How To Build an Expert Sourcing Strategy
Spend management is arguably one of the most essential aspects pertaining to a business, considering that without an adequate spend management strategy it can be easy to run into problems with cash flow. Not to mention your spend management strategy will help your organization in optimizing spend, improving processes, risk mitigation, and reducing costs.
At the end of each year, it is advantageous for the sourcing manager to draft a sourcing strategy for each spend category to review with both business owners and finance at the beginning of the new year. The sourcing strategy will ensure solid alignment going into the new year and establish a thorough plan on how to optimize the spend best. It is important to note that the sourcing strategy could be for a business unit or a spend category, as it depends on how your sourcing team is organized. With this being said, let’s take a look at how to build a spend management strategy.
Preparation
Collecting all of your spend analytics and reviewing it with the team will be the first step within your spend management strategy. There will be key data that you will need to pull which includes the following:
By Supplier - Pull the report based on supplier in descending order with the contract pipeline. You will want to see the spend for the last three years with both the contract and the date. This will be the most critical information needed.
Additional Reports - While this isn’t required, you may want to add in information by entity/region, by cost center, and by ledger account or commodity code. You will need to be able to drill down by supplier for all of these additional options.
Spend time understanding each supplier and what actions will need to be taken in the new year. Ask yourself the following questions:
If the contract will be expiring in the new year, are you creating a strategy for renewal or to RFQ for a potential new supplier?
Has spend changed over the past 3 years for each supplier? if so how does that impact your negotiation strategy?
Have the business requirements need to be changed?
This stage will be all about ensuring you outline what is important to your business and determining the approach you are going to take for the following year. Once this has been completed, it is time to jump in with Finance Planning & Analysis (FP&A).
Establishing Budget Expectations
Procurement will have to work with Finance Planning & Analysis (FP&A) to understand the budget expectations and their company’s objectives in the new year. If your company engages third-party spend intelligence partners, then make sure to rope in their analysts to obtain their insight on the spend category(s) that you support.
Pull any metrics from the year prior and ensure that you have an understanding of what was both achieved and missed (e.g. cost savings, managed spend, noise level for any poor execution, etc.) This will provide you with a good foundation when preparing your goals for the next year.
Formatting Your Strategy
After completing both preparation and establishing budget expectations, you are ready to generate the sourcing strategy. Most importantly you will need to keep it as brief as possible, considering that the purpose of the strategy is to be aligned with your partners coming into the new year.
The format will vary based on your business needs and objectives, but here is an example of a format that you can use for your own spend strategy:
The Spend In Prior Year - Summarize the spend for the business unit with contract pipeline showcasing the contract expiration dates coming up in the new year.
Metrics - Review past year metrics: what worked, what didn’t, and what can be done differently going into the new year.
SWOT - Through performing a SWOT analysis, you will understand what are the internal strengths, weaknesses, opportunities, and threats. This will help you determine the strategy you can take that will cater to your strengths, take advantage of potential market opportunities, minimize your weaknesses, and proactively address threats.
Actions - Identify the top ten actions with owners and dates.
Once formatting is complete, it is time to set up the meeting and go over the spend management strategy with the team.
Going Over the Strategy With the Team
You will want to send out the sourcing strategy prior to the meeting and include all business unit heads, direct reports, and the FP&A analyst that supports the business unit. Before presenting, review the sourcing strategy and ensure that you are aligned with all of the objectives for the meeting.
The most important goal for the meeting will be to review the spend by supplier and ultimately why the business unit is utilizing each supplier. This will allow everyone in the meeting to be aligned on how suppliers are being used. This is critical due to many business heads potentially not knowing the value each of the suppliers provide the business unit, in which you will want to ensure the “supplier business owner” is accountable to explain to his/her peers on why each supplier is needed. You want to make sure that you are setting up an environment for any questions to be answered on why the suppliers are required and at the needed spend level. If the contract with a supplier is expiring in the new year, then discuss with the team the sourcing strategy for renewal, for potentially opening it up to an RFQ, or even shutting down the spend.
The temperature of the discussion will depend on the budget expectations for the new year.
If the budget is increasing by 10%, then it is likely not much of the spend will be questioned. If the opposite occurs and the budget is decreasing by 10%, then there will be a healthy discussion on what spend will need to be reduced. You will need to ensure that you are discussing the actions for the next year and any key metric expectations.
Getting Started With Your Spend Management Strategy
It is critical that the sourcing manager ensures alignment with both business owners and cross-functional teams on the spend sourcing strategy. This strategy is integral to the success of the company’s operation and ensuring for streamlined, cost-effective procurement.
Need help establishing your spend management strategy? Mike Glass runs GPC (Glass Procurement Consulting), a procurement consulting firm focused on optimizing a company's spend. Mike has worked in senior procurement management positions at NVIDIA, Google, Meta, Fitbit, and Flextronics. Mike would enjoy getting your insight on any procurement topic, feel free to contact Mike at mike@glassprocurementconsulting.com.
