Securing business partner commitment to sourcing

Positioning Paper Sourcing Alignment Strategy April 2012

Securing Business Partner Commitment to Sourcing

April 2013


Pressure on Multiple Fronts

While global sourcing is not a new phenomenon, several factors are currently lending it new urgency. In particular, procurement executives are feeling pressure from multiple constituencies to extend the supply chain and capture a range of new benefit The senior executive suite frequently leads the way by publicly committing to sourcing goods and services from low-cost markets as the principal strategy for neutralizing accelerating price inflation. Subsequently, Procurement is charged with executing on this mandate, which often takes the form of ambitious targets embedded directly into procurement executives’ performance objectives.

For their part, internal business partners often have incentives to pursue savings from low-cost country sourcing in response to two distinct factors: price pressures from their end-customers and the need for local sourcing capacity to support continued expansion of operations into emerging markets. Finally, perhaps the most alarming pressure comes from the supply base. Procurement’s exposure to the threats and opportunities of global sourcing is rising as more and more suppliers expand their own geographic reach. Therefore, Procurement must be prepared to cope with global supply chain risks and secure its “share” of the savings that suppliers are capturing from global Sourcing.


Securing Business Partner Commitment to Sourcing Strategy: 10 Conclusions

1. Beware Systemic Problems with Global Sourcing Savings Projections While traditional analytical models (and conventional wisdom) maintain that global sourcing initiatives almost invariably yield considerable savings, experience has identified two critical sources of savings erosion which these models rarely consider: 1) internal obstacles—business partners’ resistance to participating in or complying with enterprise sourcing opportunities represents a sizable lost opportunity, and 2) sourcing process costs—companies underestimate the high level of resources required for effective supplier identification, qualification, and on-boarding in emerging markets. These two often-overlooked challenges can rapidly diminish the returns from global sourcing initiatives if not well managed, potentially reducing savings by up to 75%. 2. Prevent (Substantial) Savings Erosion by Addressing Business Partner Nonparticipation and Noncompliance The scope of this guidance for Air Canada is the first challenge: internal obstacles that can erode the majority of global sourcing savings. Typical cost models focus solely on savings actually pursued in the market, failing to account for the share of spend that is held out of global sourcing initiatives due to business partner nonparticipation and noncompliance. In fact, procurement organizations rarely maximize leverage in global sourcing initiatives, which reduces overall savings potential and places agreed-upon preferred pricing at risk due to diminished spend volume. The imperative for procurement organizations aiming to increase sourcing value contribution is to address business partner resistance by improving alignment of sourcing strategies and business priorities, while establishing credible (i.e., objective) methods of resolving incidents of noncompliance. 3. Replace Current Sourcing Strategy Evaluation Criteria with Business-Centric Measures While most Procurement organizations screen potential sourcing projects with the right criteria—business impact and ease of implementation—the measures underlying those criteria tend to be skewed heavily toward Procurement metrics and objectives. Gauging “business impact” based on spend volume and expected savings, or “ease of implementation” according to the level of difficulty Procurement will face during implementation fails to account for the priorities and constraints of the business partners. To better align procurement proposals with business strategy, the procurement function at one of our clients explicitly incorporates business-centric criteria in their project evaluation, including measures of “criticality to business operations” (impact on the business’s top operational priorities) and “maturity of implementation” (Procurement’s level of experience deploying similar strategies with other businesses). 4. Evaluate Alignment at the Portfolio Level to Inform Resource Allocation Trade-Offs During sourcing project prioritization, individual assessments of project “fit” with business priorities are necessary but not sufficient, because they provide only a piecemeal view of the overall sourcing strategy. To understand the relative value of each potential project and the trade-offs involved, Procurement must present sourcing proposals as options within a larger portfolio of opportunities. Our client’s procurement function evaluates the impact of each proposal relative to the entire set of proposals, then works with business partners to determine the mix of sourcing projects that best addresses business priorities and the resources needed to execute on them. 5. Promote Sourcing Strategy Development as a Business-Led Process Unfortunately, business partner reluctance to participate in enterprise sourcing initiatives is usually rooted in skepticism and mistrust: Procurement is viewed as lacking a detailed understanding of business unit sourcing needs and unable to fairly represent those needs if they come into conflict with enterprise-level sourcing objectives. European insurance provider Aviva takes an innovative approach to building business partner trust and commitment at the outset of enterprise sourcing initiatives by designing the sourcing strategy development process around the principle that business units should take the lead in creating and defining the strategy. While the Procurement group provides guidance along the way, business units have the central responsibility of establishing and prioritizing the sourcing agenda based on their savings ideas and their performance objectives.


