Leveraging Strategic Sourcing to Become a Best-in-Class Purchasing Organization

Steve Katz 

Hey everybody, and thanks for taking time out of your busy schedule to listen into our Hilco Global Smarter Perspective podcasts. As returning listeners know, I’m your host, Steve Katz. And if this is your first time listening to the podcast, we’re glad you could tune in. Today we’re gonna be talking about strategic sourcing for purchasing organizations. And we’ll dive into best practices for its implementation. And with us for that discussion is Steve Savoy from Hilco performance solutions. Steve is Associate Director for the company, and he’s very well versed and equipped to guide us through the nuances of how best in class purchasing organizations are, among other things using strategic sourcing to drive strategic value. So Steve, welcome to the podcast.

Steve Savoy 

It’s great to be here.

Steve Katz 

We’re glad to have you on and, you know, let’s dive right into it. If you could provide just a little bit of background on what strategic sourcing is specifically for those who don’t know, and maybe how it evolved and how it’s generally used today, that’d be great, great step for us.

Steve Savoy 

Yeah, great question. As we started this conversation on strategic sourcing, let’s take a step back and talk about this, in the context of our overall performance improvement services. Strategic sourcing is one of the kind of lead services that we provide, to rapidly give value to our clients. The other two are kind of lean manufacturing. And this is a great project, especially in situations where clients have high scrap rates, so lots of overtime, and the other standard costing, where we provide some value and transparency on product and customer profitability. So to kind of provide that context. And now let’s talk about strategic sourcing. Great. Yep. So procurement has evolved a lot over the over time, going back into ancient history. But generally, procurement is focused on buying goods and services for the lowest possible price. And in the kind of mid 20th century that they kind of the 70s/80s procurement functions started moving from just purely transactional, which is, “hey, here’s the purchase order, go buy some stuff, and make sure all the paperwork gets done” to being more strategic and being a better partner with the manufacturing operation. And with the product development team. Sure. Makes sense. Yep. And as businesses grew and competition increased, procurement became increasingly complicated as a function as they aligned that strategic work, and were part of the overall competitive plan to be best in class for whatever the industry is. The mid 80s, early 90s. In particular, there are some consulting practices that kind of codified a lot of this right out of the big fortune 10 companies, let’s say, and kind of move it into a lot of other factors. And one of the things they looked at was price not being the only thing that impacts the quality of a, of a product or service. And looking at kind of the whole cost of that transaction. So quality, reliability, innovation, those kinds of things started to become factors and doing stuff. And by the 2000s, of most kindof big Fortune companies were doing this. And it was starting to kind of ease its way into the middle market, where we provide most of our support.

Steve Katz 

Okay, so that’s, that’s good background. Thanks. Thanks for that. I think, just for those who may not be as familiar, that’s a good starting point. And so, you know, traditionally, as you look at strategic sourcing, what’s what’s been the reason for that sort of disparity you reference between the large companies and the smaller middle market firms in terms of adoption?

Steve Savoy 

Yeah, another great, that’s a really great question. And something we work with our clients a lot on. A lot of it is data. Right? So the big companies have, you know, very expensive ERP systems that record transactions and record a lot of data. And so, as data analytics became available, they started looking at that data and making decisions and helping use that information to guide their purchasing choices and things that they do. Also, these big companies have a lot of market power, right when you are, you know, Ford Motor Company and you’re buying stamping. You know, there’s a lot of people very interested in being your supplier when You are a more middle market sized company and you’re buying chemicals from Dow Chemical. You know, there’s not a lot of leverage in negotiating power, you know, that you have with them. And so the tactics and strategies look a lot different, you know, in those areas. So even folks that come from very large purchasing organizations with very good practices and processes are a little surprised when they find themselves that further down the food chain, either trying to kind of implement some of those tactics. You know, and of course, as the cloud computing and a lot of other things obtained, you know, more data is more accessible to the  market companies that we’ve worked with. But still, one of the things that’s missing is just the knowledge, we kind of broadly say, and not trying to be, you know, dismissive of anything. But you know, when you are part of GE, in purchasing, you go through a lot of training to be a GE purchasing manager. And it’s hard for other for middle market companies. And broadly speaking, again, there are a few companies, obviously, that are exceptions to the rule, but to kind of dedicate that same amount of time and energy to training kind of their team. And so what we like to do in Hilco performance solutions, and part of our work processes in general, is we work with people and teach them how to do this work. Right. So one of the things that we’re trying to do with our strategic sourcing practice, is teaching our client how to be more effective, how to be more intentional and purposeful, kind of in their sourcing activities, to understand the marketplace that they’re buying from, and to understand, where are their leverage points? And how can they kind of get the most value for their spend? So those are kind of the things that we like to focus on in our practice.

