Even as businesses continuously innovate and scale new growth trajectories, adopting best practices in your sourcing lifecycle can be a key enabler to delivering business objectives. Supplier optimisation remains a key focus area in the Sourcing Toolkit of a CPO and finding the right balance in your supplier management strategy can make a significant difference to your bottom-line while delivering a sustainable competitive advantage. This article offers a perspective on the importance of supplier optimisation in your Sourcing lifecycle.
In today’s dynamic & rapidly evolving business landscape, strategic sourcing has become a crucial function and is an integral part of the CxO discussion board. In a nutshell, Strategic sourcing is a procurement strategy that focuses on obtaining products (goods/services) in a way that aligns with the organisation’s overall business objectives. It involves a systematic and holistic approach to identify, evaluate, and select suppliers to optimise value, reduce costs, and mitigate risks.
The Procurement Lifecycle may be best visualised as illustrated in Exhibit 1. The upstream areas usually fall under the realm of ‘Strategic Sourcing’ while the tactical downstream functions are classified as ‘Operational Procurement.’
Exhibit 1: The Procurement Lifecycle
As part of the procurement lifecycle, supplier optimisation plays an important role irrespective of the maturity of your sourcing function in achieving operational efficiency, cost reduction, and overall business success. So, how can one ensure the most optimal number of suppliers for a particular good or service while balancing risk and quality? For example, a long tail of suppliers may lead to operational inefficiencies and value leakage while too few may enhance your business risk significantly. How do you arrive at an optimal solution?
We offer a few perspectives towards achieving this objective.
1. Develop a Robust Supplier Evaluation Framework
One of the initial steps in supplier optimisation is to establish a comprehensive supplier evaluation framework. This framework should include key performance indicators (KPIs) aligned with business objectives, such as quality, delivery, cost, innovation, and sustainability. By objectively assessing suppliers based on these criteria, organisations can make informed decisions and identify the most suitable partners for their strategic sourcing initiatives.
2. Leverage Sourcing tools and best-practice frameworks in your Sourcing Process
While several tools may be implemented at various stages of the sourcing lifecycle, we highlight a few well-known tools that are extensively used in the industry.
2.1. The Kraljic Matrix:
Perhaps the most widely used tool by procurement and supply chain professionals for supplier portfolio evaluation, the Kraljic Matrix is a function of two parameters: supply risk and profit impact. A supplier is classified under one of the four quadrants of the Kraljic Matrix based on the function of these two parameters. For example, a supplier is classified as strategic if the sourced product/service is “business critical” while impacting the bottom-line of the company the most. Using the tool in classifying suppliers’ products and services can address supply risks while supporting strategy development.
The Kraljic Matrix is an integral part of the Opticos consultative toolkit. For example, stratification of suppliers into strategic and non-strategic at a global Swedish conglomerate client of Opticos, enabled a differentiated approach to the procurement optimisation challenge, and ultimately led to a total initial cost saving of ~120 MUSD, and a projected annual saving of ~15 MUSD.
Exhibit 2: Kraljic Matrix for Supplier Portfolio Evaluation
2.2. Total Cost of Ownership (TCO)
TCO analysis is a comprehensive approach that goes beyond the initial purchase price of a product or service and considers the entire lifecycle costs. It involves evaluating various cost components such as acquisition costs, operational costs, maintenance costs, and disposal costs.
By conducting TCO analysis, organisations can make informed decisions based on the total cost impact rather than focusing solely on the purchase price. This helps identify opportunities for cost reduction and value enhancement throughout the sourcing process.
3. Foster Strong Supplier Relationships
Building strong and collaborative relationships with suppliers is fundamental to supplier optimization. By establishing open lines of communication, organisations can enhance transparency, trust, and mutual understanding. Regularly engaging with suppliers, conducting face-to-face meetings, and involving them in the product development process (especially the strategic category) can foster innovation and drive continuous improvement. Additionally, organisations should consider conducting periodic supplier performance reviews to address any concerns and reinforce the importance of meeting expectations.
4. Embrace Technology and Data Analytics
Leveraging technology such as e-sourcing platforms, e-procurement systems, and supplier relationship management tools can improve process efficiency as well as enable your organisation to gain trust with your current and prospective suppliers by bringing transparency in your sourcing and procurement processes. Further, Advanced analytics can help identify patterns, trends, and potential risks, enabling organisations to make data-driven decisions, negotiate better contracts, and optimise supplier portfolios.