Securing Business Partner Commitment to Sourcing Strategy: 10 Conclusions

6. Remove Implementation Roadblocks by Involving Buyers in Sourcing Plan Approval and Definition Because resistance to enterprise sourcing initiatives frequently occurs at the implementation stage -procurement leaders are in full support but individual buyers oppose plans they believe are at odds with their individual sourcing requirements. Procurement must adopt targeted approaches to enfranchise skeptical buyers. We propose that Air Canada adopts its sourcing strategy development at two stages. First, once business leaders have collectively proposed a set of potential sourcing projects, a mandatory two-week “cooling off” period enables business unit procurement leaders to stress-test proposals with key buyers and subject-matter experts before deciding whether to participate. Second, following project approval, Air Canada could designate business unit buyers to define the parameters of sourcing contracts (with the help of commodity and functional experts) to address buyer concerns about alignment with their specific sourcing requirements. 7. Develop Decision Rules to Identify the “Critical Few” Sourcing Protocols that Must be Globally Standardized All too often, procurement organizations seeking to reduce sourcing risk and supplier cost-to-serve establish overly prescriptive sourcing policies that unintentionally increase complexity and generate backlash from business partners. To balance the two competing demands—enterprise process consistency and local flexibility— Air Canada could institute a set of decision rules to objectively determine which activities and policies require global standardization and which can be decided at a local level. The “litmus test” strictly limits standardization to the few activities necessary for the well-being of the enterprise—where process variance cannot be tolerated—while giving business partners flexibility to customize the majority of their sourcing activities to meet local needs. 8. Limit Early-Stage Sourcing Process Variation to Permit Needed Flexibility During Implementation The level of activity standardization varies significantly depending on the stage in the sourcing process. One approach requires greater standardization early in the sourcing process, as this is the time when Procurement must establish a solid foundation that will guide future supplier relationships. On the other hand, it allows for greater customization of sourcing activities during the implementation stage—when activities vary the most from supplier to supplier, business to business—confident that early-stage process controls have already ”locked down” critical areas such as nondisclosures or quality standards. 9. Establish an Objective Framework to Eliminate the “Politics” from Noncompliance Resolution In most organizations, efforts to resolve business unit noncompliance with enterprise spend initiatives rely more heavily on political gamesmanship than rigorous analysis of the facts; the result is either premature acquiescence to business partner objections (and significant lost leverage), or mandated compliance regardless of relative costs or benefits. DuPont’s procurement organization is able to bypass the politics with an objective and transparent process which focuses on surfacing the root causes of noncompliance and reaching decisions based on both business unit and enterprise impacts. DuPont’s fact-based approach serves to instill confidence among business partners that their issues will receive a fair review. 10. Treat Exemptions from Spend Agreements as Temporary and Addressable Once a business unit is released from an enterprise sourcing initiative, the buyer typically moves on to the next project and ceases efforts to bring the exempted business unit “back into the fold.” At DuPont, however, approved exemptions come with a “sunset” provision—a commitment from the business to work with Procurement toward participation in the preferred contract at a defined point in the future. This commitment assumes the form of an action plan, which Procurement uses to close gaps in existing internal processes and supplier capabilities that prevent business unit participation and diminish overall savings.






Examining the Economics of Global Sourcing

An analysis of the cost differences between traditional and emerging markets for a given category—in this case, industrial products - demonstrates the considerable savings generated by less-expensive labor and materials and government incentives in emerging markets, contributing to 50% total savings on manufacturing costs. At the same time, emerging market sourcing imposes greater costs than traditional markets in several key areas: higher logistics and inventory costs due to longer supply chains, greater management costs to oversee remote and (often) unfamiliar supplier relationships, and higher taxes and duties. While these costs can reduce net savings by roughly half, emerging markets still provide a significant cost advantage (25% in this case).

