Procurement
June 17, 2013

A roadmap for smarter supply chains

Government supply chains, in defence and elsewhere, are increasingly becoming interconnected and interdependent. They now extend beyond “department walls” through collaborative partnerships, outsourcing and shared services.

Yet, even in today’s climate of austerity, government sourcing and procurement organizations have an opportunity to demonstrate leadership and innovate to contribute to improving department performance. Improved departmental performance can be obtained by increasing efficiencies in strategic sourcing to lower costs, reducing or eliminating expenses, generating cash and managing risk.

To do this, procurement departments are developing strong interlocks with key stakeholders to provide visibility, avert risk and propose creative solutions. They are adopting new strategic sourcing approaches that include initiatives in purchasing, supplier health, risk management and supplier performance designed to improve efficiency and productivity.

For example, a U.K. government department is using spend analysis, sourcing and contract management procurement software to source and manage more than £2 billion of their annual spend. With modern technology, they were able to implement reverse auctions, assess and help ensure security credentials of key suppliers, and review sustainability and recycling capabilities and performance data for their supply base, among other benefits.

To deliver sustained cost savings, the sourcing department must either extend, or develop, a strategic focus. As a first step, some organizations start by creating a commodity council and associated centre of excellence to focus on greater efficiency and effectiveness. These centres let participants share expertise, experiences and leading practices. Responsibilities for the council range from initial involvement with stakeholders to ongoing supplier relationship management. They expand the traditional role by developing commodity strategies and implementation plans, then apply a consistent methodology by gathering customer requirements and demand management data, followed by analyzing market intelligence on trends, buying patterns and industry-specific data.

Typically, there are seven critical steps organizations take to develop their journey to strategic sourcing. These steps are applicable whether the strategic sourcing is in defence or another government department.

Most organizations will initiate this strategic journey by conducting a spend analysis. This involves collecting and analyzing category baseline spend data, identifying potential opportunities and re-evaluating project scope. It is then essential to determine business requirements. This involves assessing current and future department needs and challenging internal requirements to properly identify real opportunities to reduce costs while sustaining, or even improving, quality and service. A market analysis study will help determine the supply market in order to form category strategies that match department requirements with supply market capabilities. Markets are always evolving so it is important to conduct this market intelligence analysis regularly.

Departments will then strategically develop a category strategy. By identifying the potential strategic alternatives and analyzing each option, departments can select the most appropriate sourcing strategy per category. Supply market capabilities can be matched with business requirements to create a strategy and priorities for each category that significantly reduces the total cost of ownership.

Strategic supplier selection and negotiation follows. It is imperative to provide a fair, consistent and structured approach to the identification, evaluation and qualification of suppliers, as well as the subsequent selection of suppliers to support departmental objectives. Above cost reductions, sourcing also has a critical role in negotiating competitive terms and conditions that optimize cash.

Developing an implementation plan that provides a structured approach to supply transition plans and ongoing management of supplier performance are the final pieces to the path toward more strategic sourcing. By helping ensure the performance of internal users and the supply base, the meeting of business requirements and contractual terms, and the capture of savings and benefits, procurement teams can continue to transform operations, provide greater insight into vendor spend, contract and operational performance and deliver continuous improvements to supply relationships.

Pairing commodity council and centres of excellence with these steps toward a strategic sourcing approach, can lead to potential cost savings ranging from two to 15 percent. By adopting a strategic sourcing approach that includes initiatives in the areas of purchasing, supplier health, risk management and supplier performance, sourcing and procurement leaders in all government departments can help drive efficiency and productivity for stronger organizational health. In doing so, they have the opportunity to create a new roadmap for the smarter government supply chain of the future.

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