Steve Katz 

Okay. Yeah. And I would imagine, you know, particularly based on some of the things you just talked about, that when we look at various companies, both large and small, they’re utilizing procurement at quite different levels. You know, we talked about sophistication and resources and training. I guess what I’m wondering is, Can strategic sourcing really benefit an organization regardless of how deeply it has permeated that organization?

Steve Savoy 

Yeah, the short answer is, yeah, you know, we use something called the procurement maturity model, to help organizations kind of assess where they are, as far as their capabilities, and then to kind of put them on a path to growing capability. And so I’ll kind of outline that really quickly in terms of the stages in the model, and then we’ll kind of circle back and talk about, you know, how, at what point does it become helpful and not helpful to different sized companies, you know, so the least structured is a very informal, purchasing just purely as a transaction bill, the plant managers call someone up and says, Hey, order six more, you know, widgety things, and the person gets on the phone call, and just kind of orders them and they come into the facility, and they are off and running. You know, it’s not, it’s just that was a transaction, they bought it for market price. You know, typically, it’s kind of a full book value, so to speak. And, you know, kind of off they go doing their thing, and they don’t really have a plan for procurement and purchasing. You know, the next step up from that is where companies are more intentional, right. So they have, key suppliers they work with, they know what they’re working, you know, particularly they know, for their main things. So if you’re a stamping company, you understand your steel purchase, but maybe not other kind of supporting purchases, whether it’s the IT stuff that you use, or the indirect materials that you’re buying to support the production line. They are, typically allow each facility to have their own purchasing processes and their own purchasing suppliers. They’re not trying to leverage them and, you know, kind of the whole organization, Each plant has their own autonomy in their purchasing. And then the next step is when companies start to think about things from a commodity perspective. So now they think about their steal buying in a metal bend, and what are we buying holistically across the enterprise? Are there ways we can standardize alloys that we use? Are there ways we can standardize some of the chemical ingredients that we’re using in our processes? Are we looking at these things in a global perspective? Do we know? Are we buying just a local vendor because it’s convenient for us but we’re paying 30% more or have we looked overseas or even for other vendors who may have lower pricing and we have to factor in, you know, the shipping cost and other things with that, you know, are we getting a good deal? Kind of at the stage, kind of the companies have a commodity management, you’re doing commodity reviews, where you’re looking at how much are we spending? You’re looking at data, how much are we to expect these commodities to change in the upcoming three years. And then the final stage would be kind of a world class, or company organization, which incorporates all the things that we’ve talked about already. This purchasing organization now is deeply tied into the supply chain. They’re tied into the the product development side of stuff, there with the manufacturing team, they are highly sophisticated in how they purchase everything you know, that they do. They’re in consortiums and purchasing groups, you know, they’re combining their spend with competitors, maybe even or just other people near their industry to reduce the overall cost. Or maybe it’s a non strategic purchasing and non strategic sourcing thing. And as we talk to clients about this, the, you know, we, not everyone needs to be world class in this, right. So we’re not trying to just squeeze everyone into a particular pattern of spending or particular capabilities. But we do want everyone to kind of be what’s right for their organization. And for them to be as efficient in their procurement, they’re not wasting money and wasting resources within their team. And so that’s kind of how we use the maturity model to help company not only assess their current capabilities, and see where there’s some gaps, but also just set a goal for them to kind of aspire and move toward.

Steve Katz 

Yes, so that makes a lot of a lot of sense. And I think, if I’m digesting what you’re saying, correctly, you got you have different companies at different stages of this maturity model. So are there steps regardless of where a company falls in their adoption of strategic sourcing that any company that’s utilizing it should be undertaking to identify the best suppliers for its needs?