Experience finds, however, that typical cost models fail to account for two factors which further erode emerging market savings and for which companies are less prepared: • Internal Obstacles—When business partners resist participation in or compliance with sourcing opportunities, the volume of spend covered by the agreement is diminished, which in turn reduces the overall level of savings achieved. • Sourcing Process Costs—Supplier identification, qualification, and on-boarding tend to be very resource-intensive in emerging markets, yet typical cost models omit these, accounting only for ongoing management costs.


An Incomplete Picture


Procurement – Business Partner Strategy Misalignment


Sourcing Strategy Alignment Screens


Lost in Translation



Sourcing Strategy Alignment Screens

Like many procurement organizations, Air Canada is focused on expanding business unit participation in global spend agreements It is not entirely a-typical to have less than 40% of spend centers participate or align with the strategic sourcing organization. The lack of clear alignment between procurement priorities and business objectives is perhaps a great cause of concern for Air Canada Such procurement – business partner alignment challenges are not uncommon in large enterprises. In our experience, we can typically point to three underlying causes: 1. Different criteria for success: - procurement’s objectives

often differ from the priorities of the business (and in some cases actually conflict)

2. Subjective evaluation of business alignment: - buyers and

category managers struggle to interpret business priorities and map them back to sourcing projects

3. Fragmented view of strategy impact: - Procurement

typically develops and presents sourcing proposals at the project level, making it difficult to anticipate the portfolio-level impact on other critical business initiatives (such as trade-offs required)

We propose that Air Canada procurement clearly link its sourcing proposals to the business’s top priorities in order to secure business partner participation in global spend agreements.

We propose that Air Canada recasts its

sourcing project prioritization around three new disciplines:

• Business –based project evaluation

criteria that help sourcing managers view sourcing projects through a business lens;

• Well-defined assessment scales to ensure consistency when evaluating business impact and implementation

• Portfolio-level analysis that places individual sourcing projects within the context of the larger portfolio of proposals

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Component 1: Business-Centric Evaluation Criteria

At most organizations, the decision to pursue a particular sourcing project depends on analysis that considers two broad criteria—the business impact of a project and the difficulty of implementing the project. Where this analysis falls short is that Procurement usually defines these screening criteria based almost exclusively on what matters to Procurement: amount of spend, expected savings, and the level of difficulty Procurement will face during project implementation. While these are certainly valid criteria, they do not adequately account for impact and ease of implementation from the business partner’s point of view. While we assume that Air Canada’s evaluation criteria are organized around the same general objectives (business impact and ease of implementation), we suggest that Procurement expand the set of specific criteria to capture much more of the business units’ perspective. For example, “business impact” goes beyond measures of spend and savings to encompass strategic alignment, criticality to business operations, and five-year value potential. Likewise, “ease of implementation” assesses the likelihood of a successful implementation based in part on unconventional variables such as the organization’s collective level of experience with this type of project implementation, and the complexity of existing relationships among project stakeholders.

For one of our clients, the global category managers are responsible for using the criteria to screen their sourcing proposals, with the goal of developing a prioritized list of potential sourcing projects. Sometimes the evaluation is a unilateral exercise, in which Procurement conducts the initial analysis and then shares findings with the business partner. However, in situations where the business unit is particularly engaged in a spend category or sourcing strategy, the evaluation is collaborative between category manager and business executive(s) from the outset. In sum, Our clients' evaluation criteria are designed to frame the evaluation around the impact on the business partner, not just Procurement. In establishing well-defined, business-oriented criteria for each new variable, our client equips their sourcing managers to examine projects from a business perspective, with the ultimate goal of prioritizing projects with the greatest overall value.


Through a Business Lens

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Component 2: Consistent Scoring Thresholds

Having defined a robust set of project evaluation criteria, our client recognizes that their value as a prioritization tool can still be undermined by the simple fact that different buyers and sourcing managers will score those criteria differently, depending on varying experience levels, business knowledge, and situation-specific influences. To address this uncertainty, our client has taken the extra measure of explicitly defining a set of five scoring thresholds for each of the 13 criteria. The thresholds are customized to each criterion, organized around either quantitative ranges or qualitative “degrees of impact.”

