5 Keys to Sourcing Strategies

P a g e | 2 © Steve Carter, London 2010 http://www.SourcingStrategyWizard.com

Hello and Welcome

“The 5 Keys to Breakthrough Sourcing

Strategies” ...

And – How you can implement them – NOW!

s you read through these 5 Keys – and the opportunities

they present to you – you’ll easily be in a position to make a

difference to your organisation and your career – more easily

and more often.

In fact:

It is the lack of knowledge and application of these 5 keys that losesmore organisations more money than any other single factor.

Over the years, working with large and small organisations in both the public and

private sector, I have seen procurement organisations fail to take full advantage of

these 5 keys and as a result fail to get the breakthrough cost reductions and

improved service that was available to them. They have had to settle for cost

reductions of less than 5% when as much as 20% or more was possible.

I’ve made this report as brief as possible but at the same time, I’ve

given you everything you need to know about the

5 KEYS TO BREAKTHROUGH SOURCING STRATEGIES.

No padding or waffle – just useable

ideas you can put into action – immediately!

So, let’s get started:

A

The 5 Keys to BreakthroughSourcing Strategies

Steve CarterProcurement

Practitioner andConsultant


But first, why should you listen to me?

A good question and one that I would ask if I was in your shoes.

The reason is that I have been working for more than 20 years with organisations,both large and small, in the public and private sectors. I have done this both as apractitioner (I have held senior line positions in purchasing and supply functions in amajor US multinational and a large UK multinational that is now part of the ShellGroup) and as a consultant. I started my consulting career with Deloitte Haskins &Sells before moving to KPMG. After 6 years with them, I went solo and have beenhelping organisations to develop their own sourcing strategies, often as part of acategory management programme.

Here are some unsolicited testimonials:

“Steve has been a huge asset to the Council in his role as interim head of procurement. As well asdriving tactical savings, he has successfully introduced the concepts of category management andsupplier relationship management, both of which have started to pay off and kick started the Councilon its transformation journey. I would have no hesitation in recommending Steve to any organisationthat required a high level procurement professional who can deliver both short term, impactful resultsas well as longer term strategies”. Nick Bell, Deputy CEO and Group Financial Director, EssexCounty Council

"... you demonstrated a level of professionalism I didn’t believe existed in the consultancy world "Graham Jackson, UK Head of Commercial Services, Compaq Computer

" ... thank you very, very much for the magnificent contribution you have made this year and the wayin which you have driven professional purchasing practice in this company forwards" Pete Wilkinson,Group Director of Strategic Procurement, AXA UK

" ... better value for money than some larger organisations" Denis Mellon, Director of Materials, ICLSorbus

" Over the years I have been involved with a number of companies that carry out strategic reviews butfeel you grasped our requirements very quickly and delivered results promptly and professionally. If Ineed to carry out a similar project in the future I will pick up the phone to you" John Hall, ChiefExecutive, Ring Ltd

"Steve brought critical thinking and strategic clarity to a complex and under-performing area of TfL'sbusiness while mentoring the TfL team and impressing a professional client base enough to securetheir support for a wide ranging programme of commercial change in one of TfL's most crucial areasof spend. Knowledge transfer has enabled TfL to drive the programme forward for itself now butcontinued support and training from Crest at critical stages in the project will be material in ensuringlong term success" Dave Williams, Group Director of Procurement, Transport for London

The next question I know you want to ask is ... “Why wouldSteve give me this FREE report on the 5 Keys to

Breakthrough Sourcing Strategies and How to ImplementThem”


You may not have phrased the question quite like that – true?

But you still knew deep inside that there must be a reason (or catch!) for me to taketime out from my busy consulting practice to write this report and build the websitethat goes with it – yes?

Well, here is the reason:

The reason WHY I wanted you to have this important report was to do a number ofimportant things:-

I only wanted to give the report to people who were serious aboutimplementing breakthrough sourcing strategies for their organisation, whetherthis be in the private or public sector (and there are more similarities betweenthe two than are often acknowledged)

This report, I hoped, would show anyone that read through it that I do havesome great ideas – practical ideas – for improving organisations’ commercialeffectiveness

Once someone reads this report they will be more positively inclined to take alook at the paid for services I offer (informational products, software, onlinecoaching and consulting)

It’s a good way to start a relationship with a new client by ...

... making the first sale an easy sale

And what’s easier than a FREE product to start!

Does all of that make sense to you?

Good!

Then let’s start.

Often, I see procurement groups dive straight into sourcing a product, service orcategory as soon as the need arises. Sometimes it is because others determine thetiming and procurement are told too late in the day for them to be able to take a morestrategic decision; a sense of urgency is created and the task becomes one of lettinga contract – NOW! Other times it is because they fail to act on Key #1.

So here it is ...

KEY #1

The first key to a Breakthrough Sourcing Strategy is to determine the scope of yourstrategy and agree the opportunity with your colleagues.


Let me explain:

Setting the scope of what goes into your sourcing strategy is one of the keys to asuccessful outcome.

For example, if you go to market for a cleaning contract toservice a number of offices then you will get a price which may,or may not, be better than the one you are currently paying.

If you add to the scope other facilities related services such asgardening, security or maintenance then you are increasing thevalue of the contract and so your leveragein the marketplace ...

but this may have to be balanced by the fact that you may bepotentially reducing the number of capable suppliers.

But how about going further?

