Early 1980s

Prelude

Early 1980s. Increasingly complex companies experiment with more centralized/professional procurement-driven control over total corporate spending.

General Electric wins PURCHASING's 1984 Medal of Professional Excellence, in part, for its expansion of corporate contracting into "new and unusual areas such as travel." GE is credited also for pioneering "advanced [information] systems to accumulate data, analyze it, and share it on a real-time basis" and also establishing a standard corporate wide coding system for products—the granddaddy of corporate spend analysis.

Note: Such activities were not without risk. In fact, Morgan points out that the same "great audacity" that won PURCHASING 's medal for the GE group in 1984 may have played a role its quiet disbandment in subsequent years.

Mid-to-late 1980s

Companies work to centralize control over critical or strategic purchases. They also experiment with hybrid-ization between centralized and decentralized organizational structures.

A Xerox manufacturing division wins PURCHASING's 1985 Medal of Professional Excellence, in part, for its "drastic pruning of the supplier base, and establishment of a centralized commodity management setup with worldwide scope."

PURCHASING's 1987 Medal of Excellence article commending Chrysler says, "Procurement buys it all." This refers to direct manufacturing materials like steel, tires, and electronics, but also includes indirect buys like computers and transportation services. A particular innovation at Chrysler is its stress on "forward-looking commodity management strategies for every buying assignment."

Early 1990s

The phrase strategic sourcing wends its way into the business lexicon but refers, typically, to sourcing of manufacturing materials or components deemed strategic or critical to manufacturing competitiveness.

PURCHASING's 1992 Medal of Excellence story picks up the trail of Gene Richter at Hewlett-Packard where he refines his hybrid approach to strategic sourcing, emphasizing "detailed written sourcing strategies" and "obtaining divisioninvolvement and consensus."

Intel, PURCHASING's 1993 Medal winner, blazes a trail for purchasing into nontraditional spend categories. Intel applies purchasing disciplines to such areas as office furniture, copiers, security services, travel, advertising and promotion, technical publications, contract labor, trade show exhibits and capital equipment.

Mid 1990s

Sea change

Outsourcing takes off as a major corporate strategy. PURCHASING's annual Top 100 research shows an increase in average spend/dollar of revenue from 43% in 1996 to 48% in 2002. Raises strategic importance of sourcing. Increases importance of obtaining excellent performance and consistent process improvements from the supply base.

Economic growth revs up from an average 2.3% between 1990-1995 to 4% between 1996 and 2000. Despite this, growth in corporate profits goes AWOL.

Greenspan's Fed starts winning its war on inflation, making it difficult for companies to achieve profits growth through higher prices. Corporate costs for things like labor, healthcare, etc. continue to rise, raising the cost-reduction imperative.

Late 1990s early 2000s

IBM wins PURCHASING's Medal in 1999 for its transformation from "a collection of divisional purchasing groups into an integrated supply structure that recognizes the importance of suppliers in helping IBM maintain its leadership position in the technology marketplace." This includes early widespread deployment of e-sourcing tools as well as "development of (17) commodity councils aimed at leveraging IBM's vast worldwide purchases and improving supplier relationships."

For details, order PURCHASING's Book of Winners, 2nd Edition, covering 1984-2000, through the bookstore atwww.purchasing.com.

Late 1990s early 2000s: Meaning of the phrase strategic sourcing transmogrifies from 'sourcing of strategic materials' to 'applying standard, analytics-driven processes for sourcing any category of spend.'

Technology explosion offers corporations unprecedented opportunities to:

• Obtain real-time, constant access to spend data—as opposed to conducting manual, time-consuming and costly one-off spend analysis exercises.

• Deploy unprecedented tools for enforcing corporate rules like "no payables without POs."

• Use workflow capabilities to centrally monitor and control decentralized spend activity while simultaneously minimizing administrative work and associated overhead costs.

• Create competitive markets easily for spend categories rarely before subjected to competitive bidding.

Early 2000s

CEOs, under pressure from Wall Street to improve profit growth rates, give corporate buying organizations big mandates to pursue cost reductions, much of it through strategic sourcing of both direct and indirect spend. Examples:

• DuPont sets goal of reducing outside spend by 4%/yr.

• IBM articulates goal of consistently delivering "a 5% sustained competitive advantage, net of price increases or decreases, across its entire portfolio of external purchases."

• Executive managers at NCR ask procurement to deliver 4-7% supply-side savings over four years.

