiveness

Once someone reads this report they will be more positively inclined to take a
look at the paid for services I offer (informational products, software, online coaching and consulting)

Its a good way to start a relationship with a new client by ... ... making the first sale an easy sale
And whats easier than a FREE product to start! Does all of that make sense to you? Good! Then lets start. Often, I see procurement groups dive straight into sourcing a product, service or category as soon as the need arises. Sometimes it is because others determine the timing and procurement are told too late in the day for them to be able to take a more strategic decision; a sense of urgency is created and the task becomes one of letting a contract NOW! Other times it is because they fail to act on Key #1. So here it is ...

KEY #1
The first key to a Breakthrough Sourcing Strategy is to determine the scope of your strategy and agree the opportunity with your colleagues.

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Let me explain: Setting the scope of what goes into your sourcing strategy is one of the keys to a successful outcome. For example, if you go to market for a cleaning contract to service a number of offices then you will get a price which may, or may not, be better than the one you are currently paying. If you add to the scope other facilities related services such as gardening, security or maintenance then you are increasing the value of the contract and so your leverage in the marketplace ... but this may have to be balanced by the fact that you may be potentially reducing the number of capable suppliers.

But how about going further?

You may decide that you want to outsource the whole of your property management or even sell and lease back your property portfolio. This will dramatically increase the value of the contract and take you into a different league of potential cost savings but will also increase the complexity of the procurement and the range and number of stakeholders who need to be involved, adding significant time that is needed to arrive at a solution that is acceptable to everyone. Even if you decide that this is the scope that you want, there may be another alternative that adds even more value. How about selling off your property portfolio and buying in a service in which the supplier provides a defined office space per person together with everything that person needs to perform their job heating, lighting, furniture, telephone, computer and so on. All at a cost per person but with the requirement that you may want to flex this up or down over time depending on your business needs. The onus is on the supplier to sell surplus capacity in the office building. This changes a fixed cost to a variable cost so that your costs are more closely aligned with your needs. Eliminating the waste that comes with having excess office space can yield dramatic results. As well as potentially reducing all of the associated costs such as furniture if the supplier can bundle your requirements with those of other clients and go to market with a bigger volume than you can on your own. The output from this process of defining the scope should be a simple statement of no more than one or two sentences.

Summarise your scope your elevator pitch

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The scope of your sourcing strategy should be summarised in one or two simple sentences this is your elevator pitch scope, so called because it allows you to explain to someone what your strategy is about in the time it takes an elevator to get from one floor to another (which might be all the time you have to tell a senior executive!). Examples are: All residential care homes in the county IT maintenance that includes all laptops, printers and multi-functional devices All grades of boron, carbon and high strength steels for manufacturing plants in Europe

Here are some Top Tips: do identify all your potential stakeholders (i.e. those with an interest in what you are sourcing) and make sure that you have a plan for engaging with them dont fall into the trap of just sourcing what has been sourced before when the contract expires do be creative and look at related items to see if you can create a larger category to source dont limit yourself to the goods and services that you buy consider the capabilities that are needed and whether there is commonality with other categories do engage with the supply market before you make a final decision on the scope suppliers may have valuable insights into what can be achieved do summarise the scope of your sourcing strategy into one or two clear sentences so that you can share it with your stakeholders and get agreement But theres more: You now know what category you are going to source but what you dont know is the exact requirements for the item(s) in that category. This is the role of the BRD ... the Business Requirements Definition. Your BRD is a structured description of what you need to source from supply markets and covers the full range of stakeholder needs. Defining your business requirements is a team game in that you must involve the appropriate stakeholders in your organisation. This will mean that the full set of needs is taken into account and an agreement reached on any trade off that is needed between conflicting requirements.