You may decide that you want to outsource the whole of your property management– or even sell and lease back your property portfolio. This will dramatically increasethe value of the contract and take you into a different league of potential cost savingsbut will also increase the complexity of the procurement and the range and numberof stakeholders who need to be involved, adding significant time that is needed toarrive at a solution that is acceptable to everyone.

Even if you decide that this is the scope that you want, there may be anotheralternative that adds even more value.

How about selling off your property portfolio and buying ina service in which the supplier provides a defined officespace per person together with everything that personneeds to perform their job – heating, lighting, furniture,telephone, computer and so on. All at a cost per personbut with the requirement that you may want to flex this upor down over time depending on your business needs.

The onus is on the supplier to sell surplus capacity in the office building.

This changes a fixed cost to a variable cost so that your costs are more closelyaligned with your needs. Eliminating the waste that comes with having excess officespace can yield dramatic results. As well as potentially reducing all of the associatedcosts such as furniture if the supplier can bundle your requirements with those ofother clients and go to market with a bigger volume than you can on your own.

The output from this process of defining the scope should be a simple statement ofno more than one or two sentences.

Summarise your scope – your “elevator pitch”


The scope of your sourcing strategy should be summarised in one or two simplesentences – this is your “elevator pitch” scope, so called because it allows you toexplain to someone what your strategy is about in the time it takes an elevator to getfrom one floor to another (which might be all the time you have to tell a seniorexecutive!).

Examples are:-

All residential care homes in the county

IT maintenance that includes all laptops, printers and multi-functional devices

All grades of boron, carbon and high strength steels for manufacturing plantsin Europe

Here are some Top Tips:-

do identify all your potential stakeholders (i.e. those with an interest in whatyou are sourcing) and make sure that you have a plan for engaging with them

don’t fall into the trap of just sourcing what has been sourced before when thecontract expires

do be creative and look at related items to see if you can create a largercategory to source

don’t limit yourself to the goods and services that you buy – consider thecapabilities that are needed and whether there is commonality with othercategories

do engage with the supply market before you make a final decision on thescope – suppliers may have valuable insights into what can be achieved

do summarise the scope of your sourcing strategy into one or two clearsentences so that you can share it with your stakeholders and get agreement

But there’s more:

You now know what category you are going to source but what you don’t know is theexact requirements for the item(s) in that category. This is the role of the BRD ... theBusiness Requirements Definition.

Your BRD is a structured description of what you need to source from supplymarkets and covers the full range of stakeholder needs. Defining your businessrequirements is a team game in that you must involve the appropriate stakeholdersin your organisation. This will mean that the full set of needs is taken into accountand an agreement reached on any trade off that is needed between conflictingrequirements.


These requirements are critical to a successful sourcing outcome because they are akey input to a number of steps in the sourcing process. These include:-

deciding on the evaluation criteria to be used in selecting the preferredsupplier

testing your sourcing options so that the one that most closely meets yourorganisation’s overall needs is chosen

developing the most relevant performance measures to include in the contract

deciding whether circumstances have changed so much that the sourcingstrategy needs to be re-visited

You can develop and document your business requirements using the frameworkbelow.

This is thecontent

This is the testthe content

needs to pass

This is how itwill be

measured

So this is thebusiness

requirementRegulatory You put here

how the user orbudget holderhas describedtheir needs

This is what youagree with theuser / budgetholder as tohow theyrecognise theneed has beenmet

This is the keyperformanceindicator youuse

This is thedescription ofthe need andKPI that will bewritten into thecontract andcontract awardcriteria

Availability/supply

Quality

Service

Cost

Innovation


gather as much data on the future direction of your organisation as you can sothat you can test that your business requirements match the needs of theorganisation. This includes corporate and business unit strategies, policystatements, business plans and technology plans.

identify and meet with all of the stakeholders to understand and challengetheir perceived needs in order to separate needs from wants and tounderstand their priorities.

challenge the needs to make sure that you are not just replicating theprevious solution.

consult with as many people as possible who have a role to play in theacquisition or use of the product or service and make sure that there are nochanges that they know about to technology and processes that may changethe requirement.

share the summary of all of this analysis so that a consensus can be reachedthat accommodates everyone’s need and buy-in can be achieved.


The scope of your strategy and your business requirements definition tells peoplewhat is included in the strategy. What it doesn’t tell them is what you are trying toachieve. This is the role of the STP ... which stands for ...

Situation Target Proposal

The STP is a succinct description of the ...

Situation (this is a short statement of the key issues facing this category; forexample no formal procurement involvement at present, spend spread acrossa large number of suppliers, evidence of same item bought for different pricesby different people);

the initial Target you are setting (for example, 10% overall cost reduction infirst 12 months, preferred supplier list in place, no off contract buying); and

your Proposal for how you will go about it (for example, put in place supplierperformance monitoring system, agree standardised specification, negotiateprices).

Here’s an example:

Problem definition: The cost of providing homecare services to older people in theCounty is more than the budget available.Situation: 25 homecare suppliers used. Average spend with them is £150,000.Average profit margin is 6%. The County accounts for no more than 5% of anysupplier’s business. Average quality rating is “adequate”Target: Achieve same range and quantity of home care services in the next 12months for 10% less cost than now. Improve average quality rating to “good”.Proposal: Produce a category strategy that reduces the number of suppliers used toincrease the value of the County’s account to them but commensurate with achievingdefined outcomes. Implement quality improvement programme.

Combining your statement of Scope with your STP creates a powerful means ofgetting people to “buy in” to your project for developing an effective sourcing strategyand for communicating to others what you are doing and why you are doing it.

