The New Strategic Sourcing is….STRATEGIC SOURCING!!

on Tuesday, February 14, 2012

I’ve always be skeptical of blogs, presentations, and other materials that tout the next big thing in supply chain, using terms like “Next Practices”, ”Sourcing Optimization” and most recently, (or maybe not) “Strategic Category Management”.

That is not to say that I don’t want to improve, surely I do. And as a consultant in this area, I need to stay one step ahead of the competition. The problem is that as we look for the next big thing, we forget about the tried and true. We neglect the things that work, and how to learn from our mistakes.

The most recent evidence I’ve found of this problem came from a presentation Ariba and Archstone put together with some case study help from McDonalds, called “Next Generation Category Management Strategies”.

The presentation provides great detail and insight into the process McDonalds used to get control of indirect spend in that organization. The process and the results were substantial, and I give credit to the team at McDonalds as well as the consultants that helped them get the job done. The problem I have with the presentation is the focus on their concept of the next big thing in supply chain – “Strategic Category Management” and how “different” it is from strategic sourcing, when in reality, the process McDonalds used was strategic sourcing in its truest, and most basic, form.

Let’s start with a slide they call “Strategic Sourcing versus Category Management”, which outlines their perceived differences in the Goals, Frequency, Approach and Results produced by strategic sourcing and strategic category management.

First, the goals. In Archstone’s mind, the goals of strategic sourcing are “to reduce purchase price for a given commodity, most often by selecting lower cost suppliers or reducing supplier margins…”

Whereas, the goals of strategic category management are to “Maximize Category value to the organization, including Total Cost of Ownership, Risk, etc.”

Clearly, it sounds like category management is the way to go. The only problem is, none of it is true. The goal of purchasing might be to reduce price for a given commodity, but ask any strategic sourcing professional what their role is, and I would bet somewhere in there they would talk about TCO and risk abatement. Most sourcing professionals know that if they want sustainable savings, getting the lowest price is only part of the challenge.

In terms of frequency, the presentation goes on to say that strategic sourcing is “periodic”, with “activity triggered every 1-3 years”. In comparison, strategic category management is an “ongoing day to day process that triggers project based activities as needed.”

Ask a sourcing person if they only deal with the supplier for a particular category only once every 1-3 years and see what they say. Sure, that might be when you are obligated to actually go to market, but the day to day activities never stop. For most professional sourcing professionals, once pricing is established, it is time to look for other ways to improve the category, such as ease of ordering, service enhancements, inventory reductions, or other “Total Cost of Ownership” activities. True, go to a stakeholder without a sourcing background (think marketing, IT, HR), and ask them how often they look to improve value or reduce cost. They might say once every one to three years. But what they do isn’t sourcing.

Next, the presentation makes a distinction on the “approach” of the two processes. Strategic sourcing is conducted via an “N-Step sourcing methodology, culminating in transition to a new supplier contract”. Strategic Category Management is “A process that develops a Category Strategy and then applies appropriate value levers as needed to meet value objectives.”

Again, I hate buzzwords, but I am going to hold off on my rant against “value levers” and “value objectives”, besides to say that whenever I read those words I think some is “yanking my value chain”. I’ve never seen a strategic sourcing process slide that ends with the step of signing a contract. Usually there are at least one or two more steps after that, including implementation and continuous improvement. The good ones also include auditing and adjustment. Beyond that, one step in that process is normally developing a strategy for the category, which presumably would take into account “value levers”.

The last distinction the presentation makes is on the results of the two processes. The result of strategic sourcing is “reduced contract pricing…savings realization…is a possible outcome.” The results of strategic category management are “achieved targeted category value” and “savings realization is a key element of the category management process.”

Now, I don’t know about you, but I would definitely prefer “targeted value” to a simple reduction in contracted price. It just sounds better. But again, ask a sourcing person if they could actually implement a lower cost solution if the perceived value of that new solution was lower. Particularly for indirects, no stakeholder would accept the transition to a low cost supplier that could not handle their service level requirements. Strategic sourcing must therefore consider value as well.

There are a few other slides in the presentation describing in great detail the strategic category management process. In all of those slides, I could make the case that the process being described is actually strategic sourcing, from the framework (it starts with planning and ends with review/adjustment) to the process overview (which starts by defining the category and ends with savings tracking) to strategy development, which includes all the TCO factors that you would see in a normal RFP, and of course the value lever slide, which has opportunities by lever, each ending with “Other”.

Again, I won’t take the presenters to task for the information or concepts presented within any of the slides. The material is well presented, organized and clearly demonstrates insight. This is particularly true on one of the last slides, which references critical success factors including a clear vision, sponsorship, collaboration, and a willingness to do the difficult – all of which I whole-heartedly agree with. But relabeling strategic sourcing as something different (and maybe more exciting?) doesn’t do justice to the process. People are just starting to understand what strategic sourcing is; calling it something else will just add confusion and set the industry back. It makes those of us who are consultants look bad, always trying to stay ahead of a curve and identifying the next big thing, even when the companies we service are still at the base of the graph.

Let’s just call strategic sourcing what it is, strategic sourcing. It’s not a three bid process done once every couple of years. It doesn’t trade cost for value. And it doesn’t ignore total cost of ownership. Maybe to some, that’s what sourcing is. But they put the word strategic in front of it for a reason.

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