The trend toward strategic purchasing is no longer just a vague goal among purchasing professionals. A new survey by Purchasing magazine shows that 71% of U.S. corporations have begun a formal strategic sourcing program and another 24% intend to start one. Only 5% are on the sidelines when it comes to strategic buying.

That's a sea change for U.S. purchasing, long criticized—justifiably so—for excessive focus on tactical functions: seemingly endless processing of purchasing orders, checking on delivery status of missing items and generally providing limited contribution to corporate profitability. Such approaches often resulted in engineering-driven supplier selection processes that resulted in huge numbers of suppliers commanding—and receiving—premium prices and supply chains so complicated that inventories became bloated and impossible to offload when business crumbled, as it did in 2001.

"Strategy provides the direction that is so critical for a supplier community to be effective," comments Garry Berryman, vice president of materials management at Applied Materials in Santa Clara, Calif. "Leadership can see both upstream and downstream in a way that no other segment of the value stream can see."

Definitions of strategic sourcing are at times ubiquitous. For purposes of this research project, Purchasing magazine defined strategic sourcing as a systematic process that begins with thorough analysis of spend across an enterprise and then organizes that spend focusing on selected suppliers for best results on cost, product development, quality and services.

Strategic sourcing has soared in recent years because purchasing has changed so dramatically. Historically, U.S. companies were highly integrated and bought about 30% or so of cost of goods sold. "Outside materials/services (now) account for almost 70% of average corporate expenditures," comments Ernest G. Gabbard, the top buyer at Allegheny Technologies, a specialty steelmaker in Pittsburgh.

As suppliers' roles have grown, purchasing departments have used strategic planning to focus on the best suppliers. Benefits: Better pricing through leverage and the potential for bigger suppliers' role in design and supply chain enhancement.

Eighty-six percent of the respondents to the new Purchasing survey are reducing their supply base or have already completed a major overhaul. Only 14% have no plans to reduce supply base. Those organizations are generally smaller, engineering-driven or still fail to see value in the power of purchasing.

In 2001, about 80% of Lucent's indirect spend was with about 20% of the supply base. Now about 80% of the spend is with 3.5% of the supply base. "This concentration enables us to be focused and dedicated to our suppliers," says Joe Carson, vice president of supplier management at Lucent.

Honeywell, meantime, launched a global supplier rationalization program that reduced its supply base in the 40%-50% range.

More often, companies establish commodity teams that attack specific categories. Examples from the survey:

• Shiloh Industries of Cleveland, Ohio market tested personal protective equipment suppliers and reduced from six to one, recording savings of 24%.
• SPX Corp. of Southfield, Mich., narrowed printed circuit board assembly suppliers to three.
• Johnson Shale Brick of Johnson City, Tenn., went from more than 20 office products' and MRO suppliers to just one for each category.

Once key suppliers are chosen, most supply organizations then negotiate long-term contracts that commit business in return for savings and other benefits. Seventy-one percent of respondents say they are negotiating more long-term contracts as a result of a move to strategic sourcing.

Ironically the most difficult aspect of launching a strategic sourcing program isn't getting CEO support, battling internal resistance or finding adequate resources, such as time and money. It's understanding what you spend: how much, what for and with which suppliers.

Nearly half of the survey respondents (46%) report that inability to get data is the single biggest problem. Many companies can't even identify how much they spend with a given supplier. One problem is that data is stored in many locations, which sometimes don't communicate with each other. Sometimes the data is stored using incompatible IT systems or nomenclature. The biggest stumbling block is that products are identified in totally different manners. Even within one division the terms box or flexible packaging may refer to different products. Supplier identification or naming is also often inconsistent.

Many exasperated teams often just go to suppliers and ask for reports on all sales within the company. Others launch lengthy and difficult standardization systems using systems such as UNSPSC (United Nations Standard Products and Services Code), whose code can be downloaded for free at www.unspsc.org.

That's why many companies launch strategic sourcing with category teams whose first duty is to analyze spend within those categories.

IBM, for example, established 18 direct procurement councils and 12 indirect procurement councils. The direct teams covered such items as logic, cables/connectors, chemicals, wafers and keyboards. Indirect covered such categories as technical services, software, telecommunications and printing services.

IBM achieved 100% control of all spend by 2002, up from 45% prior to 1995 when it launched its new purchasing program under the late R. Gene Richter.

In the Purchasing survey, only 15% report 100% coverage of corporate spend with a strategic sourcing process. About one in four respondents report coverage in the 75%-99% range, which is also quite impressive. Such data, however, is often suspect because it's difficult to determine how aggressively purchasing departments define spend in their organizations. The most aggressive, such as IBM, define all expenditures for any purposes. Many departments exclude items ranging from energy to consultants.

One of the benefits of good spend coverage is the ability to implement an effective electronic sourcing program. "E-supply management has limited impact if not preceded by strategic sourcing," comments Allegheny Technologies' Gabbard. The main advantages of electronic sourcing are speed and leverage. If you have a faulty process, electronic systems magnify the errors.

In the Purchasing survey, two of three respondents said use of electronic sourcing is important or very important in achieving the goals of strategic sourcing. Strategic sourcing would be important even in the absence of computers, but online systems dramatically enhance its value.

The most basic reason is simple communications that allow buyers to go into suppliers' proprietary systems and see exactly when products will be delivered. They can also view quality certifications online. Additionally, eRFX systems and reverse auctions are more powerful when suppliers are vying for bigger pieces of pie. The next phase is expressive bidding in which suppliers can actually manipulate lot sizes or delivery routes so they can offer maximum savings.

Most survey respondents say they combine strategic sourcing with online reverse auctions, but in a limited way. About half use reverse auctions but for less than 20% of their total spend.

The bigger payoff from strategic sourcing is closer supplier relationships. Fifty-nine percent of the respondents say they are deriving more value from suppliers through new product development or through supply chain enhancement. Tavnir Arfi, vice president, supply chain at SPX Corp. in Charlotte, N.C., says he is working with wiring suppliers on co-development. Textron's Bell Helicopter unit brought in Airgas to recommend all new in-plant delivery systems for packaged gas. IBM buyer-engineers meet with supplier R&D teams to make sure that IBM has access to the very newest developments before anyone else.