Now that we know what we are sourcing and why (and have agreed with ourcolleagues – particularly the “users” of the item who are often the budget holders andso have a big say in what is bought and how), we now need to understand moreabout the category if we are to develop a breakthrough strategy.

This leads me to the second key.

KEY #2


The second key to breakthrough sourcing strategies is answering the question “whatdo we know about this category”. This means collecting data on three things:-

how much we spend, with whom on what

the supply market (how big is it, how is it structured, what drives costs etc.)

suppliers in those supply markets

Often analysing how much has been spent, on what, with whom and by whom canbe a tricky and daunting process.

This can be because your systems don’t collect the data needed or in the requiredform to facilitate meaningful analysis. What you can be left with is just informationfrom your accounts payable system which tells you how much has been spent with asupplier but not on what.

If this is the case in your organisation, you may have to rely on your suppliers givingyou this spend information as their sales systems are probably more comprehensivethan your purchasing systems.

Here are some types of data and their sources.

Types of Data

Category Data: Historical/forecast spend/volumesNumbers of suppliersLife expectancyGeographical spread

Supplier Data: Supplier salesProducts/services rangeSpend as % of suppliers salesPerformance historyFinancial ratiosInvestment plansDirector’s interests

Sourcing Process: Process flowBuying control mechanismsExisting sourcing strategiesPerformance measures

Customer Data: Value of sales affected/revenue dependencyProduct and process performance requirementsCurrent satisfaction level

Supply Market: Market conditions and trendsCompetitors’ positionClient positionEmerging technologies


Business reportsMarket structure and segmentationPotential suppliersCompetitor activities

Data Sources

a) Purchase orders h) Ledgers

b) Invoices i) Competitor analysis

c) Benchmarking activities j) On-line information services

d) Mystery shopper k) Supplier literature

e) Estimating departments l) Supplier accounts

f) Customer service records m) Alliance organisations

g) Organisational business plans n) Paid Market Surveys


make sure that the spend data and the subsequent analysis are clear toeveryone. If people feel that the results have popped out of a “black box” andit is not obvious how the figures have been arrived at, they will not havecredibility and so you will not get “buy in” from your stakeholders

as much as you can to “clean” the data before you use it. “Dirty” data is theresult of errors that are often made when entering data or allocating spend tothe wrong expense code. Remember the phrase “extract, transform and load”– in other words, extract your data from whatever your sources are, sensecheck it and transform it by cleaning it up if necessary before loading it intoyour analysis tool

make sure that the workload you are generating in data collection is kept tothe absolute minimum if you are to avoid bottlenecks appearing due to timeconflicts. People will be reluctant to help you if it involves significant amountsof time away from their core job

prepare a plan for data collection that clearly identifies the resources youneed, timelines, milestones and deliverables. This will help you tocommunicate to others what is needed as well as help you to keep the projecton track

You might think that now you have this data you have everything you need to startyour sourcing strategy. But you would be WRONG!

Here’s why:


There is a BIG difference between DATA and INFORMATION.

Data are plain facts about something. Spend by supplier is an example of data. Dataon its own is fairly useless.

However, when data is put into context, processed, organised, structured andpresented so that it can be interpreted and useful conclusions drawn, then it is calledInformation.

Applying the Pareto principle (the so called “80/20” rule) to spend by supplier allowsyou to home in on the relatively few suppliers with whom you spend most of yourmoney which in turn allows you to develop an appropriate strategy. This is anexample of turning data into information.

I have seen many sourcing strategies that have been overflowing with data that toldyou absolutely nothing. The test you should apply to any information masqueradingas data is to ask “so what?” Unless you can draw a conclusion that allows you totake action then it is data and not information.

This leads me to the next Key to Breakthrough Sourcing Strategies.

KEY #3

The third key in creating your sourcing strategy is to answer the question “what arethe underlying issues?”

To do this you need to analyse the data from Key #2 and turn data into meaningfulinformation.

Here’s how:

You start by analysing your spend data to produce a Pareto analysis ... in otherwords, the approximately 20% of items that together add up to about 80% of yourspend value. This segments your spend into high importance (the few items thatmake up 80% of your spend) and low importance (the many items that when addedtogether only amount to about 20% of your spend).

Although the amount you spend is only one measure of importance, it will do for nowas all we want is a quick analysis to point us in the right direction.

Later, you can include other factors that make an item important to yourorganisation. These can include:-

how frequently the item is used to make other items (if the item is used tomake products that together account for a large percentage of your sales,then the item has high importance – without it your production could come toa halt);


whether or not the item is used on a bottleneck resource - here unavailabilityof the item could bring the entire operation to a standstill;

whether or not the item is used in new products – unavailability here couldstifle your organisation’s sales development.

But that’s not all

Another possible segmentation of the things you buy is that of supply risk orcomplexity of the procurement process.

As with the importance of the item, there are a number of ways to assess an item’ssupply risk based on the nature of the item itself, the structure of the supply marketand your suppliers’ position in that market.

For now, we will keep it simple as at this stage you need to assess the supply risk ofpossibly thousands of items. The way in which we will assess supply risk is to lookat the number of capable and willing suppliers in the marketplace for each item (thisis now necessarily the number of suppliers you actually use).

If there are more than five willing and able suppliers then we can consider the risk tobe low (if a supplier fails there are many more available to use without impactingavailability or price). If there are fewer than five willing and able suppliers, supplyrisk is high.

