1. SAP Thought Leadership Paper
Strategic Sourcing
The Strategic Sourcing Imperative
Using Best Practices and Automated Processes
to Achieve Sourcing Excellence
2. Table of Contents
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Managing Procurement Costs
Best-in-Class Sourcing
Organizations Win
Measurable Success
Sourcing Best Practices
Contract Management
Best Practices
Supplier Management
Best Practices
SAP Solutions – Enabling
Sourcing Excellence
9
Conclusion
3. Strategic sourcing offers a proven way
for organizations to drive cost out of
procurement activities and cultivate
efficiencies across the supply chain.
Sourcing, contract, and supplier
management can be improved using
automated processes and applying best
practices. Sourcing technologies such as
the SAP® Sourcing OnDemand solution
deliver even greater efficiencies by
providing collaborative resources to
manage procurement projects and
increase cost savings.
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4. Strategic sourcing challenges
Managing Procurement Costs
Implementing lasting, positive, and integrated change to business processes is
crucial for organizations to meet strategic
goals and gain a competitive advantage.
Strategic sourcing has long been established as a valuable set of processes for
companies that want to reduce procurement costs. Organizations are increasingly viewing sourcing as a critical function
with management-level objectives that tie
in to the needs of the wider organization.
The recent fiscal crisis, which brought
many procurement teams to the front
lines of business, created impetus behind
the emergence of the chief procurement
officer (CPO) as an executive peer in large
organizations.
While approaches to sourcing are
evolving over time, the primary driver
continues to be the need for cost
savings. In fact, this is the top priority for
CPOs and procurement leaders. Ardent
Partners’ chief research officer, Andrew
Bartolini, found that “when it comes to
procurement pressures in today’s global
enterprise, there are savings and then
there is everything else.”1 A 2011 Aberdeen Group Inc. report reaches a similar
conclusion.2 Lower-ranking priorities
include the need to improve sourcing
performance, mitigate overall sourcing
risk, and improve supplier relationship
management (see Figure 1).
Sourcing is an increasingly popular
choice for supplementing corporate
efforts to stem an issue that continues to
plague most organizations: savings
leakage. Savings leakage can be defined
as savings negotiated by the procurement
team versus savings realized. According
to Aberdeen Group, the average organization stands to lose nearly 2.7% of its identified cost savings through savings
leakage. The resulting annual losses for
enterprises are in the millions of dollars.3
Why and how does savings leakage
occur? The trend toward globalization
and expanded supply chains has impacted the enterprise in unexpected
ways. For example, incidents around
the world, such as changing economic
conditions or unpredictable environmental disasters, may cause sourcing
disruptions and inflationary pressures
that affect operations, suppliers, and
customers. Procurement organizations
must now perform risk analyses that
take such scenarios into account when
making sourcing decisions.
More predictably, savings leakage can
also occur when business units fail to
follow company policy and, instead, make
purchases outside of existing contracts at
prices higher than those negotiated by
the procurement team. This is a scenario
over which procurement can take greater
control. The challenge lies in developing a
collaborative working model with the
finance team and other functions within
the enterprise that brings more spend
under the management of the CPO and
the procurement organization.
The increased emphasis on cost
control that has come out of the most
recent global recession has accelerated
the growing trend toward centralized
sourcing and automated processes. Many
organizations continue to do much of
their initial work in spreadsheets that
must be uploaded into the sourcing
systems rather than capturing all process
steps within a sourcing tool at the start.
This means that creating a request for
proposal (RFP), running an online auction,
or analyzing spend data must be repeated
with each sourcing project, thus impacting the productivity and flexibility of the
procurement team. Some organizations
also lack centralized insight into prior and
current sourcing activities, making it difficult to arrive at the right procurement decisions. To address these challenges,
enterprises must adopt automated,
repeatable processes and invest in
sourcing technologies.
