The Sourcing Solution: A Step-by-Step Guide to Creating a Successful Purchasing Program

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If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation. Please note that corrections may take a couple of weeks to filter through the various RePEc services. Book review--The Sourcing Solution: The concepts discussed in the book are managing vendor, vendor performance, outsourcing,offshore outsourcing, cost of acquisition, contracting, negotiation, partnering, cultural aspects and ethical issues while dealing with suppliers.

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Type of Document - pdf; pages: Sourcing Solution ,Purchase,Operation as. Download full text from publisher File URL: The products that are purchased in the highest volume will be the best candidates for cost reductions. That is because once those products are identified, the company can then justify the time and expense needed to closely study the industry that supplies that product. It can look at the ways key suppliers operate, study their business practices to see where the most money is added to the final cost of the product, and then work with the supplier to redesign processes and lower production costs.

This maximizes the contribution that suppliers make to the process. By knowing the market and knowing how much it costs for a supplier to do business, the purchasing department can set "target prices" on goods. If the supplier protests that the price is far too low, the purchasing company can offer to visit the supplier's site and study the matter. Such visits can occasionally spot problems in the supplier's operation that can help the vendor shave costs and thus lower price. The alliances also can sometimes register significant improvements in product quality.

Buyers can build clearly-defined quality targets into their target prices. It will then work with the supplier to improve the manufacturing process until that quality target is met.

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Such a process can yield enormous benefits for buyers, including reduced inventory levels, faster time to market, significant cost savings, and reduced development costs. Not all suppliers can meet the high standards demanded in this purchasing environment. Some studies indicate that companies that adapt strategic sourcing have lowered the number of suppliers they use by an average of nearly 40 percent.

What characteristics make a good supplier, then? If the supplier is willing to partner, then analysts have identified several traits that good suppliers share:.

Tools that identify and create value

Analysts indicate that suppliers receive some benefits in the emerging purchasing dynamic as well. Reduced paperwork, lower overhead, faster payment, long-term agreements that lead to more accurate business forecasts, access to new designs, and input into future materials and product needs have all been cited as gains. Other observers, meanwhile, point out that some buyer-supplier relationships have become so close that suppliers have opened offices on the site of the buyer, an arrangement that can conceivably result in even greater improvements in productivity and savings.

Of course, companies are not going to form such "partnerships" with all of their suppliers. Some form of the traditional purchasing process involving bidding and standard purchase orders and invoices will continue to exist at almost every company, and especially at smaller companies that do not have the financial weight to make large demands on their suppliers. In addition to strategic sourcing, there are other methods companies can use to improve purchasing. One is creating cross-functional teams that involve purchasing personnel in every stage of the product design process.

In the past, purchasers were not involved at all in the design process. They were simply instructed to purchase the necessary materials once a new product had been created.

Now, purchasers and suppliers are increasingly included from the start of the new product process to ensure that the products needed to create product are readily available and are not prone to quality problems. Suppliers tend to be experts in their field, so they bring a large knowledge base to the design process that would otherwise be missing. This can help prevent poor designs or manufacturing mistakes. These teams have broken down barriers and helped abolish the old manufacturing method that was known as the "over the wall" method of productions—each business unit would work on a project until its portion of the job was completed.

It would then "throw the product over the wall" to the next functional team that was waiting to perform its part of the manufacturing process. The new cross-functional teams often include personnel from purchasing, manufacturing, engineering, and sales and marketing. Purchasing teaches other members of the team how to deal directly with suppliers, cutting the purchasing personnel out of the loop. We asked a number of them around the world to quantify the likely near-term impact of their digital procurement programs.

On average, their expectations included a 40 percent increase in annual savings, 30 to 50 percent less time spent on transactional sourcing, and a 50 percent reduction in value leakage. But CPOs are also asking which of the new digital solutions will bring real value to their companies today. They receive product specifications provided by their engineering counterparts; monitor contract adherence, invoicing behavior, and supplier performance; and generate supplier profiles and scorecards.