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These requirements are critical to a successful sourcing outcome because they are a key input to a number of steps in the sourcing process. These include: deciding on the evaluation criteria to be used in selecting the preferred supplier testing your sourcing options so that the one that most closely meets your organisations overall needs is chosen developing the most relevant performance measures to include in the contract deciding whether circumstances have changed so much that the sourcing strategy needs to be re-visited

You can develop and document your business requirements using the framework below.
This is the content Regulatory Availability/supply Quality Service Cost Innovation You put here how the user or budget holder has described their needs This is the test the content needs to pass This is what you agree with the user / budget holder as to how they recognise the need has been met This is how it will be measured This is the key performance indicator you use So this is the business requirement This is the description of the need and KPI that will be written into the contract and contract award criteria

Here are some Top Tips: gather as much data on the future direction of your organisation as you can so that you can test that your business requirements match the needs of the organisation. This includes corporate and business unit strategies, policy statements, business plans and technology plans. identify and meet with all of the stakeholders to understand and challenge their perceived needs in order to separate needs from wants and to understand their priorities. challenge the needs to make sure that you are not just replicating the previous solution. consult with as many people as possible who have a role to play in the acquisition or use of the product or service and make sure that there are no changes that they know about to technology and processes that may change the requirement. share the summary of all of this analysis so that a consensus can be reached that accommodates everyones need and buy-in can be achieved.

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The scope of your strategy and your business requirements definition tells people what is included in the strategy. What it doesnt tell them is what you are trying to achieve. This is the role of the STP ... which stands for ...

Situation

Target

Proposal

The STP is a succinct description of the ... Situation (this is a short statement of the key issues facing this category; for example no formal procurement involvement at present, spend spread across a large number of suppliers, evidence of same item bought for different prices by different people); the initial Target you are setting (for example, 10% overall cost reduction in first 12 months, preferred supplier list in place, no off contract buying); and your Proposal for how you will go about it (for example, put in place supplier performance monitoring system, agree standardised specification, negotiate prices).

Heres an example:
Problem definition: The cost of providing homecare services to older people in the County is more than the budget available. Situation: 25 homecare suppliers used. Average spend with them is 150,000. Average profit margin is 6%. The County accounts for no more than 5% of any suppliers business. Average quality rating is adequate Target: Achieve same range and quantity of home care services in the next 12 months for 10% less cost than now. Improve average quality rating to good. Proposal: Produce a category strategy that reduces the number of suppliers used to increase the value of the Countys account to them but commensurate with achieving defined outcomes. Implement quality improvement programme.

Combining your statement of Scope with your STP creates a powerful means of getting people to buy in to your project for developing an effective sourcing strategy and for communicating to others what you are doing and why you are doing it. Now that we know what we are sourcing and why (and have agreed with our colleagues particularly the users of the item who are often the budget holders and so have a big say in what is bought and how), we now need to understand more about the category if we are to develop a breakthrough strategy. This leads me to the second key.

KEY #2

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The second key to breakthrough sourcing strategies is answering the question what do we know about this category. This means collecting data on three things: how much we spend, with whom on what the supply market (how big is it, how is it structured, what drives costs etc.) suppliers in those supply markets

Often analysing how much has been spent, on what, with whom and by whom can be a tricky and daunting process. This can be because your systems dont collect the data needed or in the required form to facilitate meaningful analysis. What you can be left with is just information from your accounts payable system which tells you how much has been spent with a supplier but not on what. If this is the case in your organisation, you may have to rely on your suppliers giving you this spend information as their sales systems are probably more comprehensive than your purchasing systems. Here are some types of data and their sources.
Types of Data Category Data: Historical/forecast spend/volumes Numbers of suppliers Life expectancy Geographical spread Supplier sales Products/services range Spend as % of suppliers sales Performance history Financial ratios Investment plans Directors interests Process flow Buying control mechanisms Existing sourcing strategies Performance measures Value of sales affected/revenue dependency Product and process performance requirements Current satisfaction level Market conditions and trends Competitors position Client position Emerging technologies

Supplier Data:

Sourcing Process:

Customer Data:

Supply Market:

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Business reports Market structure and segmentation Potential suppliers Competitor activities Data Sources a) b) c) d) e) f) g) Purchase orders Invoices Benchmarking activities Mystery shopper Estimating departments Customer service records Organisational business plans h) i) j) k) l) m) n) Ledgers Competitor analysis On-line information services Supplier literature Supplier accounts Alliance organisations Paid Market Surveys

