Strategic sourcing: Stretching a limited financial kitty - Part2

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globe-africa_Sep2010.jpgDr. Douglas Boateng, SmartProcurement Editorial Board member and President of the Institute of Operations Management Africa asks why strategic sourcing has had relatively limited impact in South Africa and on the continent as a whole.

 

In part one of this three-part series it was explained that:

i. Strategic sourcing is a sub-process within procurement that assists organisations to optimise the total cost of ownership of a tangible and/or intangible commodity.

ii. Procurement, on the other hand, is a mega-process (like customer service or logistics), within a supply chain.

iii. Supply Chain Management (SCM) encompasses both (i) &(ii) and is the seamless management of the entire value chain which includes, amongst others, the actions of customer service and logistics.

Douglas1.pngiv. To date strategic sourcing has been successfully applied in various public and private sector organisations in a number of countries and industry verticals. Today, it continues to help organisations achieve quantifiable savings, often between 4% and 12% on procurement spend.

v. By adopting strategic sourcing, buying organisations (especially in the public sector) can begin to seriously move towards value chain sourcing and productivity improvements.

vi. Regrettably, in much of the African continent, there is still a general focus on price rather than a holistic product lifecycle management view of sourcing and long-term supplier development.

Dr Douglas Boateng.gifWhy strategic sourcing has had relatively limited impact in South Africa and on the continent as a whole

1. Still generally perceived as a tactical, operational and paper pushing activity as opposed to a strategic function
However, in cases where sourcing has been successfully applied for both organisational and national development, the SCM function is fully recognised as being on strategic professional parity with Finance, IT, Marketing or legal, where the functional custodian is a fully fledged EXCO member reporting directly to the Chief Executive Officer (CEO).

2. Information systems are seen as panaceas and not business enablers
Although an information system plays a strategic role in sourcing decisions, most organisations see its implementation as the ultimate solution as opposed to it being simply an enabler requiring the relevant human capital and support systems for successful implementation. To date the return on investment from enterprise-wide systems continues to be sketchy, especially within the public sector. Yet organisations and governments continue to invest in more systems without undertaking some reflective stock taking to understand why the existing and previous systems failed to produce the desired outcome.

3. Limited support for innovative SMME development and local long-term job creation
Across the entire continent there is more politically driven pontificating from business executives and policy makers than there is real actionable policies for SMME development. Success stories from the automotive, chemical, financial services and other industries have clearly proven that strategic sourcing can support SMME development, long-term creation of new industries and empowerment of indigenous suppliers with real jobs. With successful support of SMMEs, the genuine long-term spread of wealth and economic activity is realised.

4. Supplier relationship management that is not win-win
Buyer-supplier relationships on the continent are still adversarial and driven by short-term gain. On the contrary strategic sourcing tends to lead to the rationalisation of a suppler base, leading to a more co-operative relationship between buyer and critical suppliers. The electronics, pharmaceuticals, food processing and selected services industries have demonstrated that mutually beneficial relationships can lead to value chain improvements, cost reductions, product innovation and throughput efficiencies.

5. Government still not fully harnessing its buying power for job creation and long-term national development
Creative but legitimate ways are needed to address the chronic unemployment in South Africa and the rest of the continent at large. From a long-term developmental perspective, there is nothing wrong in governments setting aside a portion of the procurement budget to strategically source from local suppliers whose total acquisition costs are relatively higher but within reason. In the short-term, smaller local suppliers (owed to lack of economy of scale) may not be able to compete on total acquisition cost, however, in the long-term, with volume growth, they may. Unfortunately, such initiatives continue to be hijacked by politically-driven box-ticking initiatives and short-term self interest, stifling government efforts to create and support a new generation of local and indigenous suppliers - the undoubted engine for sustainable long-term growth and job creation. It is worth noting that for every 10 SMMEs created, two or three may survive to become another major industrial conglomerate.

6. Focus on short-term organisational interests and not on supplier development
Unlike current quick fix and often self interest practices, strategic sourcing encourages the buying organisation to work with suppliers to improve performance. In some cases, it has resulted in higher short term acquisition costs. Most supply chain-driven organisations work with suppliers to learn problem solving techniques, improve quality and better financial management, especially among emerging suppliers. The result of such collaboration is competitiveness, lower long-term acquisition costs and an increase in shareholder value.

7. Procurement is not extricably linked to supply chain and overall business strategy growth and even national development
Unlike current practices in Africa, strategic sourcing compels that product and service sourcing decisions are linked more closely with strategic planning processes by connecting the type of product or service with the requirements of the value chain.

