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3 steps to strategic sourcing
To become a world-class procurement organization in the 21st century, a company requires four competencies that will enable it to effect strategic sourcing and transfer value throughout the supply chain from supplier to customer. These four competencies are the building blocks that support value creation. They are:
- The competencies needed to get the goods where they need to be, when they need to be there;
- The competencies required to anticipate and meet future demand;
- The competencies to do so in a customerdriven environment; and
- The competencies necessary to manage the flow of information throughout an extended supply chain.
Most companies face a number of challenges in trying to determine their current level of those competencies and in transforming their organizations to achieve the highest level of performance. In general, they face three barriers to doing so. First, they are not sure what competencies are really required to support a value-creating, worldclass, strategic sourcing and supply chain organization. Second, even if they could define "world class" in terms of competencies, they are not sure how to determine whether their sourcing and supply chain professionals (and the organization as a whole) can perform at the level of proficiency needed to achieve world-class results. And finally, most organizations struggle to determine the best way to support a transformation of individual and organizational competencies that will substantially—and sustainably—raise their competency level in the strategic sourcing and supply chain arenas.
[Figure 1] A formal framework for transformation Enlarge this image
[Figure 2] Example of rank ordering of gaps by job family Enlarge this image
[Figure 3] Learning path map Enlarge this image
[Figure 4] Learning path map Enlarge this image
[The Five levels of competency Enlarge this image
This article will discuss ways in which companies can overcome all of those barriers and move their procurement organizations to a higher level of performance.
What level are you?
Before any company can begin such a transformation it must identify its current level of competence. Procurement organizations fall into one of five categories: traditional, basic, intermediate, advanced, or value-creating. At the traditional, or lowest, level, purchasing tends to be almost exclusively transactional. At the basic level, the sourcing strategy focuses on reducing the price paid to suppliers. At the intermediate stage, procurement is charged with reducing the total cost of ownership. In the advanced stage, spending is visible throughout the entire organization, and automated systems track the total cost of ownership. At the value-creating, or highest, level, procurement plays a role in developing integrated business strategies across all units. As shown in the sidebar "The five levels of procurement competence," when performance in the major competency areas improves, an organization progresses to higher levels of maturity, and there are corresponding increases in shareholder value.
For organizations currently at the first four competency levels, a transformation initiative designed to change both people and processes can propel them to the next level. To guide their transformation efforts, they must adopt a formal process, such as the example shown in Figure 1. Applying a formal process helps companies ensure that the transformation effort addresses the three critical areas of need:
- The individual sourcing and supply chain competencies that are not up to world-class performance levels;
- The organizational sourcing and supply chain competencies and the related infrastructure (governance, decision processes, tools, and so forth) that are not up to world-class performance levels; and
- The cultural issues that could block any effort to address individual and organizational issues.
Successful transformations begin with a thorough competency assessment. However, perhaps the single most important component of any transformation effort, the one that correlates most clearly with success, is a "guided application." Whether the change involves a tool, an individual skill, or an organizational competency, the people who are expected to transform the way they do business MUST be shown how to apply those changes to their everyday activities. Organizations that overlook this imperative may achieve some of their goals in the short run, but they will never achieve an organizational transformation that will sustain world-class performance for the long haul. With that in mind, and using Figure 1 as a guide, let us examine the three key steps in the transformation to a high-performance, strategic sourcing organization.
Step 1: Assess proficiency and identify gaps
The first step in organizational transformation is to create a model that establishes the "to be" (desired) competency requirements and supports assessment of the "as is" (existing) competencies for the sourcing and supply chain organizations. The results of these findings then become the basis for determining the individual and organizational performance gaps and the appropriate strategies for addressing them.
Establishing the model: Supply chain competency models typically focus on seven to 10 functional competencies (for example, supply chain management, strategic sourcing, supplier development, and so forth) and define them for each level of proficiency. It's important to include competencies drawn from the strategic domain, such as change management, consulting, and team building, because a successful transformation requires that sourcing and supply chain professionals become internal consultants and change agents as well as process experts. Failure to include strategic competencies from the beginning means that they will not be directly addressed during later steps in the transformation process.
When validated against an organization's mission, goals, and culture, the model represents the "to be" vision that is the goal of the transformation effort. However, it is important that the model be tested for validity and applicability across the organization and then presented to management for approval as the basis for the transformation effort before it is formally adopted.