Here are some Top Tips: make sure that the spend data and the subsequent analysis are clear to everyone. If people feel that the results have popped out of a black box and it is not obvious how the figures have been arrived at, they will not have credibility and so you will not get buy in from your stakeholders as much as you can to clean the data before you use it. Dirty data is the result of errors that are often made when entering data or allocating spend to the wrong expense code. Remember the phrase extract, transform and load in other words, extract your data from whatever your sources are, sense check it and transform it by cleaning it up if necessary before loading it into your analysis tool make sure that the workload you are generating in data collection is kept to the absolute minimum if you are to avoid bottlenecks appearing due to time conflicts. People will be reluctant to help you if it involves significant amounts of time away from their core job prepare a plan for data collection that clearly identifies the resources you need, timelines, milestones and deliverables. This will help you to communicate to others what is needed as well as help you to keep the project on track You might think that now you have this data you have everything you need to start your sourcing strategy. But you would be WRONG! Heres why:

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There is a BIG difference between DATA and INFORMATION. Data are plain facts about something. Spend by supplier is an example of data. Data on its own is fairly useless. However, when data is put into context, processed, organised, structured and presented so that it can be interpreted and useful conclusions drawn, then it is called Information. Applying the Pareto principle (the so called 80/20 rule) to spend by supplier allows you to home in on the relatively few suppliers with whom you spend most of your money which in turn allows you to develop an appropriate strategy. This is an example of turning data into information. I have seen many sourcing strategies that have been overflowing with data that told you absolutely nothing. The test you should apply to any information masquerading as data is to ask so what? Unless you can draw a conclusion that allows you to take action then it is data and not information. This leads me to the next Key to Breakthrough Sourcing Strategies.

KEY #3
The third key in creating your sourcing strategy is to answer the question what are the underlying issues? To do this you need to analyse the data from Key #2 and turn data into meaningful information. Heres how: You start by analysing your spend data to produce a Pareto analysis ... in other words, the approximately 20% of items that together add up to about 80% of your spend value. This segments your spend into high importance (the few items that make up 80% of your spend) and low importance (the many items that when added together only amount to about 20% of your spend). Although the amount you spend is only one measure of importance, it will do for now as all we want is a quick analysis to point us in the right direction. Later, you can include other factors that make an item important to your organisation. These can include: how frequently the item is used to make other items (if the item is used to make products that together account for a large percentage of your sales, then the item has high importance without it your production could come to a halt);

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whether or not the item is used on a bottleneck resource - here unavailability of the item could bring the entire operation to a standstill; whether or not the item is used in new products unavailability here could stifle your organisations sales development.

But thats not all Another possible segmentation of the things you buy is that of supply risk or complexity of the procurement process. As with the importance of the item, there are a number of ways to assess an items supply risk based on the nature of the item itself, the structure of the supply market and your suppliers position in that market. For now, we will keep it simple as at this stage you need to assess the supply risk of possibly thousands of items. The way in which we will assess supply risk is to look at the number of capable and willing suppliers in the marketplace for each item (this is now necessarily the number of suppliers you actually use). If there are more than five willing and able suppliers then we can consider the risk to be low (if a supplier fails there are many more available to use without impacting availability or price). If there are fewer than five willing and able suppliers, supply risk is high. This now gives you a way to segment your purchases two ways based on importance and based on supply risk. This creates a 2x2 matrix known as the Kraljic matrix. You can find a sample matrix below. This matrix suggests a number of possible sourcing strategies for each of the quadrants. Tactical quadrant (low complexity/risk and low importance) Standardise and rationalise your product range Make the buying process as efficient as possible, for example by using eprocurement tools Outsource the buying process

Leverage quadrant (low complexity/risk and high importance) Long term contracts Risk management Functional analysis

Critical quadrant (high complexity/risk and low importance) Product substitution

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Cost or value analysis e-auctions

Strategic quadrant (high complexity/risk and high importance) Supplier development Make or buy analysis Value analysis

This analysis of data into information produces a matrix that is often called supply positioning. But you need to know more. Heres what: The information you have analysed so far gives you a picture from your own point of view ... the Buyers View. But of course, suppliers also have a point of view ... the Suppliers View. Suppliers analyse markets and customers in a similar way to the way that you analyse markets and suppliers. The suppliers view is often called Supplier

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Preferencing. You also need this information if you are to build a successful eed Breakthrough Sourcing Strategy. Heres how you do it. The starting point for a suppliers assessment of you is to look at the market for the goods or services it supplies to you. A common technique that suppliers use for this is the Boston Matrix. The supplier will first assess the growth rate for that market on the basis that the faster the market is growing, the more that market will be of interest to them.

