In the declining economical market the client decided that this was a great opportunity to decrease the costs of goods purchased. Unfortunately the Sourcing department was constantly saying that decreasing the price of purchased goods was not really an option and that the prices were already at their lowest. Wanting an independent opinion, the client gave us a task to review strategic purchasing from an operational and effectiveness perspective.
1. The Inner Workings of a Sourcing Department
The review started with looking at the planning and controlling processes within the department. It quickly became apparent that the department didn’t actually have a schedule of all negotiations to be performed. Negotiation goals were not set and success was measured on the basis of comparison to the last years price – if the cost remained at the same level or increased less than the inflation level then the negotiation was considered a success. This meant that there was no supplier cost modelling which also meant not having all the facts when going into negotiations. More shockingly, when observing a negotiation with a potential supplier, the negotiating team was seen to argue with one other.
2. The Challenge
The analysis pointed out a number of challenges that the client would have to deal with.
- Weak work scheduling with fire fighting mentality
- No progress control of the sourcing life cycle
- No supplier cost modelling
- Limited goal setting
- No operational KPIs
- No performance reviews
- No negotiation preparation
- The existing internal “best practices” not followed
- Limited spend analysis and historical change
To top it all off, savings generated by the department were not tracked.
3. A New Approach to Sourcing and Purchasing
The client decided that a step change program was needed. The ultimate goal was to generate more savings from the purchasing function via improved processes. A team was created from external experts and local purchasing management.
The team started by developing a ten step sourcing process through which all purchases needed to go through. This meant everything from finding new potential suppliers, through cost base modelling, to the negotiation and final selection. A second process was then developed for historical spend analysis and future need preparation. This allowed a better understanding of how the business is changing from a purchasing perspective. Finally the team developed a number of operational KPIs tracking the progress of the department. The new process was then introduced to the employees by purchasing management.
A second stage was then started, focusing on redesigning the purchasing management system. The project team started by creating a five year purchasing plan (based on historical analysis and verifications within production). Then a yearly plan was developed based on old negotiation dates and targets for new ones. This gave visibility of what is supposed to be accomplished by when. A new meeting structure was also developed with weekly progress reviews and goal setting meetings. By setting these meetings, management had now the ability to better control performance and negotiation sourcing progress. A performance report was also created reviewing the ten purchasing steps on a weekly basis against the yearly schedule. As a final step, a savings report was generated showing cost savings from each negotiation against last year’s price and inflation. At this point an overall target was set for decreasing the cost by 5.5% against last year.
4. The Outcomes
- The project gained 5.7% cost reduction in the areas targeted (without taking into account inflation). The areas removed from the equation were fuels.
- The number of tasks not completed on time reduced from 5% to 0.
- The negotiation preparation allowed a common approach in all negotiation meetings.
5. Difficulties Faced by the Team
The sourcing management was against the project from day one. At one point they even refused to collaborate with the team tasked with the improvement of operations. Their view was that the original analysis was wrong and the outcomes very far from the truth. This was tackled by setting up a meeting with the CEO and reviewing together with purchasing department the facts gathered in the analysis. At the end of this session a firm order was given to the purchasing department management to shape up or find a different role.
A second major issue was lack of historical data. Unfortunately until now negotiation process was not tracked and there was no real understanding of what had happened over the last few years.
6. How Can Excelr8 Help to Improve Strategic Sourcing
Excelr8’s approach to strategic sourcing and sourcing excellence is simple. We look at the processes and management systems that perform the work and control the performance. We analyse these in detail to check what gaps there are to an ideal situation. As this becomes clear we develop an approach to change the operational aspect of strategic purchasing and implement it together with the departmental management. A skill enhancement program is also often required here and we help to deliver it. Please Contact us to find out more about Structured Sourcing and Sourcing Excellence.