Assessing competency and analyzing gaps: Once a competency model has been developed and approved, a company can assess its existing sourcing and supply chain organizations relative to each competency that is reflected in the model. The difference between the desired ("to be") level of proficiency established by the model and the sourcing organization's current level of proficiency (the "as is" state) represents the performance gap that must be closed.
To address such shortcomings, companies need a clear picture of the gaps in proficiency in the selected competency areas. The most common approach to gathering the necessary data is to send an online survey to the organization's sourcing and supply chain professionals. Many companies choose this method because the responses can be quickly collected and analyzed. It is important to remember, however, that the objective is to accurately measure performance gaps and not to get the quickest answer possible.
For that reason, employees should discuss their survey responses in formal, individual sessions with their supervisors. This ensures that the data reflect a common judgment about each individual's level of proficiency. The meetings also provide an opportunity to open up a dialogue about change, and they are helpful in convincing managers and upper-level executives to accept the assessment results and endorse the resulting transformation strategy.
Knowing the location and extent of the gaps is only the beginning. As illustrated in Figure 2, individual and organizational competency gaps must also be:
- Compared within job families for each competency;
- Analyzed across job families to determine trends and common needs; and
- Prioritized based on the size of the gap, how critical the competency is for achieving business results, and the frequency with which the competency is required on the job.
The individual competencies and competency gaps can then be compared with organizational performance to see where people have the needed competencies but face organizational barriers that make it difficult for them to succeed. This will highlight the areas where the organizational competencies and infrastructure must be better aligned with the transformation effort in order to support sourcing and supply chain professionals' future development.
When a gap analysis lacks this level of detail, the transformation effort often drifts aimlessly and is abandoned because it does not have a clear direction. In other cases, a lack of detail leads to the adoption of strategies that respond to the most recent supply chain performance issues rather than address long-term needs.
Step 2: Establish gap-closure strategies
Once those assessments have been completed, the next step is to specify strategies to address the gaps. To obtain the necessary support, these strategies must be vetted at the company's executive levels. It is also important to recognize that not all individual gaps can be closed with training, and that not all organizational gaps can be closed by setting policies. Effectively addressing competency gaps requires weaving together numerous techniques to create enterprisewide strategies that are relevant to an organization's specific needs and goals.
The establishment of comprehensive gap-closure strategies becomes crucial to the success of the transformation effort. Doing so provides a clear pathway to follow from the start of the transformation to its end. It also helps to set expectations at a reasonable level by encouraging top executives to consider this a journey and not a destination.
Many organizations turn first to training as a means of closing a competency gap. Training is often a successful approach, but it must be carefully planned and managed. Executives often want an accelerated transformation schedule and expect training to be completed quickly. But there are two potential problems with an accelerated schedule. For one thing, attempting too much training in too short a time can affect productivity. Accelerated training schedules take people "away from their desks" for much of the time. As a result, the flow of daily business may be disrupted. For another, people need time to apply what they have learned in basic sessions to real-world situations before they go on to advanced practices. Given these considerations, it is fair to say that accelerated schedules seldom advance a transformation. Indeed, they are more likely to set it back or even derail the process altogether.
Step 3: Implement the transformation plan
The gap-closure strategies amount to a road map for the transformation. Once that all has been reviewed and approved by the top executives, then the company can proceed with implementation. The following sections will offer a brief overview of the most common gap-closure strategies relative to four transformation drivers: the curriculum plan, training, process reengineering, and transformation enablers (such as tools, procedures, and policies).
Plan the curriculum. Training is always a necessary element of a transformation. It's important to note, however, that not every training session is necessarily an enabler of change. This is the reason for creating a curriculum plan based on the results of the gap analysis. To start, it's necessary to create and document the "learning paths" for each job family that is part of the transformation effort. Learning path maps are important tools because they provide a visual display of who will receive which training, and in what sequence. (Figures 3 and 4 show examples of learning path maps for two different job families.) Comparing learning paths across job families helps ensure that the most critical competencies are addressed and that the training is integrated in a way that leads to reinforcement and growth. Based on the learning paths, companies can create detailed course outlines that guide the development and delivery of the training.