Markets experiencing high growth ar ones arkets are where the total market share available is expanding, and there's plenty of opportunity for everyone to make money. By contrast, competition in low growth markets is often bitter, and while your supplier might have your high market share now, what will the situation look like in a few months or a few the years? This makes low growth markets less attractive. The next thing they will look at is their market share relative to the competition. The higher this is, the more important the market to them.

The Boston Matrix assumes that if you enjoy a high market share you will normally be making money (this assumption is based on the idea that you will have been in the market long enough to have learned how to be profitable, and will be enjoying scale economies that give you an advantage).

Plotting the position of individual markets against market share and market growth gives four possible positions for the market. The first is high market share in a high growth market. These are the suppliers stars and the ones they get really excited about.

The next quadrant is high market share in a low growth market. Here, suppliers are well-established, so it's easy to get attention established, and exploit new opportunities. However it's only worth expending a certain amount of effort, because the market isn't growing and opportunities are limited. The third quadrant is a low market share of a high growth market these are called question marks. These are the opportunities no one knows what to do with. They aren't generating much revenue right now

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because you don't have a large market share. But, they are in high growth markets so the potential to make money is there.

The final quadrant contains the so-called dogs markets that have a low share of a low growth market. In these areas, market presence is weak, so it's going to take a lot of hard work to get noticed. Also, you won't enjoy the scale economies of the larger players, so it's going to be difficult to make a profit. The order in which suppliers will invest their time and money is stars, cash cows, question marks and dogs. Knowing where your supply markets sit can give you invaluable insights as to what you need to do. The second dimension that will influence how suppliers see you is that of the attractiveness of your account. You may be able to do little about the actual supply markets you buy from but there is plenty you can do to improve your attractiveness to key suppliers.

Here are just a few ways:

Buy On Value Not Price

Transactional items (that is, things you buy that are undifferentiated from those from other suppliers items such as gas or electricity) compete largely on price. This is sensible but what is not is to take those buying behaviours into the purchase of things that are differentiated in some way. Management Consultancy is one category that falls into this group as are bespoke IT systems. Here you are buying capability and it is not always the lowest priced suppliers that can deliver the best overall result. If you truly alter your buying behaviours to reflect the type of item you are buying then you will be looked on more favourably by key suppliers who provide value over and above that of price.

Give Good Access to Key Decision Makers

Pitching for contracts is getting more and more involved and more and more expensive. Hence the more aligned suppliers can make their bids to your needs, the better chance they have of competing successfully. This alignment comes from a sound understanding of the needs of key decision makers and so easy access to these people makes you attractive to a supplier.

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Reduce the Number of Rules for Buying

There is no doubt that complex and cumbersome procurement rules and systems add to the cost of winning work. If you can streamline these to make it easier for suppliers then you will rise in the attractiveness stakes.

Match Strengths to Needs

This factor is obviously paramount in winning new work as the match between their strengths and your needs is the starting point for delivering value for money.

You now know how suppliers might view you and the supply market.

Now for the Most Powerful Information of All

You are now in a position where you have analysed your data and produced information on possible procurement strategies for you and information on how suppliers view your account and the market. The next step is to put this together to produce a very powerful piece of information. Your supply positioning analysis gave you four quadrants with outline sourcing strategies: Tactical spend low spend, low risk Leverage spend high spend, low risk Critical (or Bottleneck) spend low spend, high risk Strategic spend high spend, high risk

Your supplier preferencing analysis also gave you four quadrants and likely supplier response: Nuisance low market importance, low account attractiveness Exploit - high market importance, low account attractiveness Develop - low market importance, high account attractiveness Strategic - high market importance, high account attractiveness

Putting these analyses together gives you the picture shown below. This is called a Procurement Portfolio.

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So, how do you use this to your advantage in creating a Breakthrough Sourcing Strategy? Heres how: The Buyers view is an analysis by category of spend. So you do this first. For your strategic categories, you then identify all of your current and potential suppliers and produce a supplier preferencing analysis for each of them. If this shows that you have a match between your strategic categories and your suppliers view of the market and you (that is, they see your account as either develop or the strategic) then you have a sound basis for pursuing a rigorous cost down or cost out strategy by creating a meaningful partnership with them. This will create the right conditions for a Breakthrough Sourcing Strategy that delivers 15% savings, 20% or even more. But how do you know what the potential is for a significant cost reduction? This requires some more data analysis price and cost analysis.

