Sourcing has become a strategic enabler for organisations. This is not surprising as research reveals that 70% of the costs of manufacturing firms is from raw materials and procured goods and services (Kausik & Mahadevan). In some industries, purchasing has three to four times more opportunity for profit improvement – compared to staff retrenchments (Andersen & Katz). And practically speaking, that is over and above the huge economic effect that retrenchment would have on an already ailing South African economy.
Used wisely, sourcing has a huge impact on organisational sustainability. However, one not need to look far to see examples of sourcing events that go wrong, whether in the public or private sector. But why? What can we learn from the mistakes and missteps of sourcing failure?
1. Lack of strategic vision
Strategic sourcing has become such a buzzword, which means sometimes that organisations fall victim to employing inexperienced or poorly prepared consultants to design sourcing strategies and methodologies that, in essence, are a rehash of the AT Kearney 7-step sourcing process. A good consultant, on the other hand, will get to know your needs and fit the programme to you, keeping your goals and needs top of mind. There is still much value in AT Kearney’s theory though, which emphasises the importance of a sourcing strategy, further recommending that this strategy should be designed by cross-functional teams and informed by market intelligence.
In this theme sourcing events fail when they lack strategic sourcing decision-making. This is because sourcing strategies are based on operational metrics such as cost, quality and delivery. The sourcing strategies that fail do not incorporate, in their decision-making, an assessment of supplier capabilities such as quality management practices, process capabilities, management practices, design and development capabilities, and cost reduction capabilities of the suppliers (Talluri & Narasimhan). Poor sourcing decisions are made on narrow-minded criteria which results in a tactical sourcing event for a strategic category.
2. Skills, skills, skills
The evolution of sourcing has been influenced by globalisation as has so many other practices and industries. Global sourcing and technology all make for complexities in sourcing events. Therefore, the sourcing skills required historically are vastly different to the sourcing skills needed today. Having said this, in some cases historical sourcing skills were mismatched in the first place as traditionally sourcing people often came from a buying administration background. As organisations began to recognise the strategic nature of procurement and sourcing, the staffing of sourcing underwent revision in many companies, but often there was too little investment made on the people in these functions. As a result, there is a skills deficit in strategic sourcing and thus a gap in implementation of the sourcing events, and a real need for professionalisation across the space.
3. Sourcing hamster wheel
When sourcing events are steam-rolled on auto-pilot and repeated because the demand for the product or service still exits, I call this the sourcing hamster wheel effect. Always moving, never forward. If there is no effective performance measurement indicator, no market analysis, no feedback and no continuous improvement, then the same mistakes will continue to be made. In these examples there is, no essence, no understanding of the core of strategic sourcing, but rather a repeat of a sourcing event without re-evaluation.
Strategic sourcing is “defined as an institutional sourcing and supplier management process that continuously improves and re-evaluates the supply chain activities of the company. It is an iterative process that cuts cost and reduces risk, while building better relationships with fewer more critical suppliers” (GE Capital, 2012)
Without monitoring and evaluation there is no way to know if the sourcing strategy is aligning to the supply chain activities of the organisation, or the overall organisation strategy. A lack of an understanding of the very tenets of strategic sourcing leads to a hamster wheel effect and a sourcing event failure.
4. Political Intervention
Political intervention (with sourcing in the public sector) is an evident contributing factor to the failure of many sourcing events. Political intervention has long reaching effects on both the organisations that are subjected to it as well as the overall economy as issues of service delivery are compromised. Additionally, potential further funding is compromised as financiers are loathe to fund institutions where failures in sourcing events are common place.
However, meddling and intervention is not limited to public sector sourcing. Private sector sourcing is sometimes mired with board, shareholder or executive intervention that is not subject to the same public scrutiny. Still, the executors of sourcing event can attest to the failures of sourcing events due to this kind of intervention.
Ultimately strategic sourcing done well can help increase profits and improve competitiveness of the organisation. Done poorly it can bring immense negative reputational damage for an organisation. In order to circumvent these failures, the follow is generally advised:
a) CEOs and members of the C-suite of organisations need to invest in sourcing departments to reap the benefits and champion sourcing strategies to influence organisational strategies. This places emphasis on ensuring that a long-term sustainable sourcing strategy is developed and implemented.
b) Investment in re-skilling and upskilling sourcing practitioners is imperative. Furthermore, recruiting sourcing experts with the requisite skills is important. Neglecting investment in sourcing resources can lead to set backs in time, profitability, efficiency and governance.
c) And finally, the recognition of the fact that developing robust governance structures that prevent political and other intervention is critical.
Lessons should be learnt from failures in sourcing events, to ensure that when we look back, we ask ourselves, both what has changed and what we learnt.
Article originally appeared in Bespoke: http://www.bespoke.co.za/index.php/articles/355203-learning-the-lessons-what-causes-sourcing-events-failures-by-ayanda-nteta
Contributed by: Ayanda Nteta (FCIPS, MBL), a supply chain executive, academic and feature writer for Bespoke Bulletin