Sourcing is one of the significant components that dictates whether a company remains profitable or starts on the path towards decline. This has been evident time and again with various South African companies.
I recently read an article on the Forbes’ website that discusses the benefits of strategic sourcing and why companies should pursue it.
Three elements of strategic sourcing
The article points out that procurement groups can no longer afford to identify a handful of suppliers and then repeatedly bid them down pennies of cost on a unit. Of note, in our same survey of CFOs and finance leaders, among organisations taking steps to enhance their supply chain management, nearly one in three (31%) are diversifying their supply chains to include multiple sources and multiple regions.
CFOs should work with their procurement leaders to strengthen supply chain resilience and responsiveness – while simultaneously reducing the total cost of ownership (TCO) – by adopting a sourcing strategy that not only considers how the enterprise’s suppliers are identified, onboarded and managed but also maps out fresh approaches to supply chain planning and inventory visibility.
The article adds that these approaches require new thinking: What’s the purpose behind our purchasing? Can we source from different countries or regions? How do we identify and nurture quality supply bases in new locations? Where are we exposed to geopolitical risk? Where can we replace products with services? Where can we replace services with technologies?
Answers to these questions will shape the priorities that guide the development of a new, or overhauled, strategic sourcing capacity. This work involves the following strategies:
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Data cleansing and spend analysis
The article points out that, before evaluating and adjusting supplier relationships, procurement and finance groups should analyse current spend by category, business unit, geographical location and supplier.
Conducting robust supplier and category enrichment to accurately and consistently classify spend data using industry standards and customised taxonomies strengthens the analysis and drives better business decisions. Procurement teams also should address the mechanisms by which bad data are being created (common culprits include requisition and purchase order processes).
Category management, sourcing, and supplier identification and onboarding
The article adds that strategic sourcing focuses on the drivers that inform supplier selection. Procurement professionals should explore internal stakeholders’ risk tolerance and understand how supplier capabilities, innovation, scale and other factors are valued within the enterprise. The CFO should be an active participant in these discussions. When identifying suppliers, cast as wide a net as possible. Larger organizations often divide this work across category managers. Smaller to mid-sized companies can into tap data and certifications from trade groups and professional associations to narrow lists of prospective suppliers.
From an onboarding perspective, it is important to equip new suppliers with clear policies and requirements related to product specifications, performance targets, system integrations, the use of portals, purchase order and invoicing details, and more. This information provides a roadmap for optimal performance.
Supplier management
The article points out that this ongoing work involves evaluating the importance and scale of each relationship and managing it accordingly. Classifying suppliers into tiers that correspond with varying levels of communications and performance monitoring helps ensure that high-value and high-risk relationships receive appropriate attention.
Effective supplier management—which addresses performance, compliance, risk and relationship management—requires a robust set of performance measures and related KPIs so that suppliers can strive to achieve quantitative and qualitative targets. These data points should populate dashboards that help mitigate risk, support forecasting activities and strengthen the organization’s bargaining position when renegotiating agreements.
These activities also enhance supply chain planning and inventory visibility by producing data and metrics that illuminate:
- Customer expectations and demand;
- Suppliers’ capacities and operational risks; and
- Trading partners’ internal constraints (for example, related to warehousing, fulfilment, logistics, labour availability and lead times).
Where finance expertise comes in
The article points out that this description of strategic sourcing is very much a high-level summary; under the CFO’s leadership, extensive cross-functional collaborations and work among finance, procurement and supply chain groups are needed to develop a full-fledged strategic sourcing capability.
Much, if not most, of this work requires the finance group’s expertise, including the following approaches:
- Data analytics, metrics and KPIs. Finance can help broaden the procurement team’s pricing-centric view of supplier and vendor performance. This involves instilling a TCO mindset and assisting procurement with identifying KPIs that measure quality, reliability, risk management capabilities and capacity for innovation. Finance groups also should provide oversight of sustainability-related data management and reporting requirements that are part of strategic sourcing. Remember, CFOs are ultimately responsible for ensuring the efficacy of sustainability data, metrics and related documentation required and/or expected by regulators, customers, insurers, bankers and other stakeholders.
- Integrations and connections. Reliable strategic sourcing data and KPIs help strengthen supply and demand forecasting as well as inventory management and supply chain risk management activities. Finance can orchestrate and help govern this data-sharing. The FP&A work done by finance can benefit from this integration as well.
- Risk management and scenario planning. Finance groups are well-versed in assessing and mitigating the geopolitical, financial, operational and reputational risks driving the need for more resilient strategic sourcing. This knowledge is valuable in the design of risk-intelligent supplier selection and management approaches. The finance group’s scenario-planning expertise helps procurement teams run simulations to assess how vendors might respond to disruptions.
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Investments in talent and technology tools
The article adds that strategic sourcing requires new thinking and new skills, which translates to investments in upskilling and, in some cases, hiring new specialists (e.g., data analysts). Other procurement groups will need new supporting automation and technology tools, including those with AI, machine learning and data analytics functionalities.
While strategic sourcing is performed by the procurement group, the finance group’s core competencies and the CFO’s strategic mindset are crucial in standing up and strengthening this increasingly vital capability.
Steady progress
If we are going to rebuild the South African economy, we must realise it cannot be a siloed effort. This a journey that requires many passengers.
Steady progress will benefit the country better in the long run than a dash for the line.
