PROCUREMENT UPDATE

Strategic sourcing is now an integral part of the procurement process. To understand where sourcing has been, where it is going, and what it means to effectively use sourcing in your organization, we talked to Tom Slaight, a partner with management consulting firm A.T. Kearney.

Oracle Procurement Update: What are the key trends you're seeing with regard to strategic sourcing?

Tom Slaight: Strategic sourcing used to be called global sourcing, and the objective was to find more far-flung alternative supply sources. Then we called it aggressive sourcing because we were trying to be more rigorous with the procurement process. In 1994, it was named strategic sourcing to take the business of corporate buying to a higher level.

So far there have been three stages in the development of sourcing. The first occurred in the late 1990s when the marketplace was learning what it was—a systematic, repeatable approach to buying the things that organizations need. In the second stage we started to use e-sourcing tools to automate the process of internet negotiations. We also began to use e-procurement tools, which automated the ordering process.

In the third stage, we're seeing two new developments. The first is advanced sourcing tools, which go beyond the rigorous setting up of a competitive marketplace. They address collaboration with suppliers and approaches to dealing with mega-suppliers. The second is the extension of sourcing to low-cost countries and regions such as China, Eastern Europe, or Latin America.

Oracle: How are organizations using sourcing?

Slaight: Leading companies are using it to address 70 percent of their spend categories. When you think about sourcing, you have to have a category with two or more suppliers and they have to be willing to compete for your business. It works better if you have a definable category of characteristics for which there is a competitive supplier marketplace.

Oracle: What sort of adoption rates are you seeing among clients?

Slaight: If you did a survey on adoption in 1998 you would probably find only 35 or 40 percent of the companies in the Fortune 1000 that knew what strategic sourcing was. In 2002 everybody knew what it was but only about 10 or 15 percent of the Fortune 1000 were doing it at a sophisticated level. In 2006, once again, everybody knows what it is and the adoption rates have crept up to 30 or 35 percent.

Oracle: Do your clients see significant savings as a result of strategic sourcing?

Slaight: They certainly do. ATK has participated with its clients in sourcing more than $200 billion of our clients' spend. Generally in commodities or direct materials we get anywhere from 4 to 8 percent savings. In other types of direct or indirect materials the percentage is 8 to 12. And in indirect services, it can be as high as 15 to 20 percent savings.

In order to sustain sourcing savings, however, our clients have to have some way of making sure that key stakeholders in the company continue to use the designated supplier and that the designated supplier doesn't sneak in price increases.

Oracle: How do you make sure you're capturing the savings negotiated in your sourcing events?

Slaight: That's what companies have been aiming at doing ever since they started to automate the procure-to-pay processes. You need a complete procure-to-pay system to ensure that you have compliance with your sourcing agreements. E-sourcing and e-procurement operate together. You use e-sourcing to bundle up several months of usage, get the supplier to bid on an ongoing fixed price, and set up the terms of a blanket order. You use e-procurement to draw down one or two items at a time from that blanket order—ensuring your terms are enforced.

Oracle: What's the first step for a company to leverage strategic sourcing?

Slaight: The first thing to do is to get a champion within the company to set up a program and roll out sourcing by category. There is usually opposition within the organization at various points. The potential contention is often between three stakeholders—senior executives who want control over how and where they spend their savings, the user group who wants to keep their suppliers content, and the purchasing person who is worried about being embarrassed because the new sourcing approach may be doing a better job at finding savings. If you get a high-level champion within the company, usually good business sense will win out.

Oracle: Where is strategic sourcing headed in the next five years?

Slaight: I think we're going to see continual advancement. Leading companies approach sourcing in one of three ways. Some companies will use their sourcing and supply management as a real competitive weapon. Other companies use strategic sourcing to become efficient and reliable providers of purchasing services. And then other companies decide they will outsource sourcing or e-procurement to other specialized providers of purchasing activities. We think that will mirror what happened in the late 1980s and early 1990s with IT outsourcing.

Catherine LaCroix is an independent writer covering a mix of consumer, technology, and business beats.

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