Sourcing Strategy-The Brains Behind the Game

Sourcing strategy is a mental chess game that leaders play before going to market. It's about understanding what you really want to get from the supply base, analyzing the potential suppliers, and then deciding how to approach the market with the chosen suppliers. Technology can help in this effort. The key is to choose the tools wisely and use them well.

By Douglas A. Smock, Robert A. Rudzki, and Stephen C. Rogers -- Supply Chain Management Review, 5/1/2007

• Strategic Sourcing vs Sourcing Strategy
• Understanding Leads to Strategy
• Technology and Standard Processes
• Gaining Understanding—Supply and Demand
• Market Services Subscriptions
• Gaining Understanding—Suppliers and Industries
• LexisNexis
• The P&G Experience
• Gaining Understanding—Buyer/Seller Market Dynamics
• Cox's Methodology
• Analyze the Balance of Power
• Closing Thoughts— Sourcing Strategy Is a Mental Game

The search for value and cost reduction from suppliers is never-ending, in part because the definition of value continually evolves over time as customer expectations rise (or sometimes even fall—how many times do we yearn for an old substantial version that morphed into a disposable?), but also because the markets, companies, and commercial circumstances surrounding that search for value constantly change. The outcome of a company's sourcing intervention factors into the dynamic market ebb and flow—to create an environment in which others react and the contrary forces of competition and collaboration sometimes redefine the value that suppliers offer.

The race in search of value and cost reduction is not a sprint, but rather an endless marathon. The same supply management leader who received corporate accolades for leveraging savings from spend analysis quickly begins to hear the CEO's and CFO's relentless question, “What have the suppliers (read: and you) done for me lately?” Glory is replaced by even greater challenges. Low-hanging fruit is now gone, yet the expectations of senior management are that the spend management harvest has become almost an annual given. “How come you did so much better last year? Where will the next level of savings come from? Is there anything besides savings that suppliers can do for us? What about innovation or quality or quick response to changing customer expectations?”

Seasoned supply professionals will certainly recognize this attitude shift, which is driven by the dynamic nature of the competitive market game. They will also recognize that technology tools— and their application to a retuned supply base in search of “on-demand” value— revolve around applying electronic and Internet-based tools to the classic strategic sourcing process on various “spend pools” or categories. Important: The process, not the electronic tool (e-tool), is the key to ongoing value mining. Strategic sourcing today is almost blasé. Companies know about strategic sourcing and have multi-step processes to accomplish it. (Doesn't everyone?) The number of steps can range from 5 to 15. Even if a company does not do strategic sourcing well, the hit to self-respect when admitting that this is the case is often just too hard to accept.

A. T. Kearney Procurement Solutions' (ATK) seven-step icon, which is the classic strategic sourcing process, is one of the basic models upon which the avalanche of electronic sourcing (e-sourcing) and procurement tools rests (see Exhibit 1). Yet closer inspection of the sourcing process makes the distinction between strategic sourcing and sourcing strategy clear. The difference is much more than just a play on words. Exploring this difference and the role of technology and the Internet in that difference is the focus of this chapter.

Strategic Sourcing vs. Sourcing Strategy

Regardless of the number of steps in a company's sourcing process (almost every company has its own tailored version), strategic sourcing is an ongoing effort to accomplish three things:

• To understand—the analysis of markets, suppliers, internal capabilities, needs, competitors, and industries.
• To decide—the tactical “go-to-market” part, which is often confused with strategy—determination of which tool to use, e.g., request for proposals (RFPs), auctions, online negotiations, face-to-face interaction. (Decide includes the supplier selection decision, the natural outcome of going to market that matches supplier capabilities to company needs.)
• To manage—perhaps the toughest to accomplish in a world in which the rules are not constant and the targets and scoring systems are changing as the customer expectations of value and the competition's actions shift.

Contracts, performance measurement, supply chain response, relationship management, and change management—tasks which are many and either complex or simple depending on the spend category and its relevance to the company's value equation—are the areas in which getting value to the bottom line really happens, but only if preceded by solid understanding and decision-making capability.

