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: 8 November 2011. Click here to order from Amazon.com.
One of the most critical, yet often overlooked, steps in any strategic sourcing initiative is conducting research. However, most people think the biggest challenge of research is knowing what to look for, while it is actually equally important to know where to look for information. The research phase of a strategic sourcing initiative requires both creative, out-of-the-box thinking and business acumen. Its purpose is to use the information analyzed during the data collection phase to begin developing market intelligence, which means identifying potential opportunities for cost reduction.
During the research phase of your sourcing initiative, you are taking your preliminary sourcing ideas, adding context to them, and converting them into a final sourcing strategy. To accomplish this, you need to gain a broad understanding of the category being sourced. This sounds like a simple concept, but many times professionals engaging in a strategic sourcing initiative do not take the time to properly understand the category they are about to source. Instead, those procurement professionals rely solely on processes and documentation developed by their predecessors.
Relying on previous work alone is a mistake for several reasons. First, suppliers can easily pick up on your lack of understanding and insight into the category. If they perceive that you do not have a firm understanding of the market, they often quote higher prices in the hope that you will not realize their price is high.
Second, without some market insight brought about by independent research, you may not identify all the suppliers in the marketplace, or you may overlook the right type of supplier. We review types of suppliers in greater detail later in the chapter, but for now, a simple example would be a manufacturer versus a distributor. Currently you may buy all your copy paper through a distributor, such as Staples. However, if the volume of paper you consume is substantial enough, and you have inventorying capabilities, it may make better financial sense to contract directly with a paper manufacturer and purchase paper in truckload quantities. Without a firm understanding of the market, you may overlook this type of opportunity.
Third, a lack of market insight inclines you toward mimicking the methods and obtaining the results of the person or group of people who sourced the category before you. Without independent research, a sourcing professional has the tendency to use documentation, formats, and requirements already developed and available to them. However, markets are fluid and change constantly. New technologies, new products, or new ideas that could be beneficial to your organization may have come into existence since the last time the product was sourced. Alternative processes, sourcing tools, or services may be available that have not been considered before. Without market research, these opportunities can easily be overlooked.
Each spend category can have a vastly different type of research associated with it. However, there are some general elements common among all products or services that should be explored during the research phase of any strategic sourcing engagement.
Those elements include:
- Identifying suppliers
- Understanding supply chains
- Understanding market conditions
- Understanding the factors of cost
- Review of technologies available
- Review of alternative processes
- Review of alternative products and services
- Performing a want-versus-need assessment