The procurement strategy – strategic sourcing

Does your organisation have an annual plan that lists all strategic and tactical procurement initiatives and activities? Or are the category managers heavily occupied by project procurement issues and ad hoc inquiries from the organisation, leaving little time for rigorous tenders and other supplier activities? The various categories handled by procurement organisations often do not differ in terms of the effort involved, the skill and number of resources responsible, the depth of involvement of operational stakeholders, and the time invested in innovative procurement concepts. Against the background of limited resources and the varying impact of cost categories on the company’s overall cost, this leads to suboptimal procurement results. In addition to escalating external costs, there often follows a drop in quality, delivery bottlenecks, and demotivated category managers, since they are rarely able to complete all their allotted tasks in a satisfactory manner within the available time.

The fundamentals of a comprehensive category strategy are full cost transparency and a market-facing category classification. The savings potential and relative complexity of the categories are deduced from the existing price levels, historical procurement activities, and market benchmarks. Combined with the resource requirements, these two factors inform the high-level category strategy. The most important categories should be assigned the most capable resources and most effective measures. From all of these considerations the division of the resources and categories into strategic, tactical, and operational can be made, as well as an annual plan for procurement activities.

The causes of suboptimal procurement behaviour can lie both inside or outside the procurement department. One-dimensional “silo thinking” within the corporate functions, poor data transparency, or a lack of focus on the procurement strategy are all conditions under which procurement opportunities remain hidden and savings go unrealised.

Typical signs are:

• Reactive instead of proactive procurement behaviour
• Cost increases for materials or fluctuations in demand at the expense of the bottom-line
• The liability and costs incurred through defects in purchased materials remain within the company.
• Fixed agreements and conditions for the customer differ in duration and/or validity period to those of the relevant suppliers.

The optimal positioning and adjustment of procurement requires a multi-layered approach. OCM can help you make purchasing-affecting contexts visible and derive measures to minimise risks and to take into acccount costs relevant to purchasing within your organisation. The measures can be internal to procurement, internal to the company, or directed at the customer or supplier. In addition to content development, a change management programme actively supported by senior management is vitally important in embedding cross-departmental communication and process changes within the organisation.

An example of a process improvement initiative is the introduction of value engineering concepts, whereby strategic sourcing takes on a core function in the company. In value engineering projects, interdisciplinary teams pursue the goal of generating a cost-optimal product. The aim is the fulfilment of customer demands at the lowest possible external costs. For this purpose, Value-Orientated Design or Design-to-Cost concepts are applied. Focussing on the key characteristics and optimising the design is crucial in ensuring both cost minimisation and value maximisation. Value engineering offers an excellent opportunity to systematically solve complex issues, to leverage savings opportunities, and to maximise product yield. Successful value engineering therefore requires intensive cooperation between development, procurement, marketing, and production.

Digitalisation, outsourcing, global sourcing, near-shoring, design-to-value, e-procurement, crowdsourcing – these are the trend terms of recent years. The question is: are these just marketing measures and intriguing concepts that can't actually be implemented? It is noteworthy that almost all managers are familiar with the terms, but companies often have little or no access to them. In most companies, innovation in procurement is neglected for what are believed to be the more prestigious, less operational areas of the organisation. Despite their advantages and disadvantages, the trend terms refer to valuable concepts that, while not appropriate for every company, should at the very least be sufficiently examined and tested. Reasons for a lack of innovation are mostly the low prioritisation of strategic questions, insufficient resources, or a lack of experience in these concepts.

In line with your unique situation, we work with you to develop innovative sourcing strategies tailored to your needs and evaluate them according to the potential benefits and risks. We support the decision-making process and work with your organisation to develop the implementation plan to ensure a smooth rollout.

How has Procurement performed compared to last year? Have you lowered your costs and improved your quality and service level? What is your maverick buying quota? What did the procurement optimisation initiatives achieve, or why did they fail? Which are your best suppliers and how have they developed? Many procurement organisations are not yet ready to answer these questions. The most serious consequences are typically missed savings, mediocre to poor performance of your suppliers, or cooperation with the wrong suppliers. Misdirected or failed initiatives not only waste resources, they also frustrate the associated team.

When introducing a measurement and control system for your purchasing department, we help you to transform existing and future data into target-oriented, transparent, and comparable performance indicators. It is also important to bridge the gap between these performance indicators and company level reporting and, in particular, the total external costs in a period. The next step is the introduction of measurement and control processes and appropriate instrumentalisation, for example, through software support or the introduction of a corresponding function.