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Strategic Sourcing often seems as much an art as a science. While some sourcing initiatives achieve amazing results, others struggle to get off the ground. What makes one sourcing initiative great and another a disappointment?

Denali Consulting recently surveyed more than 50 Strategic Sourcing professionals – consultants and practitioners alike – to learn their secrets to strategic sourcing success. Ten consistent best practices emerged as "must-do" activities to drive desired results from Strategic Sourcing initiatives.

Ten Best Practices
1: Begin with an End State in Mind
2: Prepare Prior to Launch
3: Focus on People From Day One
4: Plan Early for Savings Tracking
5: Standardize Your Sourcing Process, But Be Flexible
6: Put Strategic Sourcing Into Context of a Holistic Category Management Process
7: Formalize Your Change Management Approach
8: Maintain a Commitment to Total Cost of Ownership
9: Use Holistic Measures to Track Success
10: Don't Shortcut Market Assessment: Use External Market Intelligence

1: Begin with an End State in Mind
We consistently heard from experts that too often organizations jump into a Strategic Sourcing initiative without thinking ahead to the end state. "Strategic Sourcing is a way of life, not a short-term initiative, and should be treated as such," stated one consultant.

If you interview organizations that get sourcing right, you will find they're organized, staffed, and operated differently than traditional Purchasing departments, and thinking ahead is the key to transitioning from purchasing to Strategic Sourcing.

Consider the initiative's end state. Who will be impacted as a result? Identify groups that would be affected by an initiative and bring them into the process from the beginning to enable transformation and change.

As with any business transformation initiative, it's important to start with the vision, then develop the strategy, and finally create the operational plan for executing the vision. Viewing Strategic Sourcing holistically, across all related supply chain business processes, will impact your transactional procurement, logistics, and supplier development processes, as well as your IT infrastructure, organization, and culture.

2: Prepare Prior to Launch
In addition to taking time to develop your vision, it's important to prepare operationally and organizationally before launching a Strategic Sourcing initiative. A lot of pre-work must be completed before the first sourcing team gets out of the gates. Team members have to be selected, notified, and trained. Steering groups must be organized. And a project management infrastructure must be installed.

In one of the best-organized efforts we've seen, management sent each sourcing team off-site for two to three days before they officially launched any initiative. This off-site session helped to kick-start the teambuilding process – members determined how they would operate as a team, selected team roles, and prepared detailed project plans. In addition, the team was immersed in Strategic Sourcing training. At the end of the session, these teams were prepared to "hit the ground running" with their sourcing initiative.

3: Focus on People From Day One
Most procurement organizations have a Strategic Sourcing process. Whether yours is a five-, six- or seven-step process, most organizations have similar activities and checkpoints. In more than 20 years of Strategic Sourcing consulting, we've never seen a client fail because their Strategic Sourcing process wasn't correct. The hurdles (and successes) are almost always attributable to "people issues." To get the people side of the equation correct, several factors must be considered.

Be up-front about expectations regarding time commitment to avoid bottlenecks in the future.
Use a formal, collaborative knowledge management program to capture and share sourcing process, category, and market information across the organization. Follow with a knowledge transfer program for future initiatives.
Consider an organizational structure that enables the new processes associated with Strategic Sourcing and supplier development.
Ensure team success by putting the right people, with the right skills, in place from day one, beginning with recruiting, through training and redeployment.

4: Plan Early for Savings Tracking
While Strategic Sourcing programs create benefits beyond simple cost reduction, cost is typically the reason most corporations embark on Strategic Sourcing in the first place. Figure out how you're going to track cost savings and other benefits from the get-go. Think about how you will establish your baseline and calculate savings while you are planning your Strategic Sourcing program. Get feedback from key stakeholders, inside and outside of the procurement organization. Your internal customers are the most important of these stakeholders, as they are the ones whose budgets will be most impacted by your Strategic Sourcing efforts. Their input and support regarding savings tracking will be key to the overall program's success.

5: Standardize Your Sourcing Process, But Be Flexible
Most sourcing managers we spoke with felt one of the key strengths of a formal Strategic Sourcing process was the ability to standardize the approach to sourcing. Standardization includes building the category spend profiles and specifications, creating total cost models, analyzing the supply market, developing sourcing strategies, creating the RFX, going to market, evaluating proposals, selecting suppliers, and implementing new agreements. Most Sourcing managers interviewed confessed that prior to having a formal sourcing program, the traditional approach to purchasing was more personal preference than a standardized process.

Learning from past sourcing teams and implementing a standardized, documented Sourcing process can guarantee repeated sourcing successes, improved processes, and quickly adopted new best practices and technologies. Some of the best organizations we've seen with regard to standardized sourcing processes use a web-based "Sourcing toolkit" that gives step-by-step instructions for each sourcing phase and includes standard templates for key activities. One company that we spoke with used a web-based toolkit to standardize their approach globally, across 40 locations in 20 countries.

Most sourcing organizations make the mistake of not allowing flexibility to manage complexity. While all those interviewed agreed the fundamental Strategic Sourcing steps need to be followed for all spend categories, most suggested there should be flexibility, or "versions," that vary slightly based on the characteristics of the sourcing category. For example, the level of rigor for supplier evaluation for an office products sourcing initiative would likely be different than that associated with an engineered products sourcing initiative. One respondent has three versions of a Sourcing process used for indirect materials, direct materials, and services. All processes have the same five basic steps, but each uses different tools and templates that are more applicable to the characteristics of the spend category.