Steve Savoy 

Yeah, a great question. When we talk to companies is broadly, you know, there are a couple of things or a few things that all companies can do, and assess in their own capabilities just to move that next level of performance. You know, the first step, of course, is, you know, what are the what are the needs of the organization, from the procurement team? You know, what are the requirements of goods and services, what are the specification quantities that they need of all these different commodities and items that they purchased. And the second thing that we see a lot of companies not do a really good job of that would definitely help all of them do some market research, you start just even with Google, looking at other companies that provide these things, and kind of initiating a conversation with a company. You know, we’ve had a lot of companies that are very surprised with what they find even just Googling as far as capabilities and things. And the last thing I guess, I’ll say, and this broad kind of overview stuff, is talk with your existing suppliers, and make sure you’re understanding, you know, what their needs are, and just have open questions with them. You know, I’ll tell a quick story here, you know, I had a client, they were a consumer good kind of distributor and manufacturer. And they had a vendor in Asia that they worked with for years and years. But they always made their purchases with a spot buy. So they would come in and say, hey, send me 100 of these within meet, you know, that 10,000 of those other things. But they’ve worked with the supplier for years. And they had no intention of changing that supplier to a new supplier. They just always liked him, he did a good job provided timely and high quality product. And in that industry, it was very common to do thought buys. And so they had brought someone who had worked in that industry for years and years, they would have said that their procurement was that same class, because that’s what everyone did kind of in their industry. We came in and kind of talked to them about some of their vendors, this vendor and others, and said, Why don’t you put them on a long term contract? Right? And just be how that conversation goes like, well, it’s just not how things are done. And I said, just ask them the question and see what he says. Right? So they had that they asked them, they said, Hey, what do you think about this? We’ve worked with you, we’re not really trying to, you know, source these things, other places, would you find value in having a long term agreement with us? And his answer was, absolutely, if it in fact, I can give you a 15% discount on everything. If you can give me a five year contract. You know, you don’t have to guarantee volume, but just, you know, a letter that says I’m your source for these things for the next five years. And they were like, really, and he explained because they had this great relationship over the years. He was they were able to have a conversation. And he said that contract will Allow me to go to a bank and get financing. And It will allow me to expand my business, you not only our capabilities to supply things for you, but also allow us to buy capital expenditures, capex that will help me grow into other customers as well. So that was a conversation that they would have never had if they were only listening to people who are experts in that industry. But it provided not only value to them in terms of very immediate cost reductions. But it also provided value to their vendor and made a stronger partner for them.

Steve Katz 

Okay, Steve, so that is a great example. You know, giving those types of real world experiences a chance to live, live and breathe and be digested by the audiences is, I love that it’s fantastic, really, really helps drive it home. So thanks for that. And then, you know, I’m thinking it would be beneficial for our listeners, to better understand the role that you and your team are able to play in assisting companies to implement or advance their strategic sourcing efforts, utilizing some of those best practices, and other the other many nuances that I’m sure you and your team bring to the table. So could you provide some of that context here?

Steve Savoy 

Yeah, absolutely. So we work with companies on their strategic sourcing plans and how to do that with them. You know, we talk about it in a couple of different dimensions, you know, let’s start at the top. You know, first is, we want to understand, what is the strategy of the procurement organization? What is it? What is that team charter to do? What is their what are they being asked to accomplish, you know, by the organization and by leadership. So it’s kind of the first step of stuff. And then the next thing is kind of the big data part of things, right, where we kind of dive into their data, how much have you been spending on each of your vendors into the commodity, regionally, where are you spending? What are the your shipping costs of your inbound material? What does that look like? We talk with cross functional team, we want to understand, you know, do we have 1000 different fasteners? Because we need 1000 Different fasteners? Or do we have them just because they’re just kind of lingering in the system. And, you know, people just kind of pick whatever they want with the product, the product teams only have a favorite force, fasteners, for example. And then we put together a plan. And this is where we introduced category management. You know, we’re identifying suppliers outside of kind of the traditional suppliers, you know, that the company uses to see if they would possibly be good fit. And then we’re gonna get into kind of the actual sourcing steps. Right. So the steps of requests for information from vendors, particularly new vendors, just to make sure we’re on a level playing field, we’ll ask for a quote from the key vendors that we want to kind of work with, we’ll evaluate the proposal across multiple factors, not only price, but their quality reputation, their online delivery capabilities, and assess their broader capabilities in terms of what machinery and equipment do they have? Are they able to be a partner with us beyond just one product? Can they be a partner with us across several of our sourcing needs, and then finally, of course, negotiating, and then, you know, onboarding new vendors if required and onboarding new products as required. And then the final step that we leave our clients with is, these are some things you can do to kind of continuously monitor and improve that process, improve those vendor relationships, so that they’re eager to work with you and you’re getting the most attention that you can from them.

Steve Katz 

All right, Steve. Well, that was a great overview. If listeners have questions or want to discuss their specific situations in regard to procurement efforts and strategic sourcing challenges or interest, how should they go about getting in touch with you?

Steve Savoy 

Yeah, great to join you today Steve, and a pleasure to talk about strategic sourcing as well. Happy to assist anyone who has questions. The best way to reach me is via email, which is [email protected]. And also, people should feel free to reach out to me on LinkedIn, or reach out through the Hilco Global website and look forward to talking with people.

Steve Katz 

All right, perfect. And listeners. As always, we hope that this smarter perspective podcast provided you with at least one key takeaway that you can put to good use in your business or share with a colleague or client to help make them that much more successful moving forward as well. And remember that you can check out more great podcasts and articles featuring timely insights from Hilco experts at HilcoGlobal.com/smarter-perspectives. Until next time, for Hilco global, I’m Steve Katz.