Contemplating Strategic Sourcing - Government's 18 to 24-month crossing

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Heleen_Liebenberg.pngThere is a substantial gap between government’s current Procurement practices and those contemplated in its policy strategy document, Heleen Liebenberg, senior consultant at Volition Consulting Services told SmartProcurement.

Government’s policy strategy document is based on a Strategic Sourcing methodology: it will require a phased implementation approach because the current tender process is not aligned with Strategic Sourcing, said Liebenberg, who specialises in Strategic Sourcing and Business Process Development.

A Strategic Sourcing methodology is used to identify, examine, select and implement sourcing alternatives for a specific Commodity Group. It encompasses the whole process for investigation, business case development, evaluation, selection and alignment with suppliers to achieve operational improvements and support overall strategic objectives.

From_Procurement_to_Strategic_Sourcing.jpgFigure 1: From Procurement to Strategic Sourcing

Government’s current Procurement approach differs from Strategic Sourcing in the following aspects:
1. The implementation of cross-functional teams.
2. The implementation of a continuous process from demand identification to contract management and exit strategies.
3. The introduction of the Total Cost of Ownership principle.
4. The introduction of Financial and Risk Management strategies to eliminate fraud and corruption.

Despite the challenges, Liebenberg explained the efficiencies that government will enjoy under Strategic Sourcing methodology

Objectives of the implementation of Supply Chain Management in Government Procurement

The South African government has an enormous collective buying power and has a responsibility to ensure that its Procurement function supports overall economic growth objectives and serves as an instrument for attaining those objectives.

During 2003, Cabinet adopted an integrated Supply Chain Management function in an effort to address the divide between the then out-dated provisioning and Procurement function and the transformation to world-class procurement practices that are fair, equitable, transparent, competitive and cost effective.

Government_Procurement_Reform_desired_future_state.pngFigure 2: Government procurement reform desired future state

The government’s Supply Chain processes have been designed to add value at each of phase of the process and include the main elements of Demand Management, Acquisition Management, Logistics Management, Disposal Management and Supply Chain Performance Management and seek to maintain or improve quality levels and reduce risk (see Figure 2 alongside).

Unfortunately, to date very few organs of state have succeeded in implementing a fully functional and seamless Supply Chain Management model, which further complicates the implementation of the Preferential Procurement Regulations, 2011 issued in terms of Section 5 of the Preferential Procurement Policy Framework Act on 8 June 2011, which came into effect on 7 December 2011.

Strategic Sourcing as a function of Supply Chain Management

Supply Chain Management is an integral part of financial management, which intends to introduce international best practice. It seeks to bridge the gap between traditional methods of procuring goods and services and the balance of the supply chain, at the same time addressing procurement related matters that are of strategic importance.

Strategic_Sourcing.pngStrategic Sourcing, as a function of Supply Chain Management, aligns an organisation’s overall business strategy with sourcing objectives. When properly defined, a sourcing strategy assists an organisation to gain a true understanding of its requirements, know how it must align to the existing supply market, and develop a plan for both short and long-term sourcing objectives.

Strategic Sourcing is a disciplined systematic process which aims to reduce the Total Cost of Ownership, maintain or improve quality levels, improve governance and reduce risk, and create greater customer service and overall customer satisfaction.

Having a clearly defined sourcing strategy will significantly improve both the quality of the results and the speed required to achieve an organisation’s sourcing objectives.

Benefits of cross-functional sourcing teams

Strategic Sourcing is not an isolated Procurement process. The development of Cross-Functional Sourcing Teams (CFSTs) ensures that vital information is not overlooked or excluded and provides maximum buy-in and the consideration of all aspects throughout the sourcing process. CFSTs are also a mechanism to secure the technical knowledge of stakeholders outside of the Procurement function.

CFSTs are made up of commodity experts and representatives from various user and functional departments and work together within the strategic sourcing framework to achieve the desired outcome.

Role_of_Cross_Functional_Sourcing_Teams.pngFigure 3: Role of cross-functional sourcing teams

High Level overview of the Strategic Sourcing Process

Step 1: Commodity analysis
The objective of commodity analysis is to gain an in-depth understanding of the commodity group under review: the total cost associated with the commodity and the identification of strategic cost drivers.

Step 2: Specify the requirements
This is a cross-functional exercise that brings the CFST closer to the end user and ensuring that cost and value benefits are achieved. The purpose of this phase is to develop an overall understanding of the current business demand and usage, including the impact of the commodity on internal processes, business criticality and touch points.

Step 3: Market analysis
During Step 3 the CFST is required to develop a full understanding of the end-to-end structure and nature of the supply market: how it currently operates in support of the organisation’s requirements; current suppliers’ strategies, behaviours and performance; and the gap between market performance and actual requirements.

Step 4: Identify opportunities
Sourcing methodologies and different stages of the sourcing process have been developed to assist the CFST in the systematic identification and rationalisation of value opportunities as they progress.
Idea generation and value identification already start during the investigation phase (Step 1) and are recorded, investigated and updated throughout the process in support of the final business case to be delivered.

Final cost and value benefits, as defined, validated and approved, are recorded, managed and tracked throughout the souring process.

Step 5: Develop the sourcing strategy
Based on the information and knowledge obtained through the previous stages, the CFST is required to analyse the current commodity group situation from multiple perspectives before constructing an approach, or set of approaches, that will optimise the organisation’s position. The CFST then delivers the final business case for approval.

Step 6: Secure Supply
The Sourcing Activity stage executes the pre-determined sourcing strategy. This step covers the process of communicating the organisation’s requirements to potential suppliers. Most solutions will involve competitive selection, where suppliers are compared to ensure maximum value for the organisation.

Critical Success Factors

Organisational buy-in and top-management support is crucial to the successful implementation of Strategic Sourcing within any organisation. Developing, implementing and managing a shared sourcing philosophy is one of the most crucial activities undertaken by any organisation, influencing all other organisational departments directly or indirectly. Therefore, implementation requires the breakdown of traditional departmental empires and functional walls in the drive to achieve a shared organisational strategic objective.

All interested parties should be included from the early development stages ensuring that concerns and issues are addressed upfront with clear guidelines for responsibilities, decision-making activities, communication, reporting and management. Objectives, shared vision and mission statements, including targets for achieving strategic operational goals, should be clearly communicated and agreed upon prior to the implementation phase.

It is crucial to develop and implement the optimal procurement structures, policies, procedures and tools to enable successful implementation of the strategic sourcing approach.

Implementing Strategic Sourcing is a long and difficult journey, but the benefits are significant, sustainable and justify the pain and effort.

Heleen Liebenberg is a senior consultant at Volition specialising in Strategic Sourcing and Business Process Development. For more information contact her at hliebenberg@volition.co.za.

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