This now gives you a way to segment your purchases two ways – based onimportance and based on supply risk. This creates a 2x2 matrix known as the Kraljicmatrix. You can find a sample matrix below.

This matrix suggests a number of possible sourcing strategies for each of thequadrants.

Tactical quadrant (low complexity/risk and low importance)

Standardise and rationalise your product range Make the buying process as efficient as possible, for example by using e-

procurement tools Outsource the buying process

Leverage quadrant (low complexity/risk and high importance)

Long term contracts Risk management Functional analysis

Critical quadrant (high complexity/risk and low importance)

Product substitution


Cost or value analysis e-auctions

Strategic quadrant (high complexity/risk and high importance)

Supplier development Make or buy analysis Value analysis

This analysis of data into information produces a matrix that is often called supplypositioning.

But you need to know more.

Here’s what:

The information you have analysed so far gives you a picture from your own point ofview ... the Buyer’s View.

But of course, suppliers also have a point of view ... the Supplier’s View.

Suppliers analyse markets and customers in a similar way to the way that youanalyse markets and suppliers. The supplier’s view is often called Supplier

P a g e | 14 © Steve Carter, London

Preferencing. You also needBreakthrough Sourcing Strategy.

Here’s how you do it.

The starting point for a supplier’s assessment of you is to look at the market for thegoods or services it supplies to you. A common techniqueis the Boston Matrix.

The supplier will first assess the growth rate for that market on the basis that thefaster the market is growing, the more that market will be of interest to them.

competition in low growth markets is often bitter, and while youhigh market share now, what will tyears? This makes low growth markets less attractive.

The next thing they will look at is their market sharerelative to the competition. The higher this is, themore important the market to them.

The Boston Matrix assumes that if you enjoy a high market share you will normallybe making money (this assumption is based on the idea that you will have been inthe market long enough to have learned how to be profitable, and will be enjoyingscale economies that give you an advantage).

Plotting the position of individual markets against market share andmarket growth gives four possible positions for the market. The first ishigh market share in a high growth market. These are the supplier’sstars and the ones they get really excited about.

The next quadrant is high market share in a low growth market.Here, suppliers are well-established, so it's easy to get attentionand exploit new opportunities. However it's only worth expendinga certain amount of effort, because the market isn't growing andopportunities are limited.

The third quadrant is a low market share of a high growth marketthese are called question marks.knows what to do with. They aren't generating much revenue right now

London 2010 http://www.SourcingStrategyWizard.com

eed this information if you are to build a successfulBreakthrough Sourcing Strategy.

The starting point for a supplier’s assessment of you is to look at the market for thegoods or services it supplies to you. A common technique that suppliers use for this


Markets experiencing high growth arwhere the total market share available isexpanding, and there's plenty of opportunity foreveryone to make money. By contrast,

competition in low growth markets is often bitter, and while your supplierhigh market share now, what will the situation look like in a few months or a fewyears? This makes low growth markets less attractive.

The next thing they will look at is their market sharerelative to the competition. The higher this is, themore important the market to them.

Boston Matrix assumes that if you enjoy a high market share you will normallybe making money (this assumption is based on the idea that you will have been inthe market long enough to have learned how to be profitable, and will be enjoying

that give you an advantage).

Plotting the position of individual markets against market share andmarket growth gives four possible positions for the market. The first ishigh market share in a high growth market. These are the supplier’s

the ones they get really excited about.

The next quadrant is high market share in a low growth market.established, so it's easy to get attention

and exploit new opportunities. However it's only worth expendingof effort, because the market isn't growing and

The third quadrant is a low market share of a high growth marketthese are called question marks. These are the opportunities no oneknows what to do with. They aren't generating much revenue right now

http://www.SourcingStrategyWizard.com

this information if you are to build a successful

The starting point for a supplier’s assessment of you is to look at the market for thethat suppliers use for this


arkets experiencing high growth are oneswhere the total market share available isexpanding, and there's plenty of opportunity for

By contrast,r supplier might have

he situation look like in a few months or a few

Boston Matrix assumes that if you enjoy a high market share you will normallybe making money (this assumption is based on the idea that you will have been inthe market long enough to have learned how to be profitable, and will be enjoying

Plotting the position of individual markets against market share andmarket growth gives four possible positions for the market. The first ishigh market share in a high growth market. These are the supplier’s

The third quadrant is a low market share of a high growth market –These are the opportunities no one

knows what to do with. They aren't generating much revenue right now


because you don't have a large market share. But, they are in high growth marketsso the potential to make money is there.

The final quadrant contains the so-called dogs – markets thathave a low share of a low growth market. In these areas, marketpresence is weak, so it's going to take a lot of hard work to getnoticed. Also, you won't enjoy the scale economies of the largerplayers, so it's going to be difficult to make a profit.

The order in which suppliers will invest their time and money is stars, cash cows,question marks and dogs.

Knowing where your supply markets sit can give you invaluable insights as to whatyou need to do.

The second dimension that will influence how suppliers see you is that of theattractiveness of your account.

You may be able to do little about the actual supply markets you buy from but thereis plenty you can do to improve your attractiveness to key suppliers.

Here are just a few ways:

Buy On Value Not Price

Transactional items (that is, things you buy that are undifferentiated from those fromother suppliers – items such as gas or electricity) compete largely on price. This issensible but what is not is to take those buying behaviours into the purchase ofthings that are differentiated in some way.

