Even as businesses continuously innovate and scale new growth trajectories, adopting best practices in your sourcing lifecycle can be a key enabler to delivering business objectives. Supplier optimisation remains a key focus area in the Sourcing Toolkit of a CPO and finding the right balance in your supplier management strategy can make a significant difference to your bottom-line while delivering a sustainable competitive advantage. This article offers a perspective on the importance of supplier optimisation in your Sourcing lifecycle.

 

Introduction

In today’s dynamic & rapidly evolving business landscape, strategic sourcing has become a crucial function and is an integral part of the CxO discussion board. In a nutshell, Strategic sourcing is a procurement strategy that focuses on obtaining products (goods/services) in a way that aligns with the organisation’s overall business objectives. It involves a systematic and holistic approach to identify, evaluate, and select suppliers to optimise value, reduce costs, and mitigate risks. 

The Procurement Lifecycle may be best visualised as illustrated in Exhibit 1. The upstream areas usually fall under the realm of ‘Strategic Sourcing’ while the tactical downstream functions are classified as ‘Operational Procurement.’

Exhibit 1: The Procurement Lifecycle

As part of the procurement lifecycle, supplier optimisation plays an important role irrespective of the maturity of your sourcing function in achieving operational efficiency, cost reduction, and overall business success. So, how can one ensure the most optimal number of suppliers for a particular good or service while balancing risk and quality? For example, a long tail of suppliers may lead to operational inefficiencies and value leakage while too few may enhance your business risk significantly. How do you arrive at an optimal solution?  

We offer a few perspectives towards achieving this objective.  

1. Develop a Robust Supplier Evaluation Framework 

One of the initial steps in supplier optimisation is to establish a comprehensive supplier evaluation framework. This framework should include key performance indicators (KPIs) aligned with business objectives, such as quality, delivery, cost, innovation, and sustainability. By objectively assessing suppliers based on these criteria, organisations can make informed decisions and identify the most suitable partners for their strategic sourcing initiatives. 

2. Leverage Sourcing tools and best-practice frameworks in your Sourcing Process 

While several tools may be implemented at various stages of the sourcing lifecycle, we highlight a few well-known tools that are extensively used in the industry.  

2.1. The Kraljic Matrix:

Perhaps the most widely used tool by procurement and supply chain professionals for supplier portfolio evaluation, the Kraljic Matrix is a function of two parameters: supply risk and profit impact. A supplier is classified under one of the four quadrants of the Kraljic Matrix based on the function of these two parameters. For example, a supplier is classified as strategic if the sourced product/service is “business critical” while impacting the bottom-line of the company the most. Using the tool in classifying suppliers’ products and services can address supply risks while supporting strategy development.  

The Kraljic Matrix is an integral part of the Opticos consultative toolkit. For example, stratification of suppliers into strategic and non-strategic at a global Swedish conglomerate client of Opticos, enabled a differentiated approach to the procurement optimisation challenge, and ultimately led to a total initial cost saving of ~120 MUSD, and a projected annual saving of ~15 MUSD.

Exhibit 2: Kraljic Matrix for Supplier Portfolio Evaluation

 

2.2. Total Cost of Ownership (TCO)

TCO analysis is a comprehensive approach that goes beyond the initial purchase price of a product or service and considers the entire lifecycle costs. It involves evaluating various cost components such as acquisition costs, operational costs, maintenance costs, and disposal costs.  

By conducting TCO analysis, organisations can make informed decisions based on the total cost impact rather than focusing solely on the purchase price. This helps identify opportunities for cost reduction and value enhancement throughout the sourcing process. 

3. Foster Strong Supplier Relationships 

Building strong and collaborative relationships with suppliers is fundamental to supplier optimization. By establishing open lines of communication, organisations can enhance transparency, trust, and mutual understanding. Regularly engaging with suppliers, conducting face-to-face meetings, and involving them in the product development process (especially the strategic category) can foster innovation and drive continuous improvement. Additionally, organisations should consider conducting periodic supplier performance reviews to address any concerns and reinforce the importance of meeting expectations. 

4. Embrace Technology and Data Analytics 

Leveraging technology such as e-sourcing platforms, e-procurement systems, and supplier relationship management tools can improve process efficiency as well as enable your organisation to gain trust with your current and prospective suppliers by bringing transparency in your sourcing and procurement processes.  Further, Advanced analytics can help identify patterns, trends, and potential risks, enabling organisations to make data-driven decisions, negotiate better contracts, and optimise supplier portfolios. 

5. Practice Supplier Diversity and Risk Mitigation 

Supplier optimisation should extend beyond cost reduction and performance improvement. Organisations should actively promote supplier diversity by considering businesses owned by underrepresented groups, fostering a more inclusive and sustainable supply chain. Diversifying the supplier base can enhance innovation, support local economies, and contribute to a positive brand image. 

Furthermore, effective risk management strategies are essential for supplier optimisation. Organisations should identify and assess potential risks associated with suppliers, such as geopolitical instability, natural disasters, or financial vulnerabilities. Developing contingency plans and alternative sourcing options can help mitigate potential disruptions and ensure business continuity. 

6. Encourage Continuous Improvement and Innovation 

Strategic sourcing is not a one-time exercise but a continuous process of improvement and innovation. Organisations with a mature Sourcing and Procurement functions encourage suppliers to embrace continuous improvement methodologies, such as Lean Six Sigma to eliminate waste, reduce costs, and enhance quality. Further, engaging suppliers in collaborative innovation initiatives, seeking their expertise in product development, process optimisation, and sustainability practices are important levers in achieving competitive advantage. By fostering a culture of continuous improvement, organisations can stay ahead of the competition and drive long-term supplier optimisation. 

The Final Word: 

Even as businesses continuously innovate and scale new growth trajectories, adopting best practices in your sourcing lifecycle can be a key enabler to delivering business objectives. Supplier optimisation remains a key focus area in the Sourcