Strategic Sourcing and Purchasing

Pop quiz:

• How many people in your organization have “sourcing” in their title or functional expertise?
• Do these sourcing employees attend board meetings?
• How many “procurement” initiatives resulted in $250K in annual savings last year? How about $1M?

Keep your answers handy, we’ll need those later.

Don’t set and forget!

Almost every company, regardless of industry or sector, purchases in some form or fashion. Whether it’s staplers, rare earth materials, or components, materials need purchasing! Any business worth its salt wouldn’t pay any more for those components than they need to, but “the component order” (once it’s set up) becomes a set-and-forget administrative task. We’ll call that purchasing.

“Purchasing is a routine process of ordering that is guided by sourcing models and agreements” – Simplicable

What happens, though, if your company’s “component order” is a key component of the product you sell? Would that be wise to set and forget? Simplicable tells us “purchasing is a routine process of ordering that is guided by sourcing models and agreements.”

What is strategic sourcing?

Sourcing models, eh? Take car insurance; sure, you may have had the same company since you were 16 (and we hope that’s not true), but could you be getting better service somewhere else? Lower premiums? More features or coverage? How often do you shop around? This is a great example of strategic sourcing. Taking the time and effort to ensure key components and services are delivering the value your company needs to ensure healthy growth and profitability.

Purchasing and strategic sourcing aren’t exclusive; purchasing still happens so the business runs. Applying strategic thinking to the important streams of purchasing within your organization is a vital part of growth.

Purchasing is a key function and doing it well means manufacturers will have products to efficiently produce, have optimal cash flows from well-managed inventory, resolve or prevent quality issues in a timely manner and maintain good supplier relationships.  Sourcing isn’t more important, it’s just different and it’s something that most middle-market companies don’t do frequently enough to justify having as a core competency.

Why is sourcing important?

Sourcing is more active than purchasing, as it requires the management of your supply streams. Do your suppliers take as much pride in the component as you do? Do they ensure efficiency in distribution and manufacturing? Are they charging you too much?

Think back to your quiz answer: of the people in the organization (if there are any) with “sourcing” in their title, how much of their workday involves answering those questions about your supply streams? Do they fill out and approve buy orders from known vendors over and over again? If invited to a board meeting, could they explain to decision-makers why Vendor A has been a partner for such a long time when Vendor B makes an equal widget for 15% less?

Sourcing strategies often result in new suppliers for key components and services and that has risk.  Even when well managed these aren’t necessarily ones an organization should go through every year.

We’ve found Fortune 50 companies contain enough breadth to keep a sourcing team busy on a full-time basis.  In middle-market companies, we find a project-based approach, spending about six months every five years or so, is more reasonable.

If your organization isn’t currently operating with a strategic sourcing philosophy, it may be difficult to install from within; after all, most companies are at least somewhat resistant to change, especially if it might involve renegotiating or ending a relationship you’ve had for years. We’ve all had that friend or relationship we knew we needed to get away from, right? Don’t be afraid to accept the red flags and let go!

That said, sometimes it takes a friend to see the red flags you might not be able to. Someone to come in and point out the issues and even find you a better option. Forsyth helps you upgrade and move on from inefficient or hurtful relationships to get you moving in the right direction.

Forsyth Advisors helps companies improve profitability through material cost improvements, indirect expense reductions, and manufacturing efficiencies. With hands-on experience in private equity and on the front lines of manufacturing and purchasing, we bring a unique perspective and a history of results to manufacturing and value-added distribution businesses.

---

If you’d like to see what Forsyth can do for your specific business relationships, let us know and download a case study below!