Figure 1: Top Strategic Sourcing Priorities
Top-down directives to
increase cost savings
60%
Need to improve
sourcing performance
40%
Need to mitigate
overall sourcing risks
Need to improve supplier
relationship management
32%
19%
Source: Aberdeen Group – The State of Strategic Sourcing – Building a Context for the Next Decade, April 2011
SAP Thought Leadership Paper –The Strategic Sourcing Imperative
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5. Despite the focus on the growing importance of the CPO, procurement, and
supplier relationships, only a small percentage of organizations in a recent
Ardent Partners survey have made the
required technology investments (see
Figure 2). These few organizations have
begun to achieve basic visibility into supplier information management, performance management, and risk
management. Without this technology,
manual sourcing events such as RFPs
can be time consuming and burdensome, often taking months to execute
offline. Organizations also risk missing
important compliance mandates by not
having a single version of the truth for
sourcing data.
Best-in-Class Sourcing
Organizations Win
Measurable SuccesS
Creating a clear sourcing methodology
and process up front goes a long way
toward establishing sourcing best practices and realizing significant, measurable results. Aberdeen Group has identified several performance metrics that
distinguish “best-in-class” companies –
the top 20% – from the rest.4 Each of
these metrics has a bottom-line benefit.
“Best-in-class” companies have
achieved the following:
•• 80% of spend under management –
This represents the percentage of nonpayroll spend actively managed
by the procurement group. For every
dollar of spend under management,
Aberdeen has historically quantified
cost savings between 5% and 20%.
Top-performing enterprises place
nearly 37% more spend under management than all other organizations in
the Aberdeen survey.
Figure 2: Percentage of Companies with Automated
Sourcing Management Functionalities
•• 78% procurement contract compliance – This represents the percentage
of procurements that have been made
within existing negotiated contracts.
•• 12% realized or implemented procurement cost savings – This represents
the actual cost savings that are delivered to an organization after supplier
invoicing.
•• 0.26% rate of savings leak – This
number is compared to a 2.70% rate
of savings leak for average companies.
The majority, 52%, of best-in-class
organizations have enhanced their
spend analytics capabilities. Spend
analysis has become a critical strategic
tool that can funnel valuable corporate
spend data into improving the planning
and execution of sourcing. This spending intelligence can also be useful when
negotiating with suppliers. It requires
development of specialized capabilities,
including an active spend analysis program and cross-functional collaboration
with finance, product, and sourcing
groups, as well as enterprise-wide visibility into spend across all commodities
and services categories. Best-in-class
companies are also 30% more likely to
use sourcing technology tools than
other companies. Sourcing automates
multiple strategic sourcing processes,
including event creation, electronic bidding, scenario development, and supplier optimization to help ensure that organizations use analyzed spend data to
negotiate effectively with suppliers.
Aberdeen Group statistics provide
validation and a compelling business incentive for organizations to improve the
effectiveness of their sourcing, contract,
and supplier management processes by
adopting best practices to achieve a superior standard of performance.
Source: Ardent Partners – CPO Rising 2011: Innovative Ideas for the Decade Ahead, July 2011
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SAP Thought Leadership Paper –The Strategic Sourcing Imperative
6. Sourcing Best Practices
To help procurement professionals
achieve best-in-class sourcing performance, Aberdeen Group has identified
the following best practices (see Figure 3):
•• Alignment of sourcing, contract, and
supplier management activities and
objectives with the greater
organization
•• Enhancement of spend analytics
capabilities
•• Automation of strategic sourcing processes, such as requests for information, quotes, or proposals (RFx) and
online auctions
A key objective for the CPO and procurement team is to expand the percentage
of corporate spend under their management and eliminate spend that is out of
compliance. Thus, a sourcing best practice to consider is fostering open collaboration between the procurement organization and the business units. Such an
approach can make it easier for departments throughout an organization to request and obtain support for sourcing
activities. This can be accomplished
through a corporate portal or through a
sourcing tool that is universally accessible. The procurement team can more
readily leverage its expertise and align its
efforts with the overall organization and
ultimately increase the percentage of
corporate spend under management.
Another sourcing best practice is to
provide a centralized repository of all
related sourcing documents that are accessible to all stakeholders. Documents
and records can then be used for spend
analytics, repurposed for new projects,
or leveraged for standard reporting purposes. This approach also generates
additional visibility for the procurement
department.
