Strategic Sourcing for Indirect Spend

Despite a significant investment in eProcurement, eSourcing and such, not many organizations have been able to draw cost and efficiency benefits in indirect supply chains. However, as such systems become more sophisticated, how people use these systems to support their business process will also evolve

Strategic sourcing can deliver significant cost and efficiency benefits in both direct and indirect supply chains. Whilst many organizations have achieved this for their direct supply chains, they failed to do so for their indirect goods and materials. Why did that happen? This is primarily because organizations are unaware about what they spend, with whom, when or how. This is despite the fact that significant investments have been made in eProcurement, eSourcing and spend analysis / management tools. So what has gone wrong?

In our work with organizations, in both the government and private sectors, the common theme that runs is their eProcurement environments that are not able to deliver the basic data required to use a strategic sourcing approach.

The provision of accurate content in a timely fashion linked with the use of electronic transactions for all parts of the procurement process are the keys to delivering this data. We believe that on-demand supply chain infrastructures are best placed to deliver this data, providing quick-win benefits and enabling strategic sourcing approaches for indirect supply chains.

Content (and Connectivity) is King
Motor manufacturers were using strategic sourcing years ago for their direct supply chains; in fact many people claim that General Motors started the whole approach in the 80s. The reason they could use this approach was that they knew exactly how many widgets went into a car, where they bought them from and at what price; they had big manufacturing and Materials Resource Planning (MRP) systems that held the information. However, even today, whilst these companies can tell you how many washers they buy, they cannot tell you how many PCs they buy.

The fundamental building block for employing a strategic sourcing approach to any commodity is data. You have to know what you buy, from whom, when and at what price, before you can even begin to think about employing this approach.

A properly implemented eProcurement environment can help achieve this, but only if it has the capability to deliver this basic data. The components needed to achieve this are:

• A purchase-to-pay tool to capture your demand
• A correctly coded catalogue of goods and services
• Integration to your providers for electronic purchase orders and invoices
• A data warehouse for management information.

The two most difficult to achieve are properly coded catalogues and provider integration into the procurement process.

Provider Adaptation
That's not a mistype. Provider adoption is hard work, and there is no silver bullet to the process. For provider adoption to be successful, providers and their customers have to learn to adapt.

The first thing to remember is that providers are businesses too with their own system and processes. The introduction of any new IT system to an organization can be a painful experience, but today providers are receiving an increasing number of requests to provide electronic catalogues and integrate their back-office systems to their customers' eProcurement systems. They, like you, have limited IT budgets and have to prioritize their activities to suit.

eMarketplaces have received some bad press over the years, but ultimately they represent the only long-term option for provider integration for indirect expenditure. They provide prepopulated environments with providers pre-enabled and - depending upon the commercial model chosen - offer the least cost and fastest route to adopt new providers as they are more likely to integrate with something that has the potential to connect them to many customers rather than just one. There are obvious parallels in the direct supply chain, where the EDI Value-added Network providers still dominate rather than every customer and provider directly interconnecting their systems. At the end of the day, it comes down to working with your providers to help them adapt to electronic trading and make sure that they get benefits too.

Coding - How Low Do You Go?
The coding of products and services is important in two areas. Primarily it ensures that the management information is useable. Additionally, it makes these products and services comparable by the users making the purchasing decisions. However, coding catalogues for an eProcurement system is, to be polite, problematic.

Firstly, you need to decide on a coding scheme / standard that is capable of meeting your needs in terms of breadth and depth, i.e. it covers a broad enough range of products / services to a sufficient level of granularity. Secondly, you have to get the items in your
catalogues coded. You can ask your provider to do this or do it yourself, either way this is a significant piece of work, which, in our experience, is actually best left to the providers - they will know more about their products / services than you.

Finally, you must decide to what level of granularity you want the products and services coded. This is a difficult balancing act between the need to have sufficient granularity to make meaningful and beneficial sourcing and procurement decisions versus the effort that it will take to code the products/services. For most organizations, the granularity required will vary between product groups.

eSourcing - A Dangerous Habit?
It is important to note that when we talk about an eProcurement environment to enable strategic sourcing, we neither mention anything about eSourcing (eTendering, eAuction and eEvaluation) nor spend analysis / management tools. These tools can, without doubt, provide obvious cost benefits and process efficiencies - everyone loves to watch the prices plummeting on a reverse auction (particularly the Finance Director). However, they can lead to complacency. For example, spend analysis and management tools can only provide you with educated guesses at what you should spend your money on, if the basic data is not there. There is no doubt, however, that once a properly implemented Purchase-to-Pay environment is in place, they can provide substantial benefits to the sourcing process.

Provider Performance
Finally, there is the underutilized contract-management system. Most organizations today are using these sophisticated tools as a document repository for Ts & Cs and the closest they get to contract management is enabling you to work out how much of a rebate a provider owes you from the amount you have spend with them (this data normally being extracted from the general ledger).

An eProcurement environment where providers are fully integrated can unlock the potential of contract management tools as it is easy to track:

• What you ordered (purchase order)
• What the provider agreed to send you and when (purchase order response / fulfillment advice)
• What you actually received and when (goods receipt note)
• What you were charged (invoice)
• When you paid and how much (remittance advice / credit note).

Managing a contract will not generate benefits. On the other hand, using contract management to help improve provider performance will.

The Future is Bright
As eProcurement systems, and in particular eMarketplaces, become more sophisticated, how people use these systems to support their business process will also evolve. Today, we are already seeing a small number of users looking at how eProcurement systems can be used to change their core business processes.