Management Consultancy is one category that falls into this group as are bespoke ITsystems. Here you are buying capability and it is not always the lowest pricedsuppliers that can deliver the best overall result.

If you truly alter your buying behaviours to reflect the type of item you are buyingthen you will be looked on more favourably by key suppliers who provide value overand above that of price.

Give Good Access to Key Decision Makers

Pitching for contracts is getting more and more involved and more and moreexpensive.

Hence the more aligned suppliers can make their bids to your needs, the betterchance they have of competing successfully. This alignment comes from a soundunderstanding of the needs of key decision makers and so easy access to thesepeople makes you attractive to a supplier.


Reduce the Number of Rules for Buying

There is no doubt that complex and cumbersome procurement rules and systemsadd to the cost of winning work.

If you can streamline these to make it easier for suppliers then you will rise in theattractiveness stakes.

Match Strengths to Needs

This factor is obviously paramount in winning new work as the match between theirstrengths and your needs is the starting point for delivering value for money.

You now know how suppliers might view you and the supply market.

Now for the Most Powerful Information of All

You are now in a position where you have analysed your data and producedinformation on possible procurement strategies for you and information on howsuppliers view your account and the market.

The next step is to put this together to produce a very powerful piece of information.

Your supply positioning analysis gave you four quadrants with outline sourcingstrategies:

Tactical spend – low spend, low risk

Leverage spend – high spend, low risk

Critical (or Bottleneck) spend – low spend, high risk

Strategic spend – high spend, high risk

Your supplier preferencing analysis also gave you four quadrants and likely supplierresponse:

Nuisance – low market importance, low account attractiveness

Exploit - high market importance, low account attractiveness

Develop - low market importance, high account attractiveness

Strategic - high market importance, high account attractiveness

Putting these analyses together gives you the picture shown below. This is called aProcurement Portfolio.


So, how do you use this to your advantage in creating a Breakthrough SourcingStrategy?

Here’s how:

The Buyer’s view is an analysis by category of spend. So you do this first. For yourstrategic categories, you then identify all of your current and potential suppliers andproduce a supplier preferencing analysis for each of them.

If this shows that you have a match between your strategic categories and yoursuppliers’ view of the market and you (that is, they see your account as either“develop” or the “strategic”) then you have a sound basis for pursuing a rigorous costdown or cost out strategy by creating a meaningful partnership with them. This willcreate the right conditions for a Breakthrough Sourcing Strategy that delivers 15%savings, 20% or even more.

But how do you know what the potential is for a significant cost reduction?

This requires some more data analysis – price and cost analysis.

A key question that all procurement professionalsface is ... am I paying the right price? The purpose inanalysing prices and costs is to satisfy ourselves thatthe amount we are paying is fair.


One way to do this is by analysing the price without investigating the costs used bythe supplier in arriving at the price. Essentially you are comparing the price againstyardsticks of reasonableness.

Cost analysis, on the other hand, looks at the individual components that make upthe price and asks if they are a reasonable reflection of the cost of an efficientprocess for producing those goods or service.

Generally speaking, price analysis will only ever give you anindication of fairness for simple procurements for which there isample evidence of similar procurements in the public domain.

On the other hand, cost analysis can rarely be sufficient withoutprice analysis being done in support. For example, suppose you are

buying a bespoke laptop computer and your supplier has provided the following costcomponents:

£Materials 160Labour 80Overheads 80Development costs 1,000,000Profit 40Price 1,000,360

All of the cost components and the profit look reasonable. Even the £1 milliondevelopment cost could be justified on the basis of the set up costs for the supplier.But a simple price comparison using any number of publicly available sources wouldquickly demonstrate that a price of more than £1m for a laptop.

However, analysing a supplier’s costs in this way not only gives you a usefulbenchmark with which to compare suppliers’ prices but also gives you the startingpoint to question the cost build up ... for example, returning to the cleaning contractin the scope section, a supplier will have estimated the future price of materials.What are these estimates based on? Can those materials be bought cheaper?What assumptions have been made about usage? Is there an amount in there forspillage, waste, even theft? Are those estimates fair? What about the cost ofequipment? Are these based on new or old equipment? Purchase, lease or rental?Etc. etc. etc.

But wait. There’s more!

You have identified the spend categories and suppliers that might form the basis of abreakthrough sourcing strategy. But how do you know whether or not your supplierswill be willing to work with you in this way?

The answer is ...


... more information!

What you need to know are three things:

1. What is your relative bargaining power compared to your suppliers and canyou leverage it

2. How is the market structured and how do you extract value from it

3. Can you encourage new entrants or develop alternative sources in order tocreate leverage with your current suppliers

The first question is answered by an analysis called Power Dependency. The tworemaining questions are answered using a Market Analysis Model. All three canbe analysed using Porter’s Five Forces.

As you would expect, the Porter Model consists of five elements which togethermake up the structure and competitive options of a market. These elements are:-

suppliers to businesses in the supply market;

customers of businesses in the supply market;

possible new entrants to the supply market;

existing businesses in the supply market; and

the product or service the market supplies.

These factors are often represented by a diagram such as the one below.

The vertical axis (threat of new entrants – existing competitors – threat ofsubstitutes) determines the market structure. For example, if the threat of newentrants is high (for example because costs of starting a business is low) and theproduct is profitable then you might expect the market to be fragmented and consistof many small suppliers.

The horizontal axis (suppliers – existing competitors – buyers) determines the coststructure of the supply chain. For example, if buyers have little bargaining powerthen any costs further down the supply chain are likely to be passes on to them withmost of the available profit being made by companies in the supply market orsuppliers to that market (depending on who has the relative power between them).