How technology can create advantage and value for understanding, deciding, and managing will be explored in this book, but for now sourcing strategy is the main concern and it falls in the understand part of the process.

Understanding Leads to Strategy

Using the ATK process in Exhibit 1 as a model, sourcing strategy is part of Step 2. Yet the strategy process is actually about thoroughly understanding what is needed, the goals for what is to be received from the supply base, and what the company is capable of supporting with its suppliers (part of Step 1); analyzing the potential suppliers, their industry, the power and collaborative dynamics in that industry between suppliers and buyers, and the classic supply/demand, macroeconomic and global implications—trade regulations, wars, protectionism, currency, and so forth (Step 2); and deciding how to approach the market and which suppliers will make up the “market” that is approached (part of Step 3).

This process is called the skill of “linking” at Procter & Gamble (P&G), and it is the underlying purpose of strong supply management. In this section of the process the overarching approach to the supply market is set, and if done well, it will be set for two to four years into the future and have multiple go-to-market engagements across changing market conditions, with periodic renewals along the way.

Technology and Standard Processes

The question now becomes where does technology fit into the thinking/linking part of the process? Sourcing strategy occurs before suppliers are solicited and technology linkages are utilized, does it not? In part this is quite true. However, technology has created analytical tools and electronic access to treasure troves of information that if used well are critical to the understand phase and the overall strategic sourcing process. Important: Because most companies have tailored their sourcing process to their own culture, capabilities, and the skills of their people, very few rote sourcing strategy e-tools exist. Experienced sourcing organizations have evolved to a point that changing their process to an off-the-shelf e-tool version will simply require too much work in process retraining and vocabulary “brainwashing” to be efficiently deployed.

If a company has no common process or is just beginning to create a process, an opportunity for software to set the process exists, but to set a process correctly sourcing consulting is a likely option. However, consulting does not come cheap, especially top-quality consulting. Consulting includes the consultant's own process, e.g., the ATK “seven stepper,” the Accenture “five stepper,” etc. Some processes have accompanying e-tools such as the ATK relationship with software leader UGS Corporation (a provider of product life-cycle management software and services that acquired the ATK eBreviate tools), but a “universal” software tool has not driven this process in most companies.

Niche tools. It is in the more detailed analysis of the understanding phase in which technology makes its biggest impact. In addition to the standardized modules in purchased suites or the “homegrown” suites tailored to a company's process, focused niche tools are available to assist the strategic thinking and analysis efforts that are necessary to create a winning sourcing strategy. Niche tools focus on three areas:

• Analyzing suppliers and supply/demand balances in key markets by purchasing and using market-specific supplier analysis tools and Web-based market intelligence services.
• Understanding relative dynamics between the “actors” in the supply chain, especially where power lies in the chain and whether that power structure, whether based on supply/demand, inherent assets, or intellectual property ownership, will influence how suppliers must be approached and even where in the supply chain to focus the strategy for greatest advantage (tier 1 or upstream or both).
• Using technology tools that reinforce the rigor in the strategic sourcing process overall such as the standardized or tailored process flows mentioned above.

The use of technology in these areas is often highly tailored to the industry, a specific company, or an analytical methodology. One size rarely fits all.

Gaining Understanding—Supply and Demand

Once the internal analysis has been gathered (requirements, specifications, technical capabilities, resources, and so forth), classic sourcing strategy requires an external environmental scan. The Web has made a buyer's search process far easier and with a broader reach than ever before. Many companies stop with Web searches—tapping Google or Yahoo! search engines to access supplier catalogs, websites, and particular supply capabilities half a world away, checking finances, reputations, current customers, and contact information. The advent of blogs and customer rating sites adds to the information available, making market analysis a light year more effective than just five years ago. Additionally some software and procurement outsourcing companies can add specific market expertise if their services are chosen.