A key question that all procurement professionals face is ... am I paying the right price? The purpose in analysing prices and costs is to satisfy ourselves that the amount we are paying is fair.

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One way to do this is by analysing the price without investigating the costs used by the supplier in arriving at the price. Essentially you are comparing the price against yardsticks of reasonableness.

Cost analysis, on the other hand, looks at the individual components that make up the price and asks if they are a reasonable reflection of the cost of an efficient process for producing those goods or service. Generally speaking, price analysis will only ever give you an indication of fairness for simple procurements for which there is ample evidence of similar procurements in the public domain. On the other hand, cost analysis can rarely be sufficient without price analysis being done in support. For example, suppose you are buying a bespoke laptop computer and your supplier has provided the following cost components:

Materials Labour Overheads Development costs Profit Price

160 80 80 1,000,000 40 1,000,360

All of the cost components and the profit look reasonable. Even the 1 million development cost could be justified on the basis of the set up costs for the supplier. But a simple price comparison using any number of publicly available sources would quickly demonstrate that a price of more than 1m for a laptop. However, analysing a suppliers costs in this way not only gives you a useful benchmark with which to compare suppliers prices but also gives you the starting point to question the cost build up ... for example, returning to the cleaning contract in the scope section, a supplier will have estimated the future price of materials. What are these estimates based on? Can those materials be bought cheaper? What assumptions have been made about usage? Is there an amount in there for spillage, waste, even theft? Are those estimates fair? What about the cost of equipment? Are these based on new or old equipment? Purchase, lease or rental? Etc. etc. etc. But wait. Theres more! You have identified the spend categories and suppliers that might form the basis of a breakthrough sourcing strategy. But how do you know whether or not your suppliers will be willing to work with you in this way? The answer is ...

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... more information! What you need to know are three things: 1. What is your relative bargaining power compared to your suppliers and can you leverage it 2. How is the market structured and how do you extract value from it 3. Can you encourage new entrants or develop alternative sources in order to create leverage with your current suppliers The first question is answered by an analysis called Power Dependency. The two remaining questions are answered using a Market Analysis Model. All three can be analysed using Porters Five Forces. As you would expect, the Porter Model consists of five elements which together make up the structure and competitive options of a market. These elements are: suppliers to businesses in the supply market; customers of businesses in the supply market; possible new entrants to the supply market; existing businesses in the supply market; and the product or service the market supplies.

These factors are often represented by a diagram such as the one below. The vertical axis (threat of new entrants existing competitors threat of substitutes) determines the market structure. For example, if the threat of new entrants is high (for example because costs of starting a business is low) and the product is profitable then you might expect the market to be fragmented and consist of many small suppliers. The horizontal axis (suppliers existing competitors buyers) determines the cost structure of the supply chain. For example, if buyers have little bargaining power then any costs further down the supply chain are likely to be passes on to them with most of the available profit being made by companies in the supply market or suppliers to that market (depending on who has the relative power between them). By asking the right questions, you can use this model to estimate the relative bargaining power and so whether or not your strategies can be implemented. Another approach is that of relative bargaining power.

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Here is an explanation: In the previous section, you have quantified (to an extent) the power that buyers and suppliers have in your chosen market using Porters Five Forces. What you can do with this information is to draw a 3x3 matrix like the one below.

High

EXPLOIT

EXPLOIT

BALANCE

Buyer strength

Medium

EXPLOIT

BALANCE

DIVERSIFY

Low

BALANCE

DIVERSIFY

DIVERSIFY

Low

Medium

High

Supplier strength

This gives you three potential strategies:Exploit use your relative strength to force through the changes you want to make
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Balance where relative strength is equal so you will need to negotiate and manage change Diversify where the supplier has the relative strength so you will need to take action to change suppliers or re-specify the product or service to create new supply options. Here is how you can use it: For example, if you are a small organisation that manufactures exhaust pipes for the automotive industry then steel coil is a commodity that is used in most of your products and so has a big impact on your costs. Supply preferencing might suggest that this commodity sits in the Leverage quadrant and so your strategy should be about using that leverage to get a lower price. However, your supplier is likely to be very much larger than you and unlikely to concede a price reduction. Switching suppliers wouldnt improve your situation as you are likely to be smaller than all of them. Equally, if you are a very large organisation with a product or service that sits in the Strategic Critical quadrant, you might conclude that you have little or no opportunity to achieve a price reduction. However, your supplier may see you as a prestige account because of your brand name and this can give you leverage.