By asking the right questions, you can use this model to estimate the relativebargaining power and so whether or not your strategies can be implemented.

Another approach is that of relative bargaining power.


Buyerstrength

Supplierstrength

Low

Low

Medium

Medium

High

High

BALANCE

BALANCE

BALANCEEXPLOIT EXPLOIT

EXPLOIT

DIVERSIFY DIVERSIFY

DIVERSIFY

Here is an explanation:

In the previous section, you have quantified (to an extent) the power that buyers andsuppliers have in your chosen market using Porter’s Five Forces. What you can dowith this information is to draw a 3x3 matrix like the one below.

This gives you three potential strategies:-

Exploit – use your relative strength to force through the changes you want to make


Balance – where relative strength is equal so you will need to negotiate and managechange

Diversify – where the supplier has the relative strength so you will need to takeaction to change suppliers or re-specify the product or service to create new supplyoptions.

Here is how you can use it:

For example, if you are a small organisation that manufactures exhaust pipes for theautomotive industry then steel coil is a commodity that is used in most of yourproducts and so has a big impact on your costs. Supply preferencing might suggestthat this commodity sits in the “Leverage” quadrant and so your strategy should beabout using that leverage to get a lower price. However, your supplier is likely to bevery much larger than you and unlikely to concede a price reduction. Switchingsuppliers wouldn’t improve your situation as you are likely to be smaller than all ofthem.

Equally, if you are a very large organisation with a product or service that sits in the“Strategic Critical” quadrant, you might conclude that you have little or no opportunityto achieve a price reduction. However, your supplier may see you as a prestigeaccount because of your brand name and this can give you leverage.

What about sourcing strategies for the other spend categories?

For all other sectors on the purchasing portfolio, your strategy needs to be one ofeither moving the category and suppliers to the top right (by re-scoping the categoryor selecting different suppliers, for example) or creating the most cost-effectivemeans of sourcing them.

But how do you do this?

This leads me to the next Key to Breakthrough Sourcing Strategies.

KEY #4

The fourth key is to generate as many potential strategy options as you can.

Too often I see people jump straight from the analysis stage (if done at all!) to asolution and then try and implement it. Without the analysis we have just beenthrough, this can be a very dangerous approach as you may get all the way to theend of a contract letting process before finding that the only solution and supplier(s)are either too expensive or don’t match your BRD.

Generating strategy options can be carried out with a peer group using brainstormingtechniques. Additionally, it is possible to benchmark similar strategies from other


organisations (e.g. check with regional centre of excellence, national frameworkinformation, neighbouring counties etc…).

Hybrid strategies might also be developed by comparing features of existingstrategies and combing to form new strategies. When carrying out comparison, youneed to establish success criteria (which usually are the business requirements).

When you start to brainstorm ways to create a breakthrough sourcing strategy, thereare seven types of intervention you can consider.

1. Market interventions: over and above bidding interventions throughcompetitive tendering, other ways you can influence the market include makeversus buy strategies, supplier rationalisation programmes and encouragingnew entrants.

2. Technical interventions: these include rationalising or simplifyingspecifications, innovative technologies and creating intellectual propertyrights.

3. Cost structure interventions: here you deploy techniques such as Lean, SixSigma, Total Cost of Ownership, Value Analysis and Value Engineering.

4. Work process interventions: in this intervention you attempt to create anadvantage that delivers a breakthrough in costs or service by looking atexternal, collaborative processes with suppliers – such as joint planning.

5. Supplier relationship interventions: this involves leveraging or changing yourrelationship with suppliers to give better access to supplier capabilities or toensure excellent supplier performance.

6. Supply chain interventions: this requires you to design the right supply chainfor your organisation by either eliminating unnecessary intermediaries (alsocalled disintermediation or eliminating the “middleman”) or using outsourcingto gain expertise or scale, both of which can be used to create breakthrough costreductions and service improvements.

7. Cross strategy leverage interventions: creating the ability to use competingsupplier technologies in concert with each other to assemble system solutionsacross normally independent sourcing efforts and synchronise interventionsfrom multiple suppliers to deliver a holistic value proposition.

When you carry out your brainstorming sessions with colleagues, use this listas a check that you considered as many ways as possible to create thatcompetitive edge.

Here is an example of how you can use this to generate sourcing options.

Suppose we are a local authority responsible for providing adult social care. Ouroverall strategy is to give people their own budgets and to let them use it to meettheir care needs (with some help from social workers).

P a g e | 23 © Steve Carter, London

The first step when developing soobjectives. These are a succinct summary of the business

requirements definition.

So, forincrease consumer choice by giving individuals their own budgetand thecouncil tax increases.

Once you have your objectives, you can start to identifyissues that affect the achievement of those objectives.one of our issues is how to manage costs if you havepassed control of the budget to thousands of individuals whowill make the buying decision in future as this will lose you,the buyer, any leverage from that

The next step is to develop hypotheses for how you mightaddress the issues you have justthree possible hypotheses to test out as possible sourcing strategies.

The expectation is that having completed the exercise you will have a number ofoptions. What you need to do now is to test whether or not there arsolutions (in other words, a solution that combines parts of individual solutions tocreate an improved version).

The starting point is to list the criteria the sourcing strategies need to addresstogether with any data that measures the succin meeting those criteria. We call this the datum.

