In most cases, purchases account for one of the largest if not the largest part of the total cost. Thus, the importance of sourcing and procurement is self-evident. Though many times the terms sourcing and procurement are used interchangeably, they actually represent two fundamentally different concepts. Sourcing refers to the value added process of selecting suppliers and the respective cooperation scheme and it must be supported by advanced analytics & market intelligence, supplier performance information and a concrete and well-developed strategy. On the other hand, procurement refers to the transactional of the relationship and should be streamlined as much as possible in order to achieve efficiency.
Deloitte can provide you with an integrated approach incorporating spend analysis, strategic sourcing, supplier management as well as procurement optimization.
Before implementing any sourcing / procurement initiatives, it is very important to analyze past, current & projected spending patterns. The analysis must span the entire enterprise and include data that is often collected from various departments and locations and must also identify sourcing barriers & limitations (i.e. single / sole source, legal / contract restrictions etc). Such an analysis of direct and indirect spend gives the company the information and decision-support required to develop supply strategies that are aligned with the objectives of the organization and to identify and prioritize sourcing & procurement improvement initiatives.
Key business Issues
• What is the savings potential in each commodity / material category?
• In what commodity / material categories should we focus first? How should we prioritize our efforts? What should be our first actions?
• In which areas is there the highest potential for e-enabling?
The overall goals of strategic sourcing is to achieve large and sustainable cost reductions, long-term supply stability and minimization of supply risk. The strategies to achieve such goals can be as wide as rationalizing supplier base, leveraging spending across departments, business units and geographical regions, reconfiguring supply specifications, and / or developing strategic partnerships / alliances with selected suppliers.
However, the task of strategic planning within sourcing is often not performed properly despite the fact that supply-base management processes contribute extensively to business-unit and company-wide goals. This results in “disconnected” sourcing from company goals. Furthermore, when no clear directions and formalized / standardized processes exist to develop and apply a sourcing strategy, buyers commonly apply their own way of thinking and patterns of buying often resulting in sub-optimal use of company’s resources.
Key Business Issues
• How we should manage each commodity/ material category depending on spend and supply characteristics?
• What is the optimal portfolio of suppliers that satisfies our supply requirements per commodity / material category?
• What our outsourcing / make or buy strategy should be?
Active supplier management is an integral part of strategic sourcing. Organizations are increasingly moving away from the traditional approach of selecting the “lowest cost supplier” to a “total cost of ownership” approach. This approach presupposes extensive knowledge of supplier performance and its impact on enterprise operations, knowledge that can be acquired only through institutionalized processes that capture and analyze supplier performance data. This data need to be incorporated into the selection and negotiation process to arrive at sourcing decisions that actually ensure the lowest total cost.
Key Business Issues
• How do we measure supplier performance? What criteria & performance targets should we use? Are we taking steps to improve it?
• How do we develop, manage and control approved supplier lists?
• How can we use supplier performance knowledge in our selection procedures?
In procurement optimization, the main focus is on transactional efficiency and on squeezing process-related costs and inefficiencies throughout the purchasing cycle that begins with the identification of the need for the material and end with its receipt.
The blur between the concepts of sourcing and procurement has lead some organizations, especially those operating under strict regulatory restrictions, to burden the procurement process with controls and supplier selection tasks that normally belong to the sourcing process, thus increasing supply lead times, process cost and inventory levels. Best practices suggest that the procurement process should be as simple as possible or even non-existent, as in Vendor-Managed-Inventory environments.
Key Business Issues
• How can we decrease the cycle time of the procurement process? Are there low-value-added controls, paperwork and delays?
• Do we scale process complexity based on the material to be purchased? How the process cost is compared to the material cost?
• How do we leverage available technology in optimizing procurement processes?