There are some caveats in all this, however. Internet information requires some degree of due diligence because the information available can be as much rumor and opinion as fact and insight, depending on the source. (Remember: Company financials are not the same as blogs.) Data overload is a huge “watch out”—constantly shifting information can paralyze as well as energize.

Comment: The key to using the Internet's vast information reservoir without being overwhelmed by its sheer volume is to be able to take a step back and determine just what information is needed and then to focus on excellent places to find it. The challenge only a few short years ago was the opposite—that is, “cast a wide net” to find enough good information to develop a sourcing strategy. Using rifle-focused searches versus shotgun-scattered surveys is more effective today.

Market Services Subscriptions

The ability to focus requires organizational experience and market savvy to be key parts of the supply management repertoire of skills. A particularly useful tool set is market services subscriptions that allow/use technology to comb through the enormous amount of information about a particular industry that is strewn about on the Web. Every industry has its own market services (energy, electronics, agriculture, metals, etc.), with some spanning multiple markets (e.g., Dun and Bradstreet financials that are built into many e-tools). Market services subscriptions can enhance both strategy formulation and strategic outcome monitoring in dynamic markets.

The key, however, is not the subscribing to market services, but rather what is done with them. As an illustration, the CPG (consumer packaged goods) industry relies heavily on energy- and petrochemical-based ingredients, ranging from natural gas that is used to dry paper and electricity that is used to make caustic soda/chlorine to the polyolefin plastics used in bottles, films, and non-woven fabrics to the surfactants, solvents, polymers, and specialty chemicals used in product formulas.

In 2005, the world “erupted” for users and manufacturers of these materials, especially in the United States where the U.S. Gulf Coast energy and petrochemical industries were ravaged by increased demand, falling supplies, and damaging hurricanes. High feedstock costs erased decades-long low-cost-producer status (superseded by the Persian Gulf), and shortages/price spikes racked supply chains. High-density polyethylene reached $0.98 per pound—an unheard of level 2 years before—which was frightening to veteran supply managers who were caught in the “Wal-Mart effect” of customer and consumer resistance to price escalation. Yet this experience was not a new phenomenon. The first two oil-triggered price shocks had come in the 1970s, but were somewhat artificial (a result of embargoes and the Shah's fall in Iran). This newer version was fabricated by a spider web of global proportions, which included huge Chinese demand, capacity that was restricted by recession in 2002, political unrest (in Iraq, Nigeria, and Venezuela), opportunistic pricing, trading speculation by commodity investors, and hurricanes.

For sourcing professionals who are tasked with developing an effective strategy to deal with these turbulent events, understanding and forecasting supply/demand balance and commodity costs and then formulating plans to blunt their impact represent huge challenges. Two of the many services available are Chemical Market Associates, Inc. (cmaiglobal.com) and Global Insight (globalinsight.com), services that are among the industry price forecasting leaders on a global scale in these markets. The purchase of their services brings a Web-based tool to the table that enables supply managers to both understand the market situation and, more importantly, with internal analysis, to create future scenarios across the range of potential market changes and underlying drivers that are necessary to formulate flexible strategic options. Effective sourcing strategies must deal with a wide enough range of market conditions to avoid constant direction changes and the accompanying internal cross-functional realignments (and frustration).

A pitfall some companies encounter when using market services is that they expect the market price forecast to be “future price-point accurate” (unlikely) and are shocked when some indices are restated due to recognition that the transparency of market price discovery was not perfect. Important: Recognize that market price indexes are as much educated guess (a “black” art?) as science—estimates are often based on a survey of prices, probably from a market researcher's telephone call.

Choosing the Tools

Each family of markets is different. Not all of them have outstanding price discovery and forecasting tools available, but many do. Savvy sourcing managers must be aware of these tools, understand the data gathering/modeling behind them, and then use the tools to understand possibilities, trends, and potential risks in their suppliers' supply chain by exploring market scenarios. Comment: CMAI and some of its peers are good examples of companies that offer service-based tools that enable usable strategies. Their market intelligence supports understanding the breadth of the market that a particular sourcing strategy covers and recognizing when the market has broken through your planning limits to trigger timely adjustments.

