Strategic sourcing - stretching a limited financial kitty - Part 1

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Dr Douglas Boateng.gifUrgent collective action is required to remedy how public sector and corporate organisations in emerging economies strategically acquire products and services and deal with selected suppliers, says Dr Douglas Boateng, SmartProcurement Editorial Board member and President of both the Institute of Operations management Africa and West African Institute for Supply chain Leadership.

“Despite marginal improvements within a number of the G20 economies, the overall global outlook remains patchy and uncertain. This unpredictability continues to result in budgetary cutbacks never before experienced in the modern era. To date, no sector has been spared: public/government departments, state-owned enterprises and countless private sector organisations have experienced the distressing effects of the global meltdown.

“With no sign of a significant upswing in the economic fortunes of the world economy, the downward trend is expected to continue into the foreseeable future while at the same there is increasing demand from shareholders and society at large for higher performance and significant improvements in service delivery.

“This unprecedented financial challenge and socio-economic value shift necessitates that emerging-economy public and private sector organisations’ strategic acquisitions processes be scrutinised.

“The United Kingdom’s Chancellor of the Exchequer announced major austerity measures in June, which have far reaching implications for public sector workers. Indicative of the state of the economy, it is a drive towards optimal efficiency in the civil service. Similarly, countries including Spain, Greece, Germany, the US, India and China are also looking for ways to limit the potential damage from an anticipated and impending second global meltdown and asset bubble; banking group HSBC anticipates that growth in the Euro zone will stagnate for several years.

(A business survey among 11 000 companies across 17 countries released by KPMG yesterday shows international business confidence sharply down compared with last year.)

There is no denying that South Africa and the rest of the continent are part of a global community

“While most pundits continue to voice the opinion that Africa will escape relatively unscathed, the question remains: for how long? Our policy makers should not be hoodwinked into believing that the boom in commodity exports will completely cushion the continent from the unfolding financial crisis.

“A slowdown in Europe is consequential for the South African economy. China and India are already showing signs that there is a limit to their seemingly insatiable demand for commodities, said Gill Marcus. China’s manufacturing index is at a 17-month low, which could have a negative impact on the demand for South Africa’s coal, iron-ore and other precious metals, said Richard Larper in the Financial Times, July 22.

“The World Bank and International Monetary Fund During have cautioned that in the short term, budgetary shortfalls will result from declines in tax revenue, external financing, aid cutbacks and slow domestic and sub-regional demand.

“The liquidity crisis is already being experienced in countries like Tanzania, Mozambique, Ghana and Malawi, and even within some sectors of the South African economy. If these shock waves continue to translate into further unemployment rates, especially among the youth, it could prove politically tricky for African governments.

“Certainly, there has been relatively good progress made in implementing policies and structural reforms to counteract some of the effects of the global meltdown and service delivery challenges. However, atypical purchases and squandering within selected government departments and state-owned entities is still comparatively high, the consequence of which is poor service delivery and shoddy workmanship plaguing society at large.

“Early this year, the South African finance minister Mr Pravin Gordhan shrewdly sounded a clarion call that maverick spending, waste and poor service delivery were not sustainable and as such concrete steps were needed to tackle the situation within various arms of government. The pronouncement by the Finance Minister calls for some introspection and frugality from public sector executives.

“Meanwhile, private sector company directors are quickly subjected to the wrath of shareholders if they fail to ethically and prudently use resources. Why can the same yardsticks not be adapted for use in the public sector and especially among state-owned enterprises? Gone are the days when there was enough in the financial kitty to hide the inefficiencies within public or private sector organisations.

While technology has a role to play in gaining efficiencies and reducing irregularities, Boateng says that fundamental core challenges must first be addressed. Topping the list is the exigent need to increase the technical knowhow of the supply chain and procurement management professional, “from whom a fundamental paradigm shift is required in terms how he or she can innovatively stretch the limited financial kitty through strategic sourcing”.

Stretching the limited budget through strategic sourcing

“Significant value chain improvements and savings can be achieved if organisations strategically source and manage their tangible and intangible products. However, there is confusion between strategic sourcing, procurement and supply chain management.

Douglas1.pngFigure 1 (left) presents a schematic representation of the three interrelated concepts

“Strategic sourcing is part of the procurement process that assists an organisation to optimise the total cost of ownership of a commodity. As a systematic process it objectively encourages the critical analysis of product acquisition and associated usage patterns within an organization. Procurement, on the other hand, is a mega-process (like customer service or logistics), within a supply chain. Supply Chain Management (SCM) is the seamless management of the entire value chain, which includes amongst others procurement, customer service and logistics.

“Strategic sourcing has been successfully applied in various public and private sector organisations: Defence, Automotive, Aviation, Banking and financial services, Healthcare, Media, Agriculture, Pharmaceuticals, Utilities, building and construction, ICT and Transport services etc.

Today, it continues to help organisations achieve quantifiable savings, often between 4% and 12% on procurement spend. Within South Africa and the rest of the continent, there is still a general focus on price rather than a holistic product lifecycle management view of sourcing and long-term supplier development.

“By adopting strategic sourcing, public sector buying organisations can begin to seriously move towards value chain sourcing, and productivity improvements. The appropriate implementation of the concept automatically lends itself to supporting the development of small- and medium-sized enterprises and non-box ticking economic empowerment of indigenous suppliers; a theme which is in line with the mandates of the South African administration and increasingly, other governments on the continent.

“As a process, strategic sourcing is geared towards ensuring that resources are utilised for optimal value chain benefit. It does not merely concentrate on what an organisation is buying, but rather prompts the process custodian to continuously appraise a sourced-in product according to benchmarks, outlined in the following link.

Can Africa’s public and private sector organisations benefit from strategic sourcing?

“The supply chain or procurement professional must note that strategic sourcing does not only apply to the purchasing of, for example, stationery or computers. It is also equally relevant in the sourcing of services (consulting, security, media and advertising, travel and entertainment, catering, warehousing, safety, cleaning), packaging components, uniforms, temporary labour recruitment, various components and parts, furniture, road and sea transport, renting of office/retail space and properties, aero-logistics, maintenance, general insurance, facilities management, education and training, and much more.

“Carefully constructed sourcing methodologies have proven immediate to long-term bottom-line benefits when implemented with the relevant human capital.

“Firstly, it encourages a shift from a purely cost-cutting and price sensitive mentality, to a clearly defined and managed approach to sourcing.

“Secondly, it encourages a modus operandi that allows for an organised, systemic approach to defining requirements, product development and innovation, supplier selection and development, negotiations, integrated forecasting, planning and demand management.

“There is a compelling argument for public and private sector organisations to move from a purely transactional procurement and independent sourcing approach, to an enhanced collective and value-adding practice of ‘total product acquisition.

Douglas2.pngFigure 2. Benefit of strategic sourcing

“Within the spheres of government and state-owned enterprises, a well-conceived strategic sourcing programme can assist in achieving quantifiable savings and productivity improvements well in excess of 30% over a three- to five-year timeframe for selected sourced-in items.

“For the private sector, especially in financial services, mining, agriculture, beverages, food processing, chemicals, education and health sectors, savings in the region of 15% is more realistic.”

For further information contact Dr Boateng on dboateng@panavest.com.

In next month’s SmartProcurement, Dr Boateng shall discuss how a Procurement and/or Supply Chain Professional can initiate strategic sourcing within his or her organisation.

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