Saturday, November 28, 2009

To Source Or Not To Source...That Really Is The Question

I met up recently with my ex-boss from my days as a sourcing practitioner at GE. During our reminiscing of times gone by we chatted about the current state of procurement and how things had changed since our time under "Neutron Jack". One thing we both agreed was that when you strip away all the e-glitz & e-glamour, nothing has changed when it comes to fundamental procurement decision-making. All Purchasing 101 rules apply just as much in 2009 as they did in 1989 when you are making key decisons such whether to do an RFQ, an RFP, a multi-round negotiation, or even whether to do a competitive sourcing event at all.

Take that last one, about whether to even conduct a sourcing event. Back in the early nineties our GE division spent about eight million dollars annually on various facilities maintenance services such as general R&M, cleaning, lawn & grounds and security. Despite this level of spend number we never ran an RFP for our facilities maintenance services. Instead we participated in a regional purchasing cooperative that included, amongst others, Proctor & Gamble. This co-op secured us about 12% savings on our facilities spend, or $960K annually. Could we have secured another 5% or more savings by going to RFP? Probably. What we did instead was direct the commodity manager who would have run the facilities RFP to a direct materials category, specifically fuel manifolds & piping. How much do you think our division spent on manifolds & piping every year? You guessed it, about eight million dollars, the same as our facilities maintenance spend. The difference was that purchase price represented less than 20%of the total cost of ownership of manifolds & piping, a cost that included impacts on fuel efficiency, maintenance & inspection cost, repair cost, assembly cost and overall engine system performance. The point is that for us the forgone savings on $8M of facilities spend by not going to RFP was far exceeded by the total cost savings on the direct materials spend category.

Flash forward to today and it still surprises me when I encounter companies that focus some of their their best sourcing professionals on time-consuming RFPs for office supplies, MRO and other simple cross-industry indirect spend categories. Ironically these same companies are often failing to direct adequate (or any) resources towards the implementation of a competitive procurement process for categories such as commercial print, advertising or transportation. The end result is often impressive savings numbers for categories like office supplies and MRO at the expense of significant missed savings opportunities for the higher impact spend areas. To make matters worse, e-sourcing software providers are (quite rationally) selling their reverse auction solutions into procurement departments with a primary focus on the simpler spend areas, marketing their case studies of 30% savings from auctions on pens, pencils, nuts, and bolts.

To be fair to procurement organizations it is often the path of least resistance to focus on the simpler indirect spend categories. High levels of stakeholder pushback are often encountered for the more strategic and higher impact categories. Having said this, it is the responsibility of C-level management to demand that procurement be invited into all stakeholder departments. With high levels of executive sponsorship, procurement leaders would be free to focus their best sourcing resources on the categories of highest return and, effectively, not source those categories where the dollar savings does not justify the investment of dollar talent.

In my ideal sourcing world far far away, companies would never run RFPs or reverse auctions for simple indirects like office supplies and MRO. Sourcing events for these types of categories would only ever be conducted by Group Purchasing Organizations who would use them to drive down prices for all buyers. In this same world, procurement's best and brightest would always be invited into stakeholder departments under the umbrella of senior executive sponsorship. These individuals would drive competitive procurement processes in the company's highest impact spend categories through utilization of best practice sourcing processes and technologies (reverse auctions, online RFPs and optimization tools are being used regularly by today's leading players for categories like advertising spend and transportation). In this world scarce procurement resources - both people and technology - would truly be focused in the areas of highest return. After all, a sourcing mind is a terrible thing to waste.