Some may look on documenting learning paths as time wasted and effort dissipated. Experience shows, however, that the time and effort spent on this type of planning always yields extraordinary dividends. With a solid, approved curriculum plan based on learning path maps in place, the transformation team can proceed much more efficiently and effectively with development and adaptation of training.
Develop and tailor training. The curriculum plan lays out the training to be conducted. Very few organizations can simply turn to a third-party vendor for offthe- shelf training programs and achieve the desired results. These programs often are too generic and focus only on overall concepts. Or they overlook the nuances of a particular transformation and create confusion when the language, processes, and tools adopted by the transformation effort differ from those presented in the training. It is critical that training fit the specific needs of an organization, and that means some development work will be inevitable.
Whether their training programs are developed inhouse or by an outside vendor, companies need to:
- Tailor content to the needs of a variety of job families and competency levels;
- Integrate industry-relevant materials with generic content;
- Provide real-world opportunities to apply the training;
- Ensure adherence to the training progression envisioned in the curriculum plan; and
- Coordinate content across multiple tracks and delivery modes.
Getting the right blend of general concepts and organization-specific applications is critical to transformational success. The best approach is to proceed in stages, beginning with initial training that focuses on overall sourcing and supply chain concepts and strategic competencies. Subsequent training can focus on key processes and enabling policies, tools, procedures, and so forth. This latter training should be delivered after participants have begun to engage stakeholders in a dialogue about the additional value they will receive as the transformation progresses.
Re-engineer processes. Keep in mind that process change is the engine that drives transformation. That is why a project's success depends in part on ensuring that the training directly supports the process changes that are the basis for the transformation. The most common areas targeted for re-engineering as part of a sourcing and supply chain transformation include sourcing, procurement, and supplier development.
Many organizations make the mistake of assuming that there are no other processes to consider. Equally as many make the mistake of assuming that the sourcing and supply chain organization is the only group affected when those processes are revised. At the same time, many fail to recognize that the sourcing transformation cannot address every process across the enterprise. There needs to be some balanced judgment about how far to extend the re-engineering effort.
A good guideline: If sourcing and supply chain personnel typically are involved in fixing problems that arise from a particular process, that process should be considered a candidate for re-engineering. That reengineering effort, not surprisingly, must involve representatives from a variety of other disciplines and functions in addition to the sourcing and supply chain professionals. Failure to get support from other groups for the re-engineering of processes is the single most common source of transformational failure in many organizations.
Deliver the training. The best trainers have experience with the content and, more importantly, have strong classroom skills. It is vitally important, however, that sponsors, leaders, and stakeholders of the transformation effort deliver at least portions of the content. The best way for an organization to send the message that it is serious about transformation is for top management to take part in the training sessions.
Implement the transformation. Working with functional leaders across the enterprise, the transformation team needs to embed the individual and organizational competencies throughout the organization and build the infrastructure necessary to support the transformation. Key tasks to be completed include:
- Enterprisewide delivery of the training curriculum so that sourcing and supply chain professionals and their counterparts in other areas have the competencies they need, when they need them;
- Development of electronic tools and linkages across the organization to facilitate world-class strategic sourcing and supply chain management;
- Alignment of decision-making and other governance processes to support the new sourcing and supply chain management processes; and
- Development of cross-functional policies and principles to drive implementation of common sourcing and supply chain management processes and practices across the entire organization.
There is, of course, much more to consider when implementing the transformation plan. But a few basic principles stand out as being especially important. Organizations must carefully orchestrate integration of the training, the development of tools, the alignment of decision-making, and the development of policies and principles. Attempting to achieve transformation while ignoring decision-making and governance processes does not work. And finally, training delivery must be planned and supported by the other transformation-enabling activities. This is true for any of the core transformation drivers.
Plan and prepare for the journey
The evolution from average to world class in strategic sourcing and supply chain management is likely to be time-consuming and challenging for any company. Is it worth all the effort involved? The answer is yes. In addition to the potential benefits described in this article, companies that complete the transformation process often achieve notable cost savings. One company recorded US $20 million in savings in the first year after completing a sourcing and supply chain transformation process. Another saw a 20-percent reduction in costs over the course of a three-year initiative that began with a comprehensive competency assessment. That initiative was so successful that the company conducted a second competency assessment to support further sourcing and supply chain transformations.
