Last Sunday night during the Oscars, I noticed an interesting Lexus commercial. An eclectic collection of has-been technology was getting pulled back by some mysterious force, while the technologically-advanced Lexus drove proudly forward. The phrase went something like, "Anything not moving forward, is moving backward." This of course referred to the fact that constant innovation and updating is essential in technology today to stay ahead of the copy-cat, follower products that lag behind the innovation curve (See Blackberry) and suffer huge revenue losses as a result. Any company that is resting on their laurels or past successes is already sealing their fate.
The same can be said about procurement. If you aren't consistently refreshing your sourcing efforts on each category, it can pass you by and leave a great deal of savings on the table. Businesses and Procurement departments often have a myriad of reasons why they may delay or resist a sourcing effort. Some of the most common include:
- "That category was just sourced three years ago." - That is positive that sourcing is taking place, however, a great deal of market forces can act upon pricing even in a very short period of time. Setting a regular schedule for sourcing a category is helpful, and beyond that keeping up with the category's market and trends in between RFP events can uncover key points of leverage and pricing fluctuations in the market.
- "We are in a contract in this category for a long time." - This can be difficult, however, in many cases leveraging market data with the incumbent supplier even while under contract can prove fruitful. Beyond market pricing and benchmarking, discussing ways to improve servicing or lead times can lead to soft cost savings and examining operational process changes can uncover vast inefficiencies and costly mistakes in the Procure-to-pay lifecycle.
- "Our supplier hasn't raised pricing for five years, and we have never found better pricing." - It is encouraging when a supplier doesn't increase pricing, however, if pricing has had no check against the market, and no check against the real cost driver of a product such as an index, the pricing has been in a "bubble." This is especially true if there was no sourcing effort to begin the relationship and purchases with the supplier in the first place. If a supplier and manufacturer are both already making a killing on your business, why would they need to increase prices? A supplier may not conduct their own negotiations or sourcing efforts with their manufacturer-suppliers and thus, you end up at their mercy. Additionally, businesses may not be aware of how the pricing is even determined. Beyond the price the supplier pays to the manufacturer being above market, the margin or markup on the item (the suppliers cut) may be out of line with the industry standard as well.
These are just a few examples demonstrating why consistent strategic sourcing efforts can make a huge difference in optimizing the bottom line. Procurement Service Providers can take the burden off of procurement teams to deliver continuous improvement and regular, timely sourcing efforts for indirect spend categories.