You then put as column headings the optionsactivity.

London 2010 http://www.SourcingStrategyWizard.com

The first step when developing sourcing options is to start with yourobjectives. These are a succinct summary of the business

requirements definition.

for our example, suppose we have just 2 objectivesincrease consumer choice by giving individuals their own budgetand the other to achieve cost savings that will keep a lid oncouncil tax increases.

Once you have your objectives, you can start to identifyissues that affect the achievement of those objectives. Hereone of our issues is how to manage costs if you have

sed control of the budget to thousands of individuals whowill make the buying decision in future as this will lose you,the buyer, any leverage from that spend.

The next step is to develop hypotheses for how you mightaddress the issues you have just identified. Here we have generatedthree possible hypotheses to test out as possible sourcing strategies.

You can test the hypotheses by askingquestions that you need answers to ifare to evaluate the hypothesis as a viableoption. If an hypotheses answers all ormost of the questions posed then itbecomes an option for a sourcing strategy.

The expectation is that having completed the exercise you will have a number ofWhat you need to do now is to test whether or not there are any hybrid

solutions (in other words, a solution that combines parts of individual solutions tocreate an improved version).

The starting point is to list the criteria the sourcing strategies need to addresstogether with any data that measures the success of the current way of doing thingsin meeting those criteria. We call this the datum.

then put as column headings the options you have generated in the previous

http://www.SourcingStrategyWizard.com

urcing options is to start with yourobjectives. These are a succinct summary of the business

we have just 2 objectives – one toincrease consumer choice by giving individuals their own budget

other to achieve cost savings that will keep a lid on

Here we have generatedthree possible hypotheses to test out as possible sourcing strategies.

test the hypotheses by askingneed answers to if you

are to evaluate the hypothesis as a viablehypotheses answers all or

most of the questions posed then itbecomes an option for a sourcing strategy.

The expectation is that having completed the exercise you will have a number ofe any hybrid

solutions (in other words, a solution that combines parts of individual solutions to

The starting point is to list the criteria the sourcing strategies need to addressess of the current way of doing things

have generated in the previous


Criteria CurrentSolution

100%Outsource

Herts CCoption

RCE Option Hybrid 1 Hybrid 2

PersonalisedService

Datu

m

s s - s -

Low start upcost

- - s s s

Desk topdelivery

+ s + + +

Do not impactenvironment

+ + s + +

24hr service s - + + +

S=same ∑S 2 2 2 2 1

+=better ∑+ 2 1 2 3 3

--worse ∑- 1 2 1 0 1

What you are going to do is compare each of the solutions in turn with the currentsituation and assess for each criterion whether the new solution provides the sameresult, a better result or one that is worse. You show this as a S, - or + in theappropriate cell.

When you have completed the comparison for all of the options that you have, youcan start to combine components of each into new hybrid solutions.

Finally, you can add up all of the S scores, + and – for each option to see whether ornot the hybrid solutions are better than your current options and so should be takenforward to the next stage ...

... which leads us to the next Key to Breakthrough Sourcing Strategies.

KEY #5

The fifth key is to choose the preferred option from our list of possible sourcingstrategies.

There are three things you need to consider when evaluating each sourcing strategyoption. These are:-

1. your Business Requirements Definition (BRD)

2. the risk involved in each strategy

3. the implementation cost versus benefit of each option


A useful starting point in evaluating sourcing strategy options is to look at thestrengths, weaknesses, opportunities and threats that each present – the so calledSWOT analysis.

Strengths and weaknesses are usually internal to your organisation whereasopportunities and threats are external. You should look at all four factors in terms ofwhether or not they are helpful or harmful to achieving your sourcing objectives.

You can summarise this analysis in a two by two matrix like the one shown in thediagram below.

STRENGTHS Directors recognise need for change

Good understanding from teammembers of the technical aspects ofthe service provided

Capability and capacity to insourceservice if needed

WEAKNESSES Relationship with supplier is currently

purely with the budget holder

Head of Service is risk averse andunwilling to consider changes to statusquo

Specification is currently with serviceteam who have no commercialresponsibility or interest

OPPORTUNITIES Demographics are predicting lower

demand in future so some supplierswill lose out

A few large suppliers are willing tomanage tiered supply base andactively manage tier 2 forimprovements

THREATS There are many other customers of this

market creating short term demandspike which means suppliers can pickand choose customers to work with

Significant number of suppliers see usin the “exploitable” or “nuisance”category

Assessing and managing risk can be an expensive and time consuming practice.What we are looking for in a sourcing strategy is an identification of the major risksthat each of our strategy options poses so that it can be factored into our final choiceof strategy.

The starting point is to list all of the potential sources of risk. This is best done as abrainstorming exercise with the team members of the sourcing strategy project or asa “Delphi type” process as explained previously.

What you do then is to rate each risk in terms of its potential impact on yourorganisation if that risk event was to happen. A scale of 1 to 4 where 1 represents aminor impact and 4 is a mission critical impact) is sufficient.


Next, you need to asses each risk for the likelihood that it would happen. Again, ascore from 1 (unlikely to happen) to 4 (almost certain to happen) will suffice.

You can then put these two scores (impact and likelihood of occurring) in a table asshown below. This gives you an indication of the extent to which your strategyoption creates a risk.

Cost-benefit analysis is a technique for deciding whether or not to follow a particularcourse of action based on its financial impact. This can be used to assess yourstrategy options as a final arbiter of your final choice.