5. Practice Supplier Diversity and Risk Mitigation
Supplier optimisation should extend beyond cost reduction and performance improvement. Organisations should actively promote supplier diversity by considering businesses owned by underrepresented groups, fostering a more inclusive and sustainable supply chain. Diversifying the supplier base can enhance innovation, support local economies, and contribute to a positive brand image.
Furthermore, effective risk management strategies are essential for supplier optimisation. Organisations should identify and assess potential risks associated with suppliers, such as geopolitical instability, natural disasters, or financial vulnerabilities. Developing contingency plans and alternative sourcing options can help mitigate potential disruptions and ensure business continuity.
6. Encourage Continuous Improvement and Innovation
Strategic sourcing is not a one-time exercise but a continuous process of improvement and innovation. Organisations with a mature Sourcing and Procurement functions encourage suppliers to embrace continuous improvement methodologies, such as Lean Six Sigma to eliminate waste, reduce costs, and enhance quality. Further, engaging suppliers in collaborative innovation initiatives, seeking their expertise in product development, process optimisation, and sustainability practices are important levers in achieving competitive advantage. By fostering a culture of continuous improvement, organisations can stay ahead of the competition and drive long-term supplier optimisation.
The Final Word:
Even as businesses continuously innovate and scale new growth trajectories, adopting best practices in your sourcing lifecycle can be a key enabler to delivering business objectives. Supplier optimisation remains a key focus area in the Sourcing Toolkit of a CPO and finding the right balance in your supplier management strategy can make a significant difference to your bottom-line while delivering a sustainable competitive advantage.
As organizations look for cost effective ways of working, outsourcing non-core functions appears as an alluring prospect. But before you hand over your operations to third parties, it is worth pausing to consider the risks associated with your sourcing approach. Starting with an overall capability perspective entails several benefits over service first approach, and it enables you to build a strategic approach to sourcing.
Outsourcing is an effective way for companies to focus on their core competencies, reduce costs, and access specialised expertise. However, the success of outsourcing initiatives is not guaranteed, and it is essential to take a strategic approach where one of the most important elements is to start with an overall capability perspective rather than a service focus.
When starting with a service focus, companies tend to focus solely on the services that will be provided by the service supplier. Such an approach does not take into account the company’s broader capability portfolio, which could lead to gaps in capabilities, ineffective management of supplier relationships, and suboptimal outcomes.
Figure 1. Potential value leakages in the sourcing process
In contrast, starting with an overall capability perspective allows companies to take a more holistic approach to sourcing. This perspective involves identifying and assessing the key capabilities necessary to ensure an optimally functioning and strategically aligned service delivery.
An overall capability perspective also allows for companies to develop a more strategic sourcing plan. The initial capability assessment should serve as the foundation for the transformation roadmap. Any capability gaps identified should be visualized, for example in a heat map, prioritised and addressed as part of the overall service delivery transformation plan – outlining the steps required to enhance or build the necessary capabilities, such as governance, processes, and technology, to close the gaps. This transformation plan will thus to a greater deal focus on achieving the company’s strategic objectives, rather than just accomplishing specific service targets.
Figure 2. An example of the heatmap illustrating capabilities and their maturity levels
The capability assessment can also be a useful tool in the service provider selection, where selection criteria should include ability to proactively support in providing and building the key capabilities. The transformation plan will then enable a joint focus and common strategic priorities.
In essence, starting with an overall capability perspective enables organizations to take a more strategic approach to sourcing and how to outsource. It involves considering the long-term implications of the sourcing approach, including the impact on the organization’s capabilities and the ability to meet future business needs. This approach also allows organizations to identify the right service providers who can help build capabilities while delivering the required services.
This is how you can take your first step to an actionable Data Strategy
To stay competitive, companies harness data to enhance customer experience, streamline operations, and carve out a sustainable advantage. Leveraging AI and advanced analytics, they tackle challenges from predictive maintenance and pricing models to organizational optimization and digitizing products.
Success with advanced analytics hinges on data accuracy and sustainable data sourcing. At Opticos, we have found that a pragmatic, focused data strategy is crucial for companies aiming to become data- and analytics empowered. This strategy facilitates the extraction of value from data, paving the road to success.
Many businesses grapple with fragmented IT landscapes, point solutions, lack of data ownership, and poor integration. As a result, analytics teams are burdened with data collection and cleaning rather than focusing on valuable analysis and insights.