Procurement also taps into various external data sources, like supply-market-specific time-series data for commodities, currency and inflation rates, tax and tariff data, or supplier solvency data. But how do companies create real value from this data? In a world of digital hype and with new solutions hitting the market every day, many CPOs are struggling to separate the wheat from the chaff.

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In this article, we attempt to bring structure to the discussion and provide a simple framework for CPOs to think about superior value creation through digital procurement and advanced analytics. Simply speaking, tools to identify and create value support the strategic sourcing process. They can be further divided into those that create spend visibility, and those that support advanced collaborative sourcing.

Advanced spend intelligence and automated sourcing insights. Spend visibility tools begin with solutions that pull historic purchase order PO and invoice data, and create a spend cube.

The prevalence of fragmented ERP systems means many multi-national and multi-business companies still find it difficult to build even simple spend cubes. Some companies, however, are already automating data cleanup and classification with algorithms that make use of artificial intelligence and self-learning methods.

Driving superior value through digital procurement | McKinsey

We expect that the solutions currently available in the market will be further enriched with additional data sources and the inclusion of basic, category-level key performance indicators KPIs. For example, they will be able to generate automated price and specification benchmarks across entities, like price arbitrage analyses or facility management costs per square meter and per person. Prices will be correlated to material cost indices, or to product specifications using linear performance pricing LPP.

Category managers will have automatically generated dashboards and heat-maps at their fingertips, helping them identify and capture sourcing opportunities. Category strategy work-flow portal. While many systems support transactional procurement processes, very few work-flow solutions currently support the generation of comprehensive category strategies and the systematic identification of savings levers.

There are emerging solutions that are able to guide category managers through a configurable stage-gate process that includes every step in the creation of a category strategy: Relevant milestone meetings with cross-functional partners will be triggered automatically, and all ideas will be stored and tracked up to the final implementation steps. These work-flow solutions will allow teams to collaborate via shared file spaces, forums, chats and video calls, and superiors will be able to track category manager activities and their impact in real-time. Also, as they serve as structured repositories for all the analyses conducted and insights generated during the strategy development process, these work-flow systems also will make the assembly of category strategy documents and negotiation preparation packs almost automatic.

By applying the most advanced tools available today, we have seen companies shorten their category strategy development times by around 30 percent while significantly increasing the depth of insight and impact generated by category management teams. In one pilot program, teams exceeded their initial savings targets by an average of 20 percent.

These analyses will increasingly be coded into standard applications. Once defined, these category solutions will routinely create the defined analyses, and automatically flag potential improvements and specific levers needed to capture them. In addition, we will see a number of category solutions for more complex, data-intensive categories like logistics, travel, telecoms, temporary labor, or freight.

These will build on massive, relatively standardized data sets and again allow the execution of a set of standard analyses to identify levers and improvement potential. Freight optimization tools already work like this, for example. They take routing data and complete pricing schemes from multiple vendors to identify least-cost vendor combinations. They can also suggest demand changes, like not using express freight on a Friday when the goods will not be delivered until Monday. One large industrial company was able to reduce its total air freight costs by 25 percent using a commercially available multi-variable freight optimization solution.

Cleansheet and should-cost analyses. Cleansheet tools comprise a work-flow application to build calculation sheets, several expert tools to estimate different cost areas like machining, logistics, or overhead cost, and a set of databases containing template libraries and factor costs e. It is not uncommon for these tools to reduce the cost of products or services by up to 40 percent, while also improving time-to-market for new product designs. Early involvement with internal customers and cross-functional cooperation to jointly challenge demand, specifications, and processes is critical for good sourcing.

Digital platforms that foster exchange, transparency, and interaction can facilitate that collaboration. A number of large software vendors already provide generic collaborative spaces including file repositories, collaborative workspaces, audio- and video-conferences, and calendaring.

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