Sourcing and Planning Need to Converge
By Robert Ferrari -- Supply Chain Management Review, 11/1/2001
To fully capitalize on the considerable potential of strategic sourcing and supply chain planning, companies need to begin integrating the two processes. Strategic sourcing is a cross-functional, cross-enterprise set of processes that allows companies to identify key areas of procurement spending and automates the identification, selection, and contracting of qualified suppliers. More importantly, strategic sourcing is a critical component of the company's inbound supply chain strategy and its overall material cost structure.
Strategic sourcing processes are being enabled and empowered by new e-sourcing tools and vendors now appearing on the scene. This e-sourcing technology is helping companies automate the various bits and pieces of the sourcing process. With the current corporate emphasis on cost savings and the mandate for a clear return on any investment, the new e-sourcing tools have become increasingly popular. In fact, AMR Research predicts that the e-sourcing market will grow at an expected five-year compound annual growth rate of 75 percent, reaching $3.5 billion in 2005.
To date, supply chain planning (SCP) activity—whether it be demand planning, supply planning, or plant scheduling—has had a largely internal focus. But the new SCP applications are specifically designed for the extended enterprise and target e-business readiness and enablement. Last year, as vendors introduced Web-based applications for the integration of planning information across extended supply chains, they also incorporated improved technologies to provide faster processing and a wider reach of information. These enhanced capabilities should encourage users to extend their SCP applications beyond their four walls.
Key Opportunity AreasIn most companies today, strategic sourcing managers are working on limited forms of global spend analysis, electronic request for quotation or information (RFQ/RFI) processes, electronic auctions, or some disconnected high-level procurement strategy setting. Meanwhile, across the hall or in the next building, their supply chain planning colleagues are continually evaluating their own needs for more effective and responsive planning processes and supporting technology. (We won't even bring engineering into the picture for this discussion.) Typically, the two groups are working independently of one another. But by not working together, they are foreclosing on important market opportunities. Among the most compelling are these:
- Demand management information can be integrated into the e-sourcing and contract management processes. This integration allows the company and its suppliers to have a common context for determining appropriate volume ranges and other relationship parameters. Going forward, demand planning and management will become an increasingly important factor in supporting supply chain planning and operations efficiency. Demand planning, an ideal space in which to begin collaborating, is often the first application implemented in a full SCP suite. Application vendors now have begun to integrate demand-planning information into their sourcing and supplier relationship management (SRM) suites.
- Supply chain design and inventory strategy can be incorporated into overall sourcing and procurement decisions. Enterprise resource planning (ERP), older supply chain management, and e-procurement applications have a limited ability to tie tactical business objectives directly to supply network deployment options or trade-offs. Newer technology from vendors allows sourcing teams to assess the trade-offs between supply network or inventory deployment and supplier sourcing alternatives. The new technology also can assist in setting optimal lot/batch sizing or coordinating delivery intervals associated with a complex, multi-tier supply network.
- The trade-off between longer-term vs. spot-market commodity procurement can be optimized, as can the synchronization of critical commodity procurement strategies. Over the past year, vendors have made considerable progress in this area. A number of them have incorporated a unique set of optimization algorithms that can tie past commodity demand and supply and market history to recommended buy quantities.
- Better supply network modeling and landed cost data can be added to the auctioning and contracting process. Total cost modeling has become a part of advanced reverse auctioning services like FreeMarkets. Broader intelligence to the various trade-offs of total cost helps managers make smarter sourcing decisions.
One of the hard lessons brought on by this current troubled economy is that business cycles are becoming more dramatic and more volatile. Though a tactical, event-driven strategic sourcing process may provide initial cost savings, it can sustain itself only for so long. Procurement and supply chain professionals must start considering the next opportunity: They need to bring together the key elements of planning and sourcing processes for a more flexible and responsive supply network.
Leading companies across all industries are already taking steps in this direction. Recent studies conducted by AMR Research have found that implementing supplier management initiatives is one of the most important e-business goals for companies in today's economy. Results show that companies seem to understand the importance of overall e-business initiatives and have planned their budgets accordingly.
A Strategic ShiftProcurement and supply chain managers should discuss where convergence areas, such as sourcing and planning, would deliver savings and further process efficiencies to their organizations. (Exhibit 1 suggests some of the specific opportunities associated with sourcing and planning convergence.) They should formulate a plan to identify the various process steps that could integrate sourcing and planning processes over the longer-term horizon. Sufficient time and resources are necessary to evaluate a company's data readiness in sourcing and planning. Importantly, these initiatives are clearly dependent on accurate and up-to-date data.
| Author Information |
| Robert Ferrari is a senior analyst with AMR Research Inc. |
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