Toward More Strategic Sourcing

When the economic times get tough, companies almost automatically try to trims costs by pumping up the competitive pressure on their suppliers. But that might be a mistake, according to a new white paper from Huron Consulting Group. Taking a rigidly competitive approach to supplier selection may save funds in the short term, but it can eat time and resources in the long run, create resistance within the organization, and send the wrong message to suppliers who have performed well. Companies need a more flexible, strategic approach, even in hard times.

"You want to have the freedom of a diverse approach to your supplier base," says Michael E. Shea, Ph.D., director with Huron and author of the report. He advocates a portfolio approach, one that bases supplier selection decisions on an appraisal of incumbent relationships as well as price performance. "If you treat the supplier base as a portfolio, you can deal with suppliers separately and uniquely, which will optimize not only the returns you get in terms of dollars but also the value of the relationships that you'll be maintaining or building," says Shea. "And it will help you manage the risks."

Such an approach means establishing an ongoing dialog with incumbent suppliers to understand their business needs and strategic objectives and how those mesh with your own goals and preferences. And it means paying close attention to switching costs. "If you switch to another supplier you may need to unplug the connectivity you have in place," notes Shea. "You may have electronic funds transfers, for example. You may have a website set up that you're ordering through. If you have e-procurement technology, you may have to switch that."

Switching carries risks, too, Shea points out. "You could easily envisage, especially in a manufacturing company, that you've been buying very specific items with design specifications from a certain supplier. If you switch to someone else, the risk is a form of cost. Will the new parts coming from that new supplier work as well as the old ones?"

The Huron paper recommends a five-phase methodology for evaluating incumbent relationships:

1. Identify key supplier issues and requirements. A team of internal stakeholders outlines the organization's short-term and long-term objectives for its supplier relationships and reviews technical and functional issues.

2. Assess relationship-based data. The team reviews internal data, including invoices, management reports, contracts, and policies and procedures, to construct the fact base for pricing targets and service level improvements. Benchmarking suppliers against industry standards may play a role here, notes Shea.

At this stage, it may become apparent that a competition is in order -- for example, if there has been a change in the supplier's products or in the buyer's needs, processes, or product lines.

3. Develop a portfolio-based strategy. The team examines each supplier by category, using a combination of quantitative and qualitative criteria, to identify opportunities for maximizing value. Opportunities for savings are identified and prioritized.

4. Implement the strategy. This phase encompasses a workable action plan, including a statement of overall objectives, required time frames, and responsible parties, as well as key performance indicators and measurement tools.

5. Continually evaluate the relationship. The process is not a one-time deal, according to Shea. "You don't stop evaluating it," he says. "And one of the things we try not to lose in this is the supplier's side of it. One can very easily fall into thinking 'I'm the buyer; I'm the one who determines what happens here. I don't really care how the suppliers feel.' We believe there can be damage through that kind of an approach."

"When you're coming back to evaluate the relationship, you're asking 'How are they doing in terms of what we agreed?' But it's also fair to ask 'How are we doing? Are we doing what we should be doing to help this relationship?'"

To read the complete Huron Consulting Group report, click here (requires free registration).