Some strategies can be considered and even adopted for reasons other thancommercial ones. This is particularly true in the public sector where there might be apolitical reason to choose a specific option. The value of the cost-benefit analysis inthis case is to show the financial consequence of the choice made.

In its simplest form, you carry out a cost-benefit analysis by adding up all of thefinancial benefits of the option and subtract all of the costs associated with it.

Costs are either one-off, or may be ongoing. Benefits are most often received overtime. We build this effect of time into our analysis by calculating a payback period.This is the time it takes for the benefits of a change to repay its costs. Manycompanies look for payback on projects over a specified period of time, for examplethree years.

Here is an example of how to calculate a payback period.

Annual value of savings made from implementing the strategy option = £1.5m

Costs of implementing the option (for example, switching costs in moving from onesupplier to another – such as investment in new computer systems) = £0.5m


Payback period = £0.5m ÷ £1.5m = 0.333 years = 4 months approximately.

You may also decide to include intangible items within the analysis. As you mustestimate a value for these, this inevitably brings an element of subjectivity into theprocess.

Putting it all together

You now have a collection of potential sourcing strategies that can deliver yourbusiness requirements; an analysis of the risks presented by each option; and thecost-benefit analysis for each option.

What you now need to do is compare each option with the others and choose thepreferred one.

The way to do it is to construct a matrix like the one shown in the diagram below.

What you and the sourcing strategy team members need to do is to rate each optionagainst each of the business requirements, the risk rating and the payback period.

You can use a simple colour code for this: green if the option meets therequirements fully; yellow if a partial match; and red if it doesn’t meet therequirements at all. The option with the most greens and fewest reds is thepreferred option.

OPTION 1 OPTION 2 OPTION 3 OPTION 4 OPTION 5

BusinessRequirements

Risk rating

Payback period

Alternatively, you can use a numerical score, say 1 to 10, to assess each factor andthe options with the biggest score is the winner.

And finally ...

Here’s how I think about Procurement – and I believe you do too, otherwiseyou wouldn’t have read all the way through this report!


I’m interested in creating value for my organisation by applying my specialisedknowledge and experience

I don’t believe that competitive tendering will create a breakthrough in costs,service, quality or the development of new products and services

Sourcing strategies are a “team game” involving many stakeholders – butultimately they are commercial strategies and so need to be led bycommercial specialists (the user quite rightly leads on the businessspecification – it’s their budget and responsibility!)

Effective sourcing strategies don’t just happen – they need a process

So, here’s a question for you ...

If you are serious about improving your skills and knowledge in this vital commercialarea, will you take just a few minutes to take a look at “the Ultimate SourcingStrategy Manual” which can accelerate your learning?

Yes! Then all you need do is go to this link and you will have immediate access toeverything you need!

http://SourcingStrategyWizard.com/TUSSM.html

In the meantime, I wish you every success in your sourcing strategy endeavours andlook forward to speaking soon.

Kind regards

Steve

Steve Carter


About the author

Steve Carter has been a consultant and interim manager in Purchasing and Supply since1993. He has a wide range of clients from both the public and private sector, includingEssex County Council, Transport for London, Lloyds TSB, AXA, Compaq, Glaxo Wellcomeand the NHS.

Prior to that, Steve worked for Deloitte and KPMG (where he headed up KPMG’s Purchasingconsultancy practice). His clients included National Power (at the time they were movingfrom the public to the private sector), LDV, BT and the Ministry of Defence.

Before becoming a management consultant, Steve worked in purchasing and materialsmanagement for two multinationals, one a UK specialty chemicals company and the other aFortune 100 manufacturing company in the automotive sector. In both companies, heworked with subsidiaries around the world to improve their purchasing and supply chainoperations.

Steve started his career as an accountant with the Co-operative Wholesale Society wherehe progressed to the most senior management accounting position in a division of more than100 factories.

Some testimonials:

“Steve has been a huge asset to the Council in his role as interim head of procurement. As well asdriving tactical savings, he has successfully introduced the concepts of category management andsupplier relationship management, both of which have started to pay off and kick started the Councilon its transformation journey. I would have no hesitation in recommending Steve to any organisationthat required a high level procurement professional who can deliver both short term, impactful resultsas well as longer term strategies”. Nick Bell, Deputy CEO and Group Financial Director, EssexCounty Council

"... you demonstrated a level of professionalism I didn’t believe existed in the consultancy world "Graham Jackson, UK Head of Commercial Services, Compaq Computer

" ... thank you very, very much for the magnificent contribution you have made this year and the wayin which you have driven professional purchasing practice in this company forwards" Pete Wilkinson,Group Director of Strategic Procurement, AXA UK

" ... better value for money than some larger organisations" Denis Mellon, Director of Materials, ICLSorbus

" Over the years I have been involved with a number of companies that carry out strategic reviews butfeel you grasped our requirements very quickly and delivered results promptly and professionally. If Ineed to carry out a similar project in the future I will pick up the phone to you" John Hall, ChiefExecutive, Ring Ltd

"Steve brought critical thinking and strategic clarity to a complex and under-performing area of TfL'sbusiness while mentoring the TfL team and impressing a professional client base enough to securetheir support for a wide ranging programme of commercial change in one of TfL's most crucial areasof spend. Knowledge transfer has enabled TfL to drive the programme forward for itself now butcontinued support and training from Crest at critical stages in the project will be material in ensuringlong term success" Dave Williams, Group Director of Procurement, Transport for London

5 Keys to Sourcing Strategies

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