6: Put Strategic Sourcing Into Context of a Holistic Category Management Process
Those who have worked in Strategic Sourcing for a long time understand that it is not the end-all process, but rather one key component of a more holistic category management process. As one Sourcing Manager put it, "If we only had Strategic Sourcing in our toolbox, we would have run out of opportunities long ago." In our experience, successful procurement organizations use a closed-loop process, most commonly called Category Management that includes:

An annual Spend Assessment to update category spend information, objectively access and estimate strategic sourcing or supplier development opportunities, prioritize sourcing or supplier development initiatives for the year, and create a sourcing and supplier development strategy for the coming year.
A Strategic Sourcing process to optimize the total cost for key spend categories when a competitive supplier selection and evaluation process is considered the optimal strategy.
A Supplier Development process to optimize the total cost for key spend categories when working with existing suppliers or contractors is considered the optimal strategy.
An annual category review process, which Denali Consulting calls "Value Discovery," that analyzes category demand and market information, as well as market and category trends, to determine the optimal category strategy for the coming year. This information feeds into the spend assessment process.

Be proactive about your category opportunities, and use tools, like spend assessment, and value discovery to deliver value.

7: Formalize Your Change Management Approach
Strategic Sourcing is a stakeholder-intensive process. Due to the wide range of materials and services involved, Strategic Sourcing affects almost every employee in an organization in one way or another. Strategic Sourcing also affects thousands of stakeholders in the external (supplier) community as well.

This isn't big news, as almost everyone interviewed admits change management is one of the most critical components of a Strategic Sourcing program; however, the differentiator among companies is the formality of change management. Those with the best results tend to have a structured change management approach to Strategic Sourcing, including:

A formal Executive Sourcing Steering Council (typically composed of the Supply Chain and Operational VPs) to approve sourcing team recommendations, set strategic direction, approve new initiatives, and provide overall project guidance.
Full-time project management resources to coordinate and manage all sourcing teams, stakeholder communications, and other related activities. Alternately, some companies use a cross-functional project management team (part-time resources) with a high degree of success.
Formal guidelines to select cross-functional sourcing team members, including the designation of senior team champions from the largest user organization.
Supplier councils to obtain feedback and involvement from external stakeholders.
Formal communications on a regular basis to internal and external stakeholders, including the use of hotlines or online tools to get feedback.
Lead by example and tell peer success stories when selling a new concept or project to a group.

8: Maintain a Commitment to Total Cost of Ownership
One of the key differentiators between Strategic Sourcing and traditional procurement is the consideration of total cost of ownership versus first price in making sourcing and supplier decisions. Many companies talk about total cost, but in the end select suppliers based on price. If you're serious about total cost of ownership – and we think you should be – use formal total cost modeling tools to create cost models for each spend category and select suppliers based on the lowest total cost of ownership. This concept tends to be as big of a cultural shift as Strategic Sourcing itself and will require significant discipline and a shift in skills to fully exploit. Additionally, total cost modeling is a very detailed process that requires a high degree of analytical capability to support.

A good example of this is a car purchase. If you make your selection based only on the purchase price, without taking into consideration other cost elements like gas mileage, scheduled maintenance, insurance, financing and residual value, you are not taking into account the total cost of owning and driving a car. The same could be said for Strategic Sourcing business decisions.

9: Use Holistic Measures to Track Success
As mentioned in Best Practice 4, executives will be most interested in savings tracking metrics, especially in the beginning. However, to ensure success over the long run, it's important to measure Strategic Sourcing accomplishments in the context of a holistic suite of metrics that address the total supply chain – across sourcing, transactional procurement, logistics and supplier development processes. Reducing costs or improving quality in one area could negatively impact another area, so it's critical to have a performance view of the entire Supply Chain. For example, if you buy a year's worth of material up-front, you may get a great deal, but it might negatively impact your inventory. We recommend using a holistic "dashboard" that tracks cost, quality, and service across all related supply chain processes. Also, don't just measure your suppliers, measure yourself from the suppliers' perspective – are you being a good customer?

Additionally, sharing the metrics and results of a program brings good energy to the table and encourages discussion about the program.

10: Don't Shortcut Market Assessment: Use External Market Intelligence
One of the most important parts of Strategic Sourcing is the external assessment phase – looking outside to understand best practices and supply markets relative to the category that you're sourcing. This will also help you determine whether it's the right time to open contracts for renegotiation. Yet, the external market assessment step is often overlooked. Many sourcing professionals are uncomfortable or unfamiliar with the external analysis phase of sourcing, and, as a result, focus most of their efforts on internal activities such as spend analysis and specification reviews. External Market Intelligence is as, if not more, important than internal category analysis. External Market Intelligence:

Identifies top suppliers, regionally, nationally, or globally
Identifies the key cost drivers of the spend category
Analyzes historical and forecasted cost trends for the category as a whole, as well as for key cost drivers
Identifies best practices used by other companies for specific spend categories
Quantifies total market size to better understand leverage potential
Documents trends around product substitutions, technologies, and global demand
Provides supplier strengths and weaknesses
Identifies potential supply risks

It's impossible to develop a successful sourcing strategy without detailed and accurate Market Intelligence.

Conclusion
If implemented correctly, Strategic Sourcing does more than add significant cost savings to your company's bottom line; it will improve your company's competitive position through the establishment of world-class supply networks. Given the growing importance of Strategic Sourcing to overall corporate success, it's critical to methodically plan and implement your Strategic Sourcing program. We hope Denali Consulting's insights will help your Strategic Sourcing program be the best it can be.

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