What about sourcing strategies for the other spend categories?

For all other sectors on the purchasing portfolio, your strategy needs to be one of either moving the category and suppliers to the top right (by re-scoping the category or selecting different suppliers, for example) or creating the most cost-effective means of sourcing them. But how do you do this? This leads me to the next Key to Breakthrough Sourcing Strategies.

KEY #4
The fourth key is to generate as many potential strategy options as you can. Too often I see people jump straight from the analysis stage (if done at all!) to a solution and then try and implement it. Without the analysis we have just been through, this can be a very dangerous approach as you may get all the way to the end of a contract letting process before finding that the only solution and supplier(s) are either too expensive or dont match your BRD. Generating strategy options can be carried out with a peer group using brainstorming techniques. Additionally, it is possible to benchmark similar strategies from other

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organisations (e.g. check with regional centre of excellence, national framework information, neighbouring counties etc). Hybrid strategies might also be developed by comparing features of existing strategies and combing to form new strategies. When carrying out comparison, you need to establish success criteria (which usually are the business requirements). When you start to brainstorm ways to create a breakthrough sourcing strategy, there are seven types of intervention you can consider. 1. Market interventions: over and above bidding interventions through competitive tendering, other ways you can influence the market include make versus buy strategies, supplier rationalisation programmes and encouraging new entrants. 2. Technical interventions: these include rationalising or simplifying specifications, innovative technologies and creating intellectual property rights. 3. Cost structure interventions: here you deploy techniques such as Lean, Six Sigma, Total Cost of Ownership, Value Analysis and Value Engineering. 4. Work process interventions: in this intervention you attempt to create an advantage that delivers a breakthrough in costs or service by looking at external, collaborative processes with suppliers such as joint planning. 5. Supplier relationship interventions: this involves leveraging or changing your relationship with suppliers to give better access to supplier capabilities or to ensure excellent supplier performance.
6. Supply chain interventions: this requires you to design the right supply chain

for your organisation by either eliminating unnecessary intermediaries (also called disintermediation or eliminating the middleman) or using outsourcing to gain expertise or scale, both of which can be used to create breakthrough cost
reductions and service improvements.

7. Cross strategy leverage interventions: creating the ability to use competing supplier technologies in concert with each other to assemble system solutions across normally independent sourcing efforts and synchronise interventions from multiple suppliers to deliver a holistic value proposition. When you carry out your brainstorming sessions with colleagues, use this list as a check that you considered as many ways as possible to create that competitive edge. Here is an example of how you can use this to generate sourcing options. Suppose we are a local authority responsible for providing adult social care. Our overall strategy is to give people their own budgets and to let them use it to meet their care needs (with some help from social workers).

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The first step when developing sourcing options is to start with your sourcing objectives. These are a succinct summary of the business requirements definition. So, for our example, suppose we have just 2 objectives one to increase consumer choice by giving individuals their own budget and the other to achieve cost savings that will keep a lid on council tax increases.

Once you have your objectives, you can start to identify issues that affect the achievement of those objectives. Here one of our issues is how to manage costs if you have passed control of the budget to thousands of individuals who sed will make the buying decision in future as this will lose you, the buyer, any leverage from that spend. The next step is to develop hypotheses for how you might address the issues you have just identified. Here we have generated three possible hypotheses to test out as possible sourcing strategies.

You can test the hypotheses by asking questions that you need answers to if you are to evaluate the hypothesis as a viable option. If an hypotheses answers all or most of the questions posed then it becomes an option for a sourcing strategy.

The expectation is that having completed the exercise you will have a number of options. What you need to do now is to test whether or not there are any hybrid are solutions (in other words, a solution that combines parts of individual solutions to create an improved version). The starting point is to list the criteria the sourcing strategies need to address together with any data that measures the success of the current way of doing things success in meeting those criteria. We call this the datum. You then put as column headings the options you have generated in the previous activity.