PURCHASING reports that Lucent Technologies, its 2002 Medal winner, has developed a margin-forecasting model that "accurately forecasts what profit margins will be for a wide range of Lucent products from four quarters into the future." That capability, PURCHASING notes, is a direct outgrowth of Lucent's move from a strongly decentralized purchasing/manufacturing model, under which only 30% of buys were leveraged to a Supply Chain Network model under which some 90% of total spend is leveraged by a global sourcing organization.

Companies run up against law of diminishing returns on strategic sourcing for direct materials buys, strike out into more other areas of spend not traditionally controlled by purchasing in order to continue delivering big corporate cost reductions.

PURCHASING buyer survey finds 77% saying their organizations are involved in services buys and 95% expecting purchasing's influence to grow over the coming five years. Spend categories over which purchasing is steadily gaining control or influence include:

• Consulting

• Advertising

• Marketing services

• PC maintenance

• Copier management

• Temporary employment

• Travel

• Catering/food

• Security

• Employee benefits

• Environmental svcs

Prologue

In its latest Cross-Industry Benchmarking Study, the Center for Advanced Purchasing Research ( CAPS ) places the average percent of total spend controlled by purchasing organizations at around 80%. That's up, by PURCHASING's estimate, from an average of around 45% as recently as 1996 and as low as 20% back in the preceding decades. One could argue all day about what such numbers really represent, or whether control is really the best word to use, or whether strong centralized control over corporate spending will be the problem U.S. manufacturing companies are struggling to solve in some five, 10, or 20 years time. But, while plenty of companies have decided—quite deliberately—to keep their buying power de-centralized, a majority of companies studied by PURCHASING in recent years seem to be moving in the direction of center-led total spend control. For this latter group, PURCHASING offers nine tips from purchasing organizations claiming to have expanded their control or influence over total corporate spending beyond the average (80%) to the extraordinary (90-100%).

1. Think long and hard about how you're going to define sourcing categories. Allow for lots of debate across the organization. Avoid simplistic delimiters like "direct" or "indirect" spend. Group according to similarities like raw materials, supply markets, product life cycles, market dynamics, demand and/or procurement levers, compliance mechanisms, enabling technologies, etc. Magic number: Most companies with spend at or near the $10 billion mark seem to settle in the vicinity of 20-30 major spend categories. Those major categories then break down into many minor spend categories, sometimes numbering in the hundreds, that use the same or similar sourcing/buying processes, governance structures, and supporting technologies.

2. Hire "scary smart" category managers then make them directly responsible to both corporate procurement and to the business-unit leaders that will be most directly affected by their activities. Expect these people to understand their industries, worldwide, as well as the suppliers' own strategists or securities analysts would.

3. Appoint a sourcing board of directors. Invite business unit leaders or VPs of sourcing to work as a group to oversee and approve category managers' activities.

4. Automate spend analysis. Get in a position to capture spend data on the fly, in real time. This may require a less-than-perfect classification scheme. Example: For the sake of automation, a company may decide to lump all transactions with supplier A into category X, when, in reality, the supplier A fits into both category X and category Y. Near-perfect real-time data costing very little to generate and available at any given point in time is better than perfect data costing many thousands of dollars to generate and only available in backward-looking snapshots every 12 to 24 months. Allows for improved monitoring and tweaking of contract performance based on real demand changes between major sourcing intervals. Allows for closer monitoring and validation of realized (versus predicted) cost savings.

5. Identify people in the organization who seem to have biggest interest in which suppliers the company uses. Ask them to routinely provide feedback on supplier qualifications and ongoing performance.

6. Fight for governance policies like "no PO, no pay". This sets up a framework for capturing spend data at point of spend rather than reconstructing at the accounts payable end. Allows for refinements in things like demand forecasting, budgeting, the writing of cleaner RFQ specifications, and negotiations with suppliers.

7. Make compliance easy. Where possible, build online malls or stores where supplier selection is a nonissue for budget holders. Build Web-based data-entry interfaces that take budget holders easily through required data-entry processes (where possible, use pulldown menus vs. fill-in-the-blank fields). Where sourcing data entry is particularly onerous, consider creating a small support organization to ensure it's done right. This is good customer service; it's also better for ensuring long-term integrity of spend data. Also: Train, train, train.

8. Go for big early wins to gain credibility, but, recognize the law of diminishing returns; balance with long-term activities aimed at improving supply chain processes and delivering year-on-year total supply chain cost reductions.

9. Publicize cost wins internally without making anyone look bad. Be careful about taking too much credit and do so only for ironclad cost savings. Make sure budget holders come out looking like heroes, not people who've been grievously misspending the company's money.