Gaining Understanding—Suppliers and Industries

Tools that examine markets are only one part of the external environment scan that good strategy requires. Understanding suppliers within key supplier industries— especially suppliers that are or could be strategic to a firm—is equally important. Taking supplier relationships to a higher level is a seminal factor in becoming an on-demand enterprise. Face-to-face personal interaction is critical in “knowing” suppliers, but having a way to monitor a supplier's overall corporate situation is equally vital.

Companies are in continuous change, whether due to major acquisitions and divestitures or product line modifications or more subtle changes in strategy or marketing. Personnel shifts are constant. Is a supplier's new vice president of marketing or a division's general manager someone with whom you have had dealings before? Was he or she with a supplier that you had a poor relationship with in the past? What experience and preconceptions might that individual bring to the supplier's broader strategy toward its customers and markets—and to your strategic relationship in particular? Financial status adds another element— overall profitability or cost structure can change quickly. More importantly, the status of the division, plant, or business unit that you deal with may not be “in sync” with the parent organization's situation. Keeping track of all this can be a full time job—and you still will not catch everything. Google and Yahoo! searches have made the task more instantaneous, but they have also made the avalanche of information even more unmanageable.

LexisNexis

Globally sifting through today's data and information to catch the actionable elements in time to do something with them is the difference between proactive and reactive supply management. LexisNexis (LN), one of the leaders in capturing public domain information, provides an Internet-based service that can do that LN services capture news and make it more “digestible” for use by sourcing practitioners in strategy development and ongoing supplier relationship management.

LN, a division of Reed Elsevier Group plc, which includes publications such as Purchasing magazine and Supply Chain Management Review, gathers information from myriad sources, working with clients to tailor the search and its delivery. Via the Web, delivery can either be push (arrives at user-determined intervals) or pull (user retrieves delivery on his/her schedule). Attorneys and academics are extremely familiar with the Lexis (legal) Nexis (business) tool box, which unlike many other sources, offers tailoring, not just research access.

Once information is in the press or registered in the legal system as public knowledge, what good is it to sourcing professionals? This is not the interesting “nobody else has figured this out” type of information that fortunes are made of, is it? You would be surprised. The Information Age has spawned a flood of data, information—even knowledge—that overwhelms people who have real jobs “fighting fires,” even if they have a speed-reading degree. Public knowledge remains private because a lack of time and access keep it that way.

So how do service tools such as those offered by LN help a sourcing professional? Data mining, like oil or mineral exploration, takes time and effort. Yet unlike the easily unearthed material everyone can find, the data nuggets that can make a difference are easy to miss in the massive data flow. P&G, the huge consumer products company, has built its expertise the “old fashioned way” on fundamentals— principles, organization, education, skills, stewardship, sourcing strategy, and supplier relationships—and timely access to information is foundational to that effort. Remember: Information is the raw material of sourcing strategy.

The P&G Experience

P&G began to use LN well before the introduction of the LexisNexis Purchasing and Supply Chain Solutions service, which interestingly was not conceived by a purchasing person, but rather by Pete Wolf, an R&D section head. In the late 1990s, P&G was grappling with the challenges of localizing supply in China and globally innovating for multiple consumer income levels and product usage conditions (think about washing clothes in European washers at high temperatures, in U.S. washers with cooler water, and in parts of emerging markets using a bucket or a stream). Along with the goal of CEO A.G. Lafley to get 50 percent of the formerly insular company's innovation from outside its walls, these challenges occurred while Pete Wolf was on the technical side of P&G's fabric and homecare business (brands such as Tide, Dawn, Downy, Ariel, Fairy, and Swiffer). He was working with sourcing teams to eliminate specification complexity, create performance specifications, qualify new suppliers, and simplify supplier processes.