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Criteria

Current 100% Herts CC RCE Option Hybrid 1 Solution Outsource option

Hybrid 2

Personalised Service Low start up cost Desk top delivery Do not impact environment 24hr service
S=same +=better --worse

s + + s
S + 2 2 1

s s + 2 1 2

s + s +
2 2 1

s s + + +
2 3 0

s + + +
1 3 1

What you are going to do is compare each of the solutions in turn with the current situation and assess for each criterion whether the new solution provides the same result, a better result or one that is worse. You show this as a S, - or + in the appropriate cell. When you have completed the comparison for all of the options that you have, you can start to combine components of each into new hybrid solutions. Finally, you can add up all of the S scores, + and for each option to see whether or not the hybrid solutions are better than your current options and so should be taken forward to the next stage ... ... which leads us to the next Key to Breakthrough Sourcing Strategies.

Datum

KEY #5
The fifth key is to choose the preferred option from our list of possible sourcing strategies. There are three things you need to consider when evaluating each sourcing strategy option. These are:1. your Business Requirements Definition (BRD) 2. the risk involved in each strategy 3. the implementation cost versus benefit of each option
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A useful starting point in evaluating sourcing strategy options is to look at the strengths, weaknesses, opportunities and threats that each present the so called SWOT analysis. Strengths and weaknesses are usually internal to your organisation whereas opportunities and threats are external. You should look at all four factors in terms of whether or not they are helpful or harmful to achieving your sourcing objectives. You can summarise this analysis in a two by two matrix like the one shown in the diagram below.

STRENGTHS Directors recognise need for change Good understanding from team
members of the technical aspects of the service provided Capability and capacity to insource service if needed

WEAKNESSES
Relationship with supplier is currently purely with the budget holder Head of Service is risk averse and unwilling to consider changes to status quo Specification is currently with service team who have no commercial responsibility or interest

OPPORTUNITIES Demographics are predicting lower

demand in future so some suppliers will lose out A few large suppliers are willing to manage tiered supply base and actively manage tier 2 for improvements

THREATS
There are many other customers of this market creating short term demand spike which means suppliers can pick and choose customers to work with Significant number of suppliers see us in the exploitable or nuisance category

Assessing and managing risk can be an expensive and time consuming practice. What we are looking for in a sourcing strategy is an identification of the major risks that each of our strategy options poses so that it can be factored into our final choice of strategy. The starting point is to list all of the potential sources of risk. This is best done as a brainstorming exercise with the team members of the sourcing strategy project or as a Delphi type process as explained previously. What you do then is to rate each risk in terms of its potential impact on your organisation if that risk event was to happen. A scale of 1 to 4 where 1 represents a minor impact and 4 is a mission critical impact) is sufficient.

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Next, you need to asses each risk for the likelihood that it would happen. Again, a score from 1 (unlikely to happen) to 4 (almost certain to happen) will suffice. You can then put these two scores (impact and likelihood of occurring) in a table as shown below. This gives you an indication of the extent to which your strategy option creates a risk.

Cost-benefit analysis is a technique for deciding whether or not to follow a particular course of action based on its financial impact. This can be used to assess your strategy options as a final arbiter of your final choice. Some strategies can be considered and even adopted for reasons other than commercial ones. This is particularly true in the public sector where there might be a political reason to choose a specific option. The value of the cost-benefit analysis in this case is to show the financial consequence of the choice made. In its simplest form, you carry out a cost-benefit analysis by adding up all of the financial benefits of the option and subtract all of the costs associated with it.

Costs are either one-off, or may be ongoing. Benefits are most often received over time. We build this effect of time into our analysis by calculating a payback period. This is the time it takes for the benefits of a change to repay its costs. Many companies look for payback on projects over a specified period of time, for example three years. Here is an example of how to calculate a payback period. Annual value of savings made from implementing the strategy option = 1.5m Costs of implementing the option (for example, switching costs in moving from one supplier to another such as investment in new computer systems) = 0.5m

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Payback period = 0.5m 1.5m = 0.333 years = 4 months approximately. You may also decide to include intangible items within the analysis. As you must estimate a value for these, this inevitably brings an element of subjectivity into the process.

