Magazine article CMA - the Management Accounting Magazine

Strategic Sourcing Means Just That - Sourcing Strategically

Magazine article CMA - the Management Accounting Magazine

Strategic Sourcing Means Just That - Sourcing Strategically

Article excerpt

Strategic sourcing - a disciplined, analytical and systematic approach to purchasing - is saving companies the world over hundreds of millions of dollars.

Finally, senior business managers are paying attention to their purchasing departments. For years, they focused on manufacturing, or on their sales and marketing departments, but little or no attention was ever given to the procurement of goods and services. Until recently that is.

Major organizations in all types of industries have turned to purchasing to improve profits. From Ford to Honda, and from AT&T to Siemens, companies have recognized the inherent power of their purchasing departments - understanding how savings on procurement go straight to the bottom line.

So, you ask, what's the problem? Like most world-class organizations, yours has a strategic sourcing program. You're putting significant time and effort into this initiative and seeing the results in lower prices from your suppliers. What could be wrong with that?

The problem is that your new purchasing program could be in conflict with your overall business strategy. Your strategic sourcing program may not be "strategic" at all. While you're undoubtedly saving a great deal of money by "beating up your suppliers," you're likely disrupting the rest of your organization by doing it.

Put simply, your new programs may not really be saving you any money at all. In fact, they could be driving up your total costs.

Managers often overlook the role that procurement plays as an integral part of an organization. What the purchasing department does affects all other parts of the company. A misaligned procurement strategy (or no procurement strategy at all) is a recipe for disaster.

Just as a company's business strategy is a logical and clearly-defined response to its customers needs, so its procurement strategy is a logical and clearly-defined response to its business needs or business strategy.

An organization's marketing, manufacturing, distribution and procurement strategies translate the business strategy into a plan or approach for each function to follow. Each of these functional strategies must support the business strategy - and be aligned with each other.

All too often companies fail to operate their purchasing function in strategically consistent ways. They go after transaction price reduction instead of purchasing for maximum value or minimum total cost.

A recent example of this price "mentality" creating an undesirable situation was with a large multinational organization. …

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