This report focuses on the initial findings of organizations that have deployed Strategic Sourcing programs between one to five years compared to those in the second set of respondents, six years and greater, highlighting their avenue to success.

STRATEGIC SOURCING: LESSONS LEARNED December, 2014 Louis Berard, Senior Research Analyst

Global Supply Chain, Complex Spend, HCM

Report Highlights

Top business pressures driving cost reductions and savings

Sourcing sustainability can address non-price factors as part of a strategic sourcing process

The ability to find new ways to stay competitive in Strategic Sourcing is ever changing

Essential capabilities of Strategic Sourcing

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Executive Summary

In a correlating paper “How to Build a Strategic Sourcing Organization,” we discussed how to position your organization in order to be successful in creating a strategic sourcing program, along with the key benefits afforded such participants, as seen below. Shown here in Figure 1, these increased levels of cost savings of 73%, more robust spend categories of 56%, and better alignment of sourcing and business objectives at 50% are really just the tip of the iceberg.

Figure 1: Top Five Benefits

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This report will review the performance of organizations that have deployed strategic sourcing programs between one and five years, compared to organizations that have strategic sourcing programs deployed for six years and greater.

We will journey through the pressures organization have faced, what our respondents’ organizations were capable of, and the actions taken to mitigate the pressures, with their capabilities and some of the key technology enablers introduced to create a winning solution.

Feeling Under Pressure

Sourcing organizations continue to be pressured to find new approaches to reduce cost and identify savings. External pressures from global markets, government regulations, and global risk factors affect key decisions made by sourcing teams around the world. The ability to maintain returns is a requirement for these organizations today. Skill sets are ever changing in this global economy; the ability to maintain the highest skills in the market place with an ever- growing contingent work force creates challenges for sourcing professionals, along with the need to understand category management strategies and the complexity of the payment processes.

Given these pressures, Figure 2 represents organizations’ mandates to reduce cost and increase savings as a leading pressure by 72%. As many organizations continue to find the balance between contingent labor and permanent labor, knowledge leakage is a growing concern. The ability to understand category management strategies that will improve the overall business model requires seasoned professionals well versed in the corporate vision, another key pressure at 61%.

Key Performance Metrics Total spend under management organization: 1-5 years 58% / 6+ years 69% Average yearly savings realized by your sourcing team. 1-5 years 7% / 6+ years 9% Average cycle time to create, negotiate, and approve contracts (in DAYS): 1-5 years 44 Days / 6+ years 42 Days

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The ability to mitigate risk while being compliant to contracts and understanding the source-to-payment processes, with ever increasing stakeholder pressures for sustainable sourcing, are key areas that consume 96% of corporate pressures seen today. Strategic sourcing professionals have a lot on their plate to work with, and not a lot of time.

Figure 2: Top Pressures

Opportunities for Improved Sustainability

Sustainability programs define the need and ability to use advanced sourcing techniques, as well as an all-encompassing vision which can address non-price factors as part of a strategic sourcing process.

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While an active part of sourcing is sustainability supported by corporate responsibility, it’s clear that today’s global sourcing architecture and methods would make one raise a conscientious eyebrow.

Figure 3 shows that only 7% of organizations have incorporated sustainability into their spend strategy, while more than a quarter of respondents indicated it is not currently a part of the decision making process for spend. The positive side, however, is that this figure has been reducing year over year due to regulatory pressure.

Figure 3: Sourcing Sustainability

Opportunities for Improvement

The ability to mitigate these pressures requires an ability to improve vendor/customer insight to improve sourcing performance. Based on this survey, however, it is evident that

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barriers to strategic sourcing revolve around the lack of advanced techniques for the one to five year organizations.

In viewing Figure 4, the inability to integrate sourcing initiatives into proper data extraction/collection (where younger organizations lag at a rate of 57%), or the ability to use data to support negotiations at 44%, shows a clear lack of proper sourcing strategies, which would provide any business greater cost savings and visibility into their sourcing process if they were properly utilized.