Putting it all together

You now have a collection of potential sourcing strategies that can deliver your business requirements; an analysis of the risks presented by each option; and the cost-benefit analysis for each option. What you now need to do is compare each option with the others and choose the preferred one. The way to do it is to construct a matrix like the one shown in the diagram below. What you and the sourcing strategy team members need to do is to rate each option against each of the business requirements, the risk rating and the payback period. You can use a simple colour code for this: green if the option meets the requirements fully; yellow if a partial match; and red if it doesnt meet the requirements at all. The option with the most greens and fewest reds is the preferred option.

OPTION 1

OPTION 2

OPTION 3

OPTION 4

OPTION 5

Business Requirements

Risk rating

Payback period

Alternatively, you can use a numerical score, say 1 to 10, to assess each factor and the options with the biggest score is the winner.

And finally ... Heres how I think about Procurement and I believe you do too, otherwise you wouldnt have read all the way through this report!

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 Im interested in creating value for my organisation by applying my specialised

knowledge and experience

I dont believe that competitive tendering will create a breakthrough in costs,

service, quality or the development of new products and services

Sourcing strategies are a team game involving many stakeholders but

ultimately they are commercial strategies and so need to be led by commercial specialists (the user quite rightly leads on the business specification its their budget and responsibility!)

Effective sourcing strategies dont just happen they need a process

So, heres a question for you ... If you are serious about improving your skills and knowledge in this vital commercial area, will you take just a few minutes to take a look at the Ultimate Sourcing Strategy Manual which can accelerate your learning? Yes! Then all you need do is go to this link and you will have immediate access to everything you need! http://SourcingStrategyWizard.com/TUSSM.html

In the meantime, I wish you every success in your sourcing strategy endeavours and look forward to speaking soon. Kind regards

Steve
Steve Carter

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About the author

Steve Carter has been a consultant and interim manager in Purchasing and Supply since 1993. He has a wide range of clients from both the public and private sector, including Essex County Council, Transport for London, Lloyds TSB, AXA, Compaq, Glaxo Wellcome and the NHS. Prior to that, Steve worked for Deloitte and KPMG (where he headed up KPMGs Purchasing consultancy practice). His clients included National Power (at the time they were moving from the public to the private sector), LDV, BT and the Ministry of Defence. Before becoming a management consultant, Steve worked in purchasing and materials management for two multinationals, one a UK specialty chemicals company and the other a Fortune 100 manufacturing company in the automotive sector. In both companies, he worked with subsidiaries around the world to improve their purchasing and supply chain operations. Steve started his career as an accountant with the Co-operative Wholesale Society where he progressed to the most senior management accounting position in a division of more than 100 factories.
Some testimonials: Steve has been a huge asset to the Council in his role as interim head of procurement. As well as driving tactical savings, he has successfully introduced the concepts of category management and supplier relationship management, both of which have started to pay off and kick started the Council on its transformation journey. I would have no hesitation in recommending Steve to any organisation that required a high level procurement professional who can deliver both short term, impactful results as well as longer term strategies. Nick Bell, Deputy CEO and Group Financial Director, Essex County Council "... you demonstrated a level of professionalism I didnt believe existed in the consultancy world " Graham Jackson, UK Head of Commercial Services, Compaq Computer " ... thank you very, very much for the magnificent contribution you have made this year and the way in which you have driven professional purchasing practice in this company forwards" Pete Wilkinson, Group Director of Strategic Procurement, AXA UK " ... better value for money than some larger organisations" Denis Mellon, Director of Materials, ICL Sorbus " Over the years I have been involved with a number of companies that carry out strategic reviews but feel you grasped our requirements very quickly and delivered results promptly and professionally. If I need to carry out a similar project in the future I will pick up the phone to you" John Hall, Chief Executive, Ring Ltd "Steve brought critical thinking and strategic clarity to a complex and under-performing area of TfL's business while mentoring the TfL team and impressing a professional client base enough to secure their support for a wide ranging programme of commercial change in one of TfL's most crucial areas of spend. Knowledge transfer has enabled TfL to drive the programme forward for itself now but continued support and training from Crest at critical stages in the project will be material in ensuring long term success" Dave Williams, Group Director of Procurement, Transport for London

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