Automation of strategic sourcing processes, such as an RFx or online auction,
through a sourcing solution can enable
new cost-saving functionalities. For
example, the reverse auction is considered the most powerful way to drive
down costs. However, it is nearly impossible to run a reverse auction without a
sourcing tool.5 A sourcing solution can
produce substantial benefits over traditional software, such as e-mail, Microsoft
Word, and Microsoft Excel, and it can
help ensure the least risk and greatest
success for an auction event.
Contract Management
Best Practices
Without proper insight into its contracts, a company cannot effectively
control its top or bottom line. Nor can it
easily access the data needed to comply
with legal and regulatory requirements.
Lack of contract visibility affects most
companies that have not implemented a
contract lifecycle management (CLM) solution. A CLM solution can be used to
maintain an electronic contract repository
and make contract information more accessible. Contract visibility allows employees to proactively manage business
relationships. Purchasing managers are
able to see when agreements will expire
and can renegotiate contracts ahead of
time for more favorable terms. Accounts
payable and accounts receivable employees are able to see agreed-upon payment
terms and pricing and match that information to invoices.
Figure 3: Best-in-Class Sourcing Strategies
Source: Aberdeen Group – The State of Strategic Sourcing – Building a Context for the Next Decade, April 2011
SAP Thought Leadership Paper –The Strategic Sourcing Imperative
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7. CLM solutions can bring significant
benefit to not only procurement departments but also legal and sales teams.
For example, close collaboration between
the procurement and legal departments
helps ensure that the proper terms, conditions, and clauses are leveraged when
contracts are being authored. Effective
contract management technologies
help organizations implement savings
programs more quickly by closely linking
the sourcing and contracting processes.
This includes having the line items,
pricing, and any preapproved terms
and conditions of an RFx cascade into a
contract after an award decision has
been made. Such tools can also enable
companies to monitor compliance and
re-source contracts before their expiration. Contract management technology
can further drive value by linking buyer
compliance to supplier terms and invoices, including proactive compliance tools
in both electronic-sourcing and direct
purchasing systems. If prespecified contract conditions are not met, purchase
orders or invoices are flagged.
Properly deployed, CLM solutions can
contribute to cost savings by reducing
savings leakage and helping ensure that
all purchasing activity is compliant with
existing supplier agreements. CLM is in
use at 63% of the organizations that
are identified as best in class. Aberdeen
Group found that companies using CLM
solutions have a 32% higher rate of
procurement contract compliance than
companies without this key enabling
technology. If you do not measure and
monitor contract performance, you
cannot know whether you are actually
realizing the contractual benefits. Having
the ability to enforce both internal and external compliance to your contracts
is the only way to maximize and unlock
identified opportunities. To address performance management, a typical CLM
solution includes audit functionality
and a scorecard, or key performance
indicator, tracking against a contract
and enables usage reporting from the
back-end system.
CLM adoption is taken in steps, beginning with the establishment of a wellstructured and readily searchable central
repository of contracts. Reports can be
generated from this repository to get an
understanding of what goods and services are being contracted, and with which
suppliers. With the repository in place, organizations can then focus on improving
contract authoring and track the performance of contracts for compliance with
negotiated prices, rebates, thresholds,
and penalties.
Supplier Management
Best Practices
Procurement organizations, as well as
other functions within the business,
can achieve significant savings and cost
avoidance by effectively managing the
performance of suppliers. Supplier
management technology leverages supplier-specific metrics to track, monitor,
and analyze the performance of key
suppliers. Procurement teams are able
to analyze forecast savings, compliance,
and delivery metrics and convert that
information into meaningful data that
can aid in the negotiation process
during supplier renewal time.
Supplier management technology
improves the process of adding new
suppliers, provides continuous validation of supplier-provided information,
and reduces the cost of managing
supplier diversity programs. The ability
to manage against a range of supply
risk–related elements is also enhanced.
It is often possible to build a business
case for supplier management purely on
cost-avoidance savings, such as the
time and effort that are required to
collect and maintain supplier registration details. However, organizations typically consider a range of other factors,
including the ability to improve capital
management within the supply chain.
