The following article is excerpted from the book Managing Indirect Spend, by Joe Payne and William R. Dorn, Jr. Published by John Wiley & Sons, Inc. Release date: 19 October 2011. Click here to order from Amazon.com.
Many companies still do not apply strategic sourcing techniques to indirect spend categories. Instead, indirect spend is treated as a series of one-off purchases, or is sourced with a simple three-bid strategy with no efforts beyond reviewing the supplier price responses. Typically, with indirect spend, per-item prices are relatively low, the product or service is not crucial to the business, and the overall costs are rarely examined because of the difficulty entailed in gathering meaningful spend and market data. Strategic sourcing allows companies to shift away from thinking about indirect spend in this ad hoc manner, and provides spend visibility, objective decision making, and a project management tool to ensure efficient use of the sourcing team’s time and efforts.
Strategic sourcing provides visibility into business processes, operational issues, and spend details that may not have been clearly available to management and stakeholders in the past. The process of strategic sourcing provides a road map for collecting and analyzing this information to determine how the purchase of a particular product or service truly fits into the overall business operations of an organization, from the identification of the need to the use of the product or service and (if necessary) its disposal.
This includes identifying:
– Who buys the product
– How it is ordered
– How it is received
– How it is paid for
– Where that information resides in your systems
– What the payment reconciliation processes are
– Where product is stored
– When it is used
– Why it is needed
– Who the suppliers are
– What value-adds or services are provided
– What happens to the product after end-of-life
Strategic sourcing allows companies to shift the management of indirect spend from a series of one-off purchases to a more coordinated effort with checks, balances, and objectivity that justifies costs and requirements. Historically, indirect purchases and spend for most companies were managed by one or many individuals, with little oversight from management and no requirement to justify their selection of suppliers. Strategic sourcing provides a process to identify the true requirements of the organization (rather than those of the individual managing the spend) and to identify suppliers and price points that appropriately meet those requirements. The process is performed in such a way that requirements are identified well ahead of supplier identification, and stakeholders agree to those requirements before alternatives to the existing arrangement are presented.
Finally, a well-designed strategic sourcing process becomes a project management tool that ensures the engagement will not end in failure due to scope creep or lack of a clear path forward, and that those working on the project make the most efficient use of their time. Attempting to reduce costs without a formalized strategic sourcing process can easily end in frustration, as roles are not clearly laid out between team members, steps are not identified, and timelines are not set. As we discuss throughout the book, the strategic sourcing process includes many challenges, and teams can easily get bogged down in noncritical details or fail to come to consensus on next steps. The process in itself includes steps that can be integrated into a comprehensive project plan that avoids convoluted outcomes.