To realise value, strategic sourcing ought to place great emphasis on cutting costs particularly on fixed cost spend when contribution margins are limited due to reduced revenue streams.
Strategic Sourcing continues to play a critical role in improving business performance, particularly, in a tough economic environment posed by COVID-19. While reducing costs from third party spend remains a priority for strategic sourcing, the overall value benefits go beyond cost savings. Value is indeed subjective, however the general consensus amongst supply chain professionals remains the ability to generate cost savings and mitigate cost increases. While cost reduction strategies are imperative, they are not the only approach for generating value in times of a crisis.
Mitigating the impact of COVID-19 with Strategic Sourcing
In times of crisis, cash preservation through payment deferrals and payment term extensions significantly improve free cash flow. Sydney Tshibubudze, Divisional Executive: Strategic Sourcing at Barloworld Automotive & Logistics further notes that a reciprocal business approach to current supply base is imperative in ensuring the generation of an additional revenue stream from existing suppliers. Revenue can be influenced through leveraging supplier relationships and gaining access to innovative technologies, better quality, and improved service offerings. Moreover, possible supply disruption can be mitigated, by creating a supply base buffer, in the event that a key supplier is drastically impacted by COVID-19 to an extent that they are compelled to close doors or reduce capacity.
Tshibubudze further explains that strategic sourcing professionals have a unique opportunity to assist businesses in building resilience in a volatile, uncertain, complex, and ambiguous world through their connection to the business, supply chain and broader market. They hold key information about customers, competitors, demand, offers, costs, and production constraints, as well as opportunities. When used efficiently in value management, this data places strategic sourcing professionals in a better position to realise strategies that lead to cost savings from third party spend.
Read our article Strategic Sourcing Value Beyond Cost Savings in Times of Crisis to learn more.
Key Strategic Sourcing strategies and initiatives to ensure an improvement in business performance
There are various strategies a company can explore, depending on the maturity of its strategic sourcing function.
“A company at early maturity can explore sourcing strategies that drive volume spend consolidation, create pricing transparency and ensure procure-to-pay process control. When the company matures, it can then explore a Total Cost of Ownership (TCO) modelling and Should-Cost modelling approach,” says Tshibubudze.
This requires thorough market research and an extensive understanding of market dynamics as well as cost drivers for goods and services the organisation needs from the supply market.
“Companies that are reaching high maturity in the strategic sourcing environment can build a robust source-to-pay system, deploying a sourcing strategy to optimise demand management while looking at levers that drive sustainable value,” points out Tshibubudze.
Driving efficiency with strategic sourcing levers
To drive efficiency, sourcing, demand, and fulfillment levers remain the key main categories to drive cost savings. The sourcing levers include volume bundling, stimulating competition among suppliers, reducing working capital and creating price or cost transparency. The demand levers include eliminating demand, standardisation specification, reducing waste, facilitating pay-per-use, and recycling of products. The fulfillment levers Request-to-Pay process, reducing fulfillment cost, enforcing governance and control, reduce supply base, fostering supplier collaboration and innovation, as well as managing risk.
“The Purchasing Chess Board with 64 Chess Moves to Reduce Procurement Costs is one of the greatest tools to identify strategic sourcing levers that can lead to cost savings and improve business performance,” says Tshibubudze.
Multi-tier supplier integration and sustainable supply chain improvements are also key strategies for driving sustainable value and reducing costs across the supply value chain. Again, focusing on product innovation and technology development from the supply market will ensure that strategic sourcing professionals constantly have continuous improvement value driver levers for their companies.
Strategic sourcing professionals on the fore-front to improving business performance
The ultimate measure of strategic sourcing’s value lies in its ability to support the company’s overall business strategy. The function’s main focus should be focused on improving the value of the services it delivers to the company by tapping into supply market power to support the company’s mission and create strategic advantage.
Widely understood as the strongest link between a company and the supply market, strategic sourcing professionals are capable of introducing some of the latest innovation from the supply market due to their extensive investment in spending time with a variety of suppliers, comprehending their products and service offerings.
“Strategic sourcing helps companies build long-term relationships with suppliers. By reinforcing the focus on the core capabilities of the suppliers and assuring the right suppliers for the right sourcing objective, strategic sourcing helps create a synergy between businesses and their suppliers,” says Tshibubudze.
Through a collaborative approach, strategic sourcing aligns a company’s buying power with its overall value proposition to the supply market. With a strong focus on continuous improvement, the function strives to improve business processes, ensuring the elimination of waste and duplication to reduce costs. As business objectives and environment changes, strategic sourcing professionals ought to constantly assess suitable sourcing strategy levers that drive efficiency to improve business performance.
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