By detailing scoring thresholds, our client has developed a set of standardized screens that calibrate the “fit” between sourcing proposals and business strategies. Buyers now have a basis for engaging with business partners around essential questions of “fit” and impact, offering even the most inexperienced buyers a ”road map” of critical issues to consider and evaluate. Overall, the evaluation criteria provide Procurement with a more accurate and consistent view of where opportunities for business unit partnership are most promising.

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A Common Measuring Stick

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Component 3:Portfolio Segmentation Grid

Beyond improving the assessment of “fit” between individual sourcing projects and business unit priorities, Procurement must also consider the portfolio impacts of each proposal. Effective prioritization requires a joint understanding (category manager and business executives) of the relative value of each potential option and the trade-offs involved. To that end, our client deploys a portfolio segmentation grid after all proposed sourcing projects have been scored for business impact and ease of implementation. The grid serves as a “roll-up” of proposed projects, mapping individual opportunities within the context of the entire sourcing strategy. Where multiple business units have been involved in the evaluation, the impact and implementation scores are roughly averaged across those business units. The portfolio view enables category managers and business partners to jointly determine which projects to pursue, which to reject, and (most interesting) where opportunities exist to modify a project to increase its relative value in the portfolio. In some cases, a sourcing proposal is adapted to align more closely with a business priority. In other situations, the potential value from a sourcing project is so compelling as to prompt the business unit to revise an existing strategy.

Our client reports that business partners had historically been frustrated by Procurement’s inability to effectively make resource trade-offs when proposing sourcing project options. The portfolio segmentation grid makes trade-offs much clearer, and further enhances prioritization by grouping projects into three resourcing designations based on their grid position: 1) Complex projects—high impact, difficult to implement; 2) Collaborative projects—moderate impact, moderate ease of implementation; and 3) SWAT projects—low to moderate impact, straightforward implementation. These designations define the overall level of resource commitment and the allocation between Procurement and the business units. Our client strives for a healthy mix of project types, citing a portfolio distribution of 30% Complex, 40% Collaborative, and 30% SWAT as their goal. This ensures that Procurement is contributing to a blend of tactical and strategic business goals, as well as immediate business needs and long-term objectives.

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A Comprehensive View of Strategic Fit

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Anchored to Business Objectives

The fundamental changes that our client has brought to its sourcing project evaluation process—business-focused project screening and collaborative prioritization—enable Procurement and business partners to craft mutually beneficial sourcing strategies that clearly link to principal business objectives. Procurement now has the opportunity to participate in the strategic planning dialogue and target projects to support those Objectives.

An example from our client’s Lubricants Market Sector demonstrates the connection between sourcing projects and the business unit’s strategic objectives. To support the business unit’s objective of markedly increasing sales of lubricants in China, Procurement will work with business partners to source 40% of spend from emerging markets by 2013. In addition, Procurement will help the business source more content locally by identifying new emerging market sources and improving product margins.

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VRM Enabling Tools Focus

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Operationalizing the Governance Framework with Tools and Templates


Operationalizing the Governance Framework with Tools and Templates Anchored to Business Objectives

The fundamental changes that our client has brought to its sourcing project evaluation process—business-focused project screening and collaborative prioritization—enable Procurement and business partners to craft mutually beneficial sourcing strategies that clearly link to principal business objectives. Procurement now has the opportunity to participate in the strategic planning dialogue and target projects to support those Objectives.

An example from our client’s Lubricants Market Sector demonstrates the connection between sourcing projects and the business unit’s strategic objectives. To support the business unit’s objective of markedly increasing sales of lubricants in China, Procurement will work with business partners to source 40% of spend from emerging markets by 2012. In addition, Procurement will help the business source more content locally by identifying new emerging market sources and improving product margins. While each of the selected global sourcing projects has a clear success measure attached, it is important to note that these are business-oriented metrics (e.g., year-on-year sales growth), rather than Procurement-centric objectives, such as savings.

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Securing business partner commitment to sourcing

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