Wolf was familiar with tools that the newly entrepreneurial R&D department was using in its search for external innovation—one of which was access to LN databases for patent filings, legal actions, company information, and so forth. Wolf made a “connection”), timely commercial input into that process would make market success more likely. The more he worked with purchasing people, the more he understood that the same reservoir of data that R&D was panning for R&D “gold” contained nuggets of purchasing “gold” for use in strategic interventions, tactical moves, and supplier relationship management. Ultimately Wolf transferred from product development into purchasing to help lead procurement's expanded use of e-tools and Internet-based tools across businesses and spend pools.

P&G leveraged the R&D-LexisNexis connection during a meeting at the Dayton, OH headquarters of LN. The P&G vision included news feeds that are targeted for particular buying desks and cover specific industries (e.g., petrochemical, pulp, molded parts and bottles, corrugated, etc.), specific strategic or potential suppliers (including financial, management profiles, mergers and acquisition rumors, patent strengths, etc.), and even preliminary best-practice benchmarking in sourcing, procurement, outsourcing, and use of e-tools.

An ongoing effort between the two companies created the forerunner of today's LexisNexis Purchasing and Supply Chain Solutions tool, which is based on basic news feeds and the LexisNexis Company Dossier product (already marketed). LN search experts interviewed sourcing managers and developed key word lists, which were later transformed into search criteria. If the resulting feed “missed the mark,” they met again and refined the searches until purchasing customers were happy. Did every article found hit the mark? Of course not, but a list of headings permitted quick scanning of the day's feed and access of articles that looked relevant. P&G, under the leadership of Rob Patton, Wolf 's successor, has broadened the range of feeds and refined content and delivery.

Gaining Understanding—Buyer/Seller Market Dynamics

Understanding why things happen with suppliers the way they do means understanding where the vital points exist in the supply chain and who has power over those pivotal points. This effort requires thinking skills. Most e-purchasing tools used to identify and capture value do not help people think through complex intercompany interactions. Are there strategy tools that do?

Cox's Methodology

Andrew Cox is the director of the Centre for Business Strategy and Procurement at the University of Birmingham, U.K., and head of Newpoint Consulting. He has become a thought leader on the implications of power in buyer/supplier interactions and the distribution of value when they interact. Years of research have led him to some highly provocative conclusions that run counter to many popular “seamless” value-sharing concepts popularized in the literature—provocative ideas such as more value is extracted by the company with power; or win-win relationships are not a likely long-term outcome; or a supply chain is a string of actors looking out for themselves, not an aligned community which is focused on the ultimate customer. . .

In a nutshell, the concept is that power drives the distribution of value along the supply chain and that power derives from control of critical assets—intellectual property, regulatory position, imbalance of business reliance on the other party (supplier needs the buyer more than the buyer needs the supplier or vice versa), innovation, branding, physical assets, distribution channels, or high switching costs. Important: An examination of the relative power at each supply chain link (power regime) leads to an understanding of how power influences value appropriation along the chain. It helps explain a phenomenon such as the “Wal-Mart effect,” in which retailer power drives supplier behavior, price, and (sometimes) profit reduction back through the chain. The goal of Cox's methodology is to identify where the power lies and then to try to reposition the relationship, either within the existing situation or by changing the set of suppliers or the type of item bought (substitutes) or through smart in- or outsourcing choices. Simultaneously, suppliers are trying to do the same thing (a point sometimes forgotten in the elaborate but naïve strategies that some supply organizations design).

One could jump to the conclusion that Cox espouses only an adversarial approach to supply chain value acquisition, but as he said in a conversation at the ISM Conference in May 2002 in San Francisco: “Just because you are dominant doesn't mean you have to be nasty.” For example, Toyota, in addition to equity stakes in many suppliers, uses its power dominance to maintain “value preference” in the chain and in its collaborative business model to ensure that suppliers have at least a small “w” in the win-win equation. The result has been a competitive advantage over many Western automobile companies that have win-lose supplier relationships, the outcomes of which ripple back to undermine these car makers' supply chains via bankruptcies, forced mergers, and sales/innovation shifts away from automotive buyers. Toyota has climbed to the top of the automobile food chain, in part fueled by use of the somewhat benevolent but the always competitive pressure of its power dominance over its supply base. The heart of Toyota's supply chain behavior is the understanding that success also rests on a measure of success for its suppliers. This is a key tenet in building an on-demand supply chain.