Concerns about data quality frequently surface. Businesses periodically launch data quality and master data initiatives. But without robust data governance, data quality tends to decline over time. Hence, achieving accurate data often depends more on luck than a solid business practice. The remedy? An actionable data strategy.
To align the organization on data-related objectives and to overcome the challenges above, Opticos provides three recommendations:
- Use Case-Driven Approach: Identify, evaluate, and prioritize use cases that tie business needs to value, targeting relevant data assets and datasets. For instance, forecasting customer order volumes in supply chain management could use historical and weather data.
- Prioritized Data Asset Governance: Instead of tackling organization-wide data ownership head-on, establish ownership of data assets for prioritized use cases. Ideally, process or function owners will own the data from source to consumption, regardless of the storage and processing systems. Start with use cases, like customer order forecasting, where assets include product inventory, article details, orders, and sales forecasts. Assign ownership from source to consumption, independent of the data’s system journey.
- Transparent Data Architecture: Establish a clear blueprint detailing capabilities to capture, ingest, store, process, share, and consume data for prioritized use cases. Setting up systems for data discovery, monitoring, and governance is also crucial. Emphasize transparency and communication so all stakeholders understand their roles in delivering high-quality data. For instance, use diagrams to map out data flow for each prioritized data asset: from source systems like CRM, through data storage like Data Lake, to Business Intelligence reporting tools.
Furthermore, we recommend a phased data strategy implementation, detailing the first phase and keeping subsequent phases indicative. As you begin implementing, the roadmap’s details become more distinct and defined.
Illustration 1 – Illustrative template for a phased, use-case-driven Data Strategy execution roadmap
An actionable data strategy implements data management practices and governance structures that enable efficient data sharing and continuous quality improvement. Once initial success is evident, the process can be scaled and replicated across other use cases.
Guiding your Data Management Journey
At Opticos, we enable organizations to leverage business benefits by building pragmatic, and holistic data management practices. Drawing from our extensive client experience and methodology, we’re here to guide your data management journey from strategy to implementation.
Finding the Sweet Spot in your business: Mastering the Balance between Standardization and Flexibility
In the dynamic landscape of modern business, organizations struggle to balance standardization and flexibility. The extremes of both these concepts are often clear-cut, but the real challenge lies in navigating the middle ground. This short article explores the balancing act, offering insights to help businesses calibrate their approach to standardization and flexibility.
Decoding Standardization and Flexibility
Standardization, in essence, is the establishment of a set of rules or procedures that dictate the execution of a specific task or process. It extends to products and services as well, aiming to deliver a consistent experience to the customer or the organization providing it. The advantages of standardization are numerous – it enhances efficiency, consistency, and predictability, reduces the likelihood of errors, streamlines processes, and ensures quality performance, thereby saving time and money.
Flexibility, on the contrary, is the capacity and infrastructure that allows an organization to adapt and modify processes, products, and services in response to evolving customer needs or market conditions. This adaptability fuels innovation, agility, and customization, enabling companies to respond swiftly to market shifts or customer requirements, which can help them stay ahead of the competition.
Assessing Your Business Needs
The first step in finding the right balance between standardization and flexibility is to assess your business needs. This involves considering the industry you operate in, the nature of your business, and your customers’ needs. Certain industries, such as manufacturing, might benefit more from a standardized approach, while others, like technology, might require greater flexibility to keep pace with innovation and changing customer needs. This assessment should be conducted from both top-down and bottom-up perspectives, containing strategy to implementation across all levels.
Illustration 1 – Dimensions and Perspectives across the Organization impacted by choices related to standardization and flexibility.
Assessing Your Processes, Products, and Services
A thorough evaluation of your processes, products, and services is crucial to determine where standardization and flexibility are most appropriate. Identify tasks or processes demanding high consistency and efficiency where standardization can benefit. Conversely, pinpoint areas that require greater flexibility to adapt to changing customer needs or market conditions.
The Pros and Cons of Standardization and Flexibility
It’s essential to weigh the advantages and disadvantages of standardization and flexibility for your business. While standardization can enhance efficiency, consistency, and predictability, flexibility can foster innovation, adaptability, and customization. However, too much standardization can suppress creativity and innovation, and too much flexibility can result in a lack of consistency and predictability.