“When it comes to procurement pressures in today’s
global enterprise, there are savings and then there is
everything else.”
Andrew Bartolini, Chief Research Officer, Ardent Partners
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SAP Thought Leadership Paper –The Strategic Sourcing Imperative
8. Organizations that leverage a common
supplier management solution and portal
for supplier registration, data validation,
and continuous profile management can
significantly advance the achievements of
the procurement team within the business. Procurement teams gain benefits
from automated data gathering, such as
contact details and banking information
that enable new discounting and working
capital management programs. This data
can drive and support sourcing strategy,
supplier implementation, and overall
program compliance.
Technology tools, such as spend analysis, contract lifecycle management,
sourcing, and supplier performance
management, contain the elements
needed to help companies achieve
greater efficiencies (see Figure 4). These
include higher rates of realized and implemented cost savings, higher rates of
spend under management, and lower
rates of savings leakage. Best-in-class
organizations are able to understand
spend behavior in actionable detail.
Sourcing and procurement teams can
analyze data by supplier, category, time
period, and geography, for example, and
develop intelligence on corporate spending. This intelligence can then be used to
help ensure contract compliance and
help the CPO and team negotiate better
contract terms, resulting in improved
cost savings.
SAP Solutions – Enabling
Sourcing Excellence
Internal and external collaboration
are key to the strategic sourcing process.
SAP Sourcing OnDemand enables crossTo enable the strategic sourcing process, functional teams to provide internal feedSAP Sourcing OnDemand delivers a flexi- back on sourcing activities. For example,
ble project management solution, includ- stakeholders within the business can help
ing a shared, online sourcing project plan develop an RFP or score an RFP submission from a supplier. Externally, suppliers
and savings-tracking functionalities.
can communicate with the business
Also, the solution provides extensive
through an intuitive, user-friendly intertools and templates to create and manface to create a profile, submit bids, and
age requests for information, requests
receive feedback. SAP Sourcing OnDefor quotation, requests for proposal
(RFP), and online auctions, which help an mand can also integrate with back-end
enterprise resource planning systems,
organization effectively evaluate supplienabling procurement teams to compare
ers, negotiate terms, and award concontracts with supplier invoices and help
tracts. The solution supports strategic
ensure supplier compliance with negotiatsourcing across all categories of spend,
ed contract terms.
including goods and services.
Figure 4: Best-in-Class Technology Use
Source: Aberdeen Group – The State of Strategic Sourcing - Building a Context for the Next Decade, April 2011
SAP Thought Leadership Paper –The Strategic Sourcing Imperative
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9. Automate Your Strategic Sourcing Process
Conclusion
Procurement professionals are on the
front lines when it comes to managing
supplier relationships. How well they perform has a significant and lasting impact
on the overall success of the business. At
the core of a modern strategic sourcing
program is business intelligence, which
can be obtained through improved collaboration among procurement, finance, and
other groups across the organization.
With strong leadership from the CPO,
these teams can develop a proactive plan
to adopt innovative approaches, best
practices, and proven technology solutions to automate strategic sourcing, contract management, and supplier management activities. Successful execution of
this strategy can result in significant cost
savings as well as greater competitive
advantage for the forward-looking
enterprise.
Learn More
To learn more about how you can accelerate
your strategic sourcing initiative, increase
cost savings, and improve your sourcing
performance with the SAP® Sourcing
OnDemand solution, please visit
www.sap.com/sourcingondemand.
Develop a proactive plan to adopt innovative
approaches, best practices, and proven
technology solutions to automate strategic
sourcing, contract management, and supplier
management activities – and realize significant
cost savings.
references
1. Ardent Partners – CPO Rising 2011: Innovative
Ideas for the Decade Ahead, July 2011.
2. Aberdeen Group – The State of Strategic
Sourcing – Building a Context for the Next Decade,
April 2011.
3. Ibid.
4. Ibid.
5. Gartner Group – Magic Quadrant for Strategic
Sourcing Application Suites, February 2010.
6. Aberdeen Group – The State of Strategic
Sourcing – Building a Context for the Next Decade,
April 2011.
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SAP Thought Leadership Paper –The Strategic Sourcing Imperative