Taking adequate time to plan and prepare for this undertaking is the best way to shorten the duration of the transformation journey. Moreover, determining both the "as is" and the "to be" competency levels through a competency assessment provides clarity and focus for the transformation effort. When an organization does not know where on the competency spectrum it is located to begin with, it is less likely to end up at the level it wants to reach.
Most of the subsequent activities associated with the transformation can be best planned and evaluated by referring back to the competency assessment. This approach provides the glue that holds the entire transformation process together and ensures a successful outcome: a transformation that significantly increases the value that the sourcing and supply chain organization creates throughout the supply chain.
Before any company can begin a transformation to a strategic sourcing organization, it must identify its current level of competence in those areas. There are five levels of "maturity" relative to competence:
Traditional: Purchasing's primary role is to fulfill the needs of internal clients. Some approved vendors may be in place, and purchasing tries to ensure that business units buy from those suppliers. Other functional areas may make sourcing decisions and inform the purchasing department after the fact. The purchasing professional's day-to-day role is almost exclusively transactional.
Basic: The sourcing organization's strategy typically is driven by a corporate mandate to reduce the price paid to suppliers. There are defined and documented procedures, but they may not be consistently followed. While there is some effort to address strategic issues, the primary focus is on driving down prices. Purchasing personnel are included in the sourcing process but they do not drive the process.
Intermediate: These strategic sourcing/supply chain organizations follow a strategy that focuses on price as a major component of cost and is aligned with corporate business goals wherever possible. The organization's processes are based on strategic sourcing principles, and the group uses many sourcing techniques with success. Business units are included in the process but do not always respond when asked to participate in strategic sourcing initiatives. The majority of the organization's spend is visible, and analysis focuses on reducing the total cost of ownership.
Advanced: Strategic sourcing is firmly embedded in the organization's supply chain. Supply chain and strategic sourcing strategies are integral to the company's overall strategy for future growth. The business units welcome participation on cross-functional supply chain and strategic sourcing teams, support the sourcing process, and actively partner with the supply chain/strategic sourcing organization. The organization's spend is visible, and analysis is supported by automated systems that track total cost of ownership.
Value-creating: In these world-class sourcing organizations, the head of supply chain and strategic sourcing is at the C-level in the company. Supply chain and strategic sourcing processes are recognized as value creators throughout the company. The supply chain/strategic sourcing organization helps business units and corporate leaders develop integrated business strategies. It is often asked to be the enterprise's leading change agent and innovator.
Few companies have achieved "value-creating," or world-class, performance in their procurement organizations, according to the results of a recent benchmarking study conducted by CSCMP and the consulting firm The Mpower Group. The survey of CSCMP members used a classification system developed by the latter for ranking a company's procurement "maturity level." The overall maturity level represents a composite average of a company's performance in each of seven core dimensions: change management, consulting and facilitation, project management, supply chain management, strategic sourcing, negotiations/contracting, and supplier management.
Performance in these areas was rated on a five-point scale. Under that rating system, companies were classified as traditional (lowest level, or 1 on the scale), basic (next level, or 2), intermediate (3), advanced (4) or valuecreating (5). (For definitions of each level, see the sidebar "The five levels of procurement competence.")
The joint study, which garnered 48 respondents, was conducted during the first quarter of 2009. Two-thirds of the respondents worked for manufacturing companies, and 44 percent said their organizations had purchasing budgets of more than US $500 million each year. Half of the companies employed more than 2,500 people, and 79 percent of respondents characterized their companies as being global in scope. As for the respondents themselves, most were domiciled in the United States but all major continents were represented. Nearly half (48 percent) of the respondents held titles of director or higher. Fortyfour percent worked in the sourcing, procurement, or supply chain areas of their companies; the rest were in logistics, operations, or "other."
The average maturity level for the respondents' companies was 3.2 on the five-point scale. This places the group as a whole slightly above the intermediate level. The individual competency with the largest percentage at the Intermediate level or below was supplier management, with 65 percent. This was followed by supply chain management (61 percent) and strategic sourcing (56 percent). It is interesting to note that these are the core process competencies for supply chain and sourcing professionals, yet survey respondents considered them to be the areas with the lowest level of maturity.
Based on the findings, the survey's authors concluded that few companies have achieved the value-creating, highest performance in any of the individual competencies, and none in the sample achieved that level overall.
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