Mastering the right balance
Mastering the right balance between standardization and flexibility requires carefully evaluating your business needs, processes, products, and services. Identifying areas where standardization can offer benefits and flexibility is needed to adapt to changing customer needs or market conditions – is crucial. A flexible approach can help you stay ahead of the competition, while standardization can provide consistency and efficiency. Additionally, a holistic view is required to address several aspects together as there may be a slight conflict between them. Some considerations may guide this decision in choosing the appropriate path forward.
Illustration 2 – Considerations when assessing processes, products, or services.
Implications for the IT Operating Model
As mentioned, disruptive industry forces present new opportunities, threats, and organizational requirements. The rapidly evolving competitive landscape introduces new challenges for CIOs. A traditional approach to IT delivery is no longer viable. The IT Operating Model should be designed to dynamically match the different features of the Digital, Evolving, and Legacy Business. Companies can adopt a multi-speed approach to IT delivery to support a dynamic business model and evolve at an increasing pace while trying to contain costs. Multi-speed IT enables business needs to be delivered at differing velocities, thereby striking the right balance between standardization and flexibility.
Balancing standardization and flexibility is crucial for success in today’s business environment. Companies must evaluate their business needs, processes, products, and services to determine where standardization and flexibility are most appropriate. By mastering the right balance, businesses can achieve greater efficiency, consistency, and predictability while fostering innovation, adaptability, and customization.
We invite you to engage in further discussion on this topic. We are more than willing to share our insights to help your business improve.
How do you choose the right implementation partner(s) for your ERP program?
ERP programs are often considered one of the largest investments for organizations and are associated with operational and financial risk, and are also a driver for change from many perspectives.
That is why it is essential to form a solid strategy for sourcing an ERP implementation partner early on. Considering, for instance, make versus buy strategy, pricing model, sourcing objects, supplier capacity, and capabilities to engage the right partner(s) in a timely manner and to help deliver on the transformation objectives.
Forming an ERP Implementation Partner Sourcing Strategy that fits your organization
Forming the ERP Implementation partner sourcing strategy will likely be a collaborative exercise where companies often find themselves considering the same questions more than once. We at Opticos recommend formulating and agreeing on a few Strategic Drivers to form a solid foundation – as a starting point. These drivers or business values will then provide guidance in the detailing of the strategy and act as a basis for making the right decisions for your organization.
These areas are generally part of an ERP Implementation Partner Sourcing Strategy:
- Strategic drivers or business value
- Sourcing direction (sourcing objects, supplier selection, make or buy)
- Commercial engagement model
When detailing a sourcing strategy, you are advised to consider a few critical and strategic areas and questions:
Illustration 1 – ERP sourcing strategy – key areas to consider
The answers to these questions, and hence the sourcing strategy, will vary depending on your organization’s existing capabilities, value drivers, and relationships with existing and preferred vendors.
The Sourcing Process
When the first version of the strategy is set, it is time for the actual selection of partner(s). We recommend qualifying the supplier’s capabilities through a collaborative sourcing process (as opposed to a traditional RFP) to develop requirements, ways of working, and validation of the cultural fit for the organization. The process will also help form a better understanding of what capabilities need to be developed in-house or purchased from external suppliers.
While the strategy will not solve all problems, it will keep organizations on the right track when making important decisions. Please remember that the strategy should be seen as a living document and might have to evolve over time!
To summarize, at Opticos, we strongly believe in considering the following recommendations to boost your journey toward finding the right partners:
- Set the sourcing strategy early and then let it evolve over time.
- Qualify the supplier’s capabilities through a collaborative sourcing process (as opposed to a traditional RFP) to develop requirements, ways of working, and validation of the cultural fit for the organization.
- Define and select strategic capabilities to retain and develop within your organization. This will support in validating what to source externally and achieve overall transformation objectives.
- Establish a solid governance structure, and engage the sponsor to allow seamless integration and clarity on roles and responsibilities across the internal organization and engaged partner(s).
It is common to have a long road to finding the right partners. Considering these recommendations might save you a bumpy ride.
Want to know more? Don’t hesitate to contact Opticos experienced sourcing professionals!
Sourcing and Procurement – Opticos have a strong Sourcing and Procurement capability and a proven record of supporting clients from strategy to agreement.
Digital Transformation – Our journey does not stop when the agreement is signed! Opticos also holds comprehensive knowledge and experience from supporting clients in ERP implementations and digital transformation; we provide experienced consultants supporting on the “client-side” with, for instance, project and change management.