Analyzing the Balance of Power

The astute use of power to achieve long-term value is part of the thinking that must go into sound sourcing strategy that delivers direction-setting beyond short-term market fluctuation. One of the tools that the Cox consulting group provides that helps the thought process necessary to use that power is the Oraculix Power Positioning Tool. This software tool is designed to help supply managers analyze the relative power between their firm and selected suppliers (using a 2 X 2 Power Matrix that contrasts the buyer's and seller's relative power; see Exhibit 2) and then to enable an assessment of the buyer's strategic options for moving to a more favorable power position that increases the likelihood of more value acquisition to achieve supply objectives.

The software forces analysis of the balance of power between the buyer and each supplier in a spend category and then plots all the suppliers onto the power matrix for easy visual comparison of the current state. It does this by posing a series of questions on five topics that must be answered:

• Relative importance of the product to the buyer.
• Nature of the demand and supply flow.
• Power attributes of the buyer.
• Importance of the buyer to the seller.
• Power attributes of the seller.

The questions require two levels of response—direct answers and an assessment of the quality of those answers (based on objective data, educated guesses, or “don't know”). A key benefit of this tool is that it highlights what is not known as much as what is known. As Cox points out, “Analysis based on guesstimates and lack of data is guesswork rather than an objective analysis of the real buyer and seller power position.” In fact, if enough answers are “don't know” the tool will not automatically provide an analysis solution, thus forcing more rigorous analysis. Once the current state analysis is completed, the focus moves to the future via another series of questions on two subjects: (1) buyer's sourcing and leverage options and (2) seller's marketing and strategy options.

Quality designations and the ability to compare all suppliers against each other on the power matrix are also part of this stage, which results in a “before and after” snapshot. The model, based on insight from years of supply chain power research, suggests factors that the buyer could use to move toward more optimal positions as well as factors that the supplier could use to do the same thing from their side. Obviously, strong use of the tool requires knowledge of the concepts behind it, delivered through what Cox describes as “master classes” and workshops covering a range of topics (e.g., effective in-sourcing and outsourcing management, strategic source planning, etc.).

The software—a series of prompts, questions, and diagramming—is nothing special, but the questions, the knowledge behind them, the rigorous thinking and analysis necessary to answer them, and the research behind the improvement suggestions are special. Sourcing strategy is not simple. “Generic” options that pass for real strategy can shortchange results. Having discipline and the time to truly penetrate the supply situation is absolutely necessary for a company's strategic materials and services. The Oraculix tool, although somewhat resource-intensive, drives the depth of thinking to make a competitive difference for vital sourcing decisions.

Closing Thoughts—Sourcing Strategy Is a Mental Game

Sourcing strategy is a mental chess game which is played before going to market. Sourcing strategy blends expertise with knowledge and intense analysis to formulate a value-creating game plan for use with the supply base. These sophisticated niche e-tools, coupled with skilled people, typically are not considered e-purchasing tools, nor, other than generic strategy “suggestions” or sourcing processes, are they offered by traditional software providers. These are deep-diving, somewhat niche-focused offerings that help a company change the game. Some types of tools are part of a wide range of similar offerings—many industries have their own equivalent of the CMAI Web Service or the LexisNexis Supplier/Industry Intelligence Solution, while others such as Oraculix are more unique. What separates the leading-edge players from the rest is not just finding these tools, but more importantly having the ability to use them as an integral part of their strategic sourcing process.

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Author Information

Douglas A. Smock, Robert A, Rudzki, and Stephen C. Rogers are authors of the new book On-Demand Supply Management (J. Ross Publishing, 2007.) This article is excerpted with permission from that book. For ordering information, visit www.jrosspub.com

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