Figure 4: Lagging Attributes to Support Strategic Sourcing

When the cornerstone of any sourcing process is the ability to proactively forecast and budget, as seen in the poor showing by younger organizations with a 33% separation (22% vs.55%) between one to five year organizations compared to organizations that are six years and greater, someone needs to say “stop the presses” and take a look at the sourcing process for these younger organizations.

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One key item that needs to be discussed here for the one to five year organizations is that they have a lot on their plate and currently do not have the experience of the six plus year organizations.

The ability to mitigate these lagging attributes quickly for these young strategic sourcing organizations will ultimately speed up their journey. By gaining greater insight into your vendors and the various impacts to both you and the customer, critical improvements and techniques can be captured on how organizations source their materials and services, yielding greater opportunities for all.

Strategic Actions – Driving Strategic Sourcing

As organizations continue to face new challenges and opportunities in this ever growing global economy, the ability to find new ways to stay competitive is ever changing. The competence to leverage strategic sourcing is a must.

But in order for technology enablers to be effective, organizations must first look at themselves as a whole. This process starts with proper organizational alignment to the sourcing strategy.

Figure 5 shows the top three strategic actions for our one to five year and six plus year organizations. It’s clear that both groups recognize the importance of proper alignment of sourcing activities for the greater good of the organization.

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Figure 5: Strategic Actions

In viewing both groups, the need to establish formal strategic sourcing processes is also apparent, as these efforts appear to be applied properly in this area by each type of group. We can see less of a need for this element in our six plus organizations, as they have been down this path before, so to speak, and have formalized/standardized their processes to a point of efficiency. Unfortunately for our one to five year organizations, they are still working on getting the right standardization before formalizing these processes; this takes time to be successful, as reflected in the figure above. The 7% separation should be viewed as time required building the proper strategic sourcing solution.

Both groups also understand the need to adopt technology to improve their overall holistic view of the organization, as these improvements will provide them with greater visibility and insight to make well informed decisions both internally and in external negotiations.

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Essential Capabilities for Strategic Sourcing

The ability to optimize your bid analysis as part of strategic sourcing processes is essential. Based on what we see in Figure 6, organizations have the technology today to capture top cost drivers in their bid processes, even if senior organizations are more adept (57% vs. 17%) at automation within an e-sourcing platform.

The ability to collect bids based on price and non-price terms (84% vs. 61%), along with collecting data from multiple sources (71% vs. 44%), now provides suppliers with wider opportunity and the freedom to express their bidding and preferences in a more sophisticated response for quotes. Our senior organizations are able to establish a more enhanced ability to analyze varying bids from suppliers, based on their years of experience and historical databank.

The ability to standardize both direct (67% vs.44%) and indirect (67% vs. 28%) spend allows organizations to now capitalize on capturing these savings more efficiently than ever before. A good example of this is something as simple as naming a pipe wrench - or is it a Stillson wrench, or Stillson? Maybe it’s called an adjustable wrench, or even just a plumber’s wrench.

The fact is we are all talking about the same tool, but it appears differently in large non-standardized systems, as various names, costs, and suppliers. Imagine this spread across a global organization with millions of varying parts. Once properly mapped and standardized, this standardization now becomes a major cost reduction while providing significant savings by properly sourcing this commodity.

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Figure 6: Capabilities

Key Takeaway

Gaining greater insight into your suppliers is essential; developing customer vendor relationships requires you both to view each other from a 360-degree view. Strategic sourcing is a critical component to organizations, identifying different approaches for finding savings and sustainable sourcing in the global market of today.

For more information on this or other research topics, please visit www.aberdeen.com.

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Related Research Treasury and Risk Management : Top Financial Risks and Tools to Manage Them; December 2013

Risk Management Through Effective Financial Planning, Budgeting, and Forecasting; May 2013

Risk Management for Travel: Policy and Mobility is a Must; April 2014

Improving Revenue Operations: Efficiencies and Innovation Lead the Way; May 2014

Author: Louis Berard, Senior Research Analyst, GSM, Complex Spend and VMS (louis.berard@aberdeen.com)

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