8. Significant challenges to the systematic evaluation of value chain requirements
One of the major challenges is associated with information systems and related processes used in collating and analysing sourcing data. With correct and up to date information, strategic decisions can be taken on a sourced-in item or commodity. For example, a company used to have over 150 printer classifications to choose from for its various offices. After a critical sourcing analysis the number of printers was reduced to ten. Not only did the company save over 15% in total acquisition costs over 12-months, but also the rationalisation lead to significant reductions in the consumption of paper, electricity, space needed, cartridges, improvement in print quality etc.

9. Companies and Governments are not leveraging the potential for bulk procurement and associated total acquisition gain share
With information comes the opportunity to leverage total acquisition spend across locations. With volume comes strength in negotiating total acquisition cost. There is clear evidence that bulking can lead to best price, quality delivery schedules and inventory management. In some cases, savings of up to 30% can be generated over a three to five-year time frame.

10. Opinionated acquisitions as opposed to Information driven sourcing
Unlike current practices within most organisations, strategic sourcing forces a move away from atypical purchasing to fact-based acquisition. In so doing, it allows the process custodian and buyer to clearly understand the nature of its value chain and the potential implication for cost and services delivery.

11. Price is still the Focus and not total acquisition cost
From initial acquisition to ongoing usage and to ultimate disposal, there are costs associated with a product. For example a printer may be priced at hundreds of Rands less than the competition, but may cost more if the price of consumables for the device are taken into account. Reliability issues, energy consumption, warranties, disposal issues all come into the total acquisitions cost that needs to be considered.

12. Limited teamwork
With fact-based sourcing comes detailed knowledge about a product, its supplier, markets and more. Cross-functional teams are mostly employed in strategic sourcing. This eliminates ‘silo thinking’ and creates an open and collaborative culture within organisations and with external partners. Current practices on the continent as a whole generally point to the contrary.

Leading strategies to achieve world class Procurement and manage costs effectively will be discussed at the 4th annual SmartSourcing and Cost Management Conference, part of SmartProcurement World, hosted at Gallagher Convention Centre, November 16 - 18. A post-conference workshop will show delegates how to manage costs practically through utilising world class TCO techniques used by leading local and global organisations.

Food for thought
1.Governments in Africa must look at sourcing from an economic development agenda point of view, and not just in terms of competitive pricing.
2.Business leaders must view strategic sourcing as a means to sustainably increase shareholder value.
3.Strategic sourcing is different from the increasingly and precarious practice of ‘box ticking’ and self interest empowerment.
4.Real strategic sourcing goes beyond the number-crunching and finance/treasury function. As such the reporting structure of the process custodian must be revisited by the policy makers and Chief Executives. For example in an increasing number of organisations the CPO is either in an EXCO role or reports indirectly to the Board via the Chief Supply Chain officer.
5.Government must seriously consider a supply chain focused strategic team within National planning or Economic Development team with responsibility for continuously looking at value chain linkages and its potential impact on socio economic growth.
6.Supply chain and procurement-related human capital must be professionally capacitated and truly empowered to act and make decisions.
7.It is necessary to always look at sourcing from a total acquisition perspective and not just price.
8.Pool resources and demand to enable leveraged acquisition. This applies to organisations and also to Governments in Africa. For example, SADC can pool requirements for certain pharmaceuticals and negotiate better acquisition terms with the international majors.
9.Continually improve procurement processes by tying it into key activities, information system enablers, the supply chain and budget process.
10.Develop win-win strategic partnerships with critical suppliers who can clearly demonstrate value-add.
11.Process custodians and management must be held accountable for the quality and results of the sourcing process.
12.Seek minority and small business procurement opportunities for indigenous suppliers which may not necessarily be able to compete on total acquisition in the short-term.
13.Choose big and small suppliers who are socially responsible.
14.Innovative strategic sourcing by government could encourage service providers to relocate to certain regions to service local needs at a reasonable price, thereby spreading economic activity and creating jobs. Government can encourage local and foreign companies through targeted tax incentives such as requiring that they locate to selected rural areas if they seek to supply products or services. Such initiatives can lead to the creation of new industries and halt rampant rural-urban migration.
15.Recognise that continuous data collection and quality information is critical for strategic sourcing.

For more information on strategic sourcing visit www.commercedge.com or email Dr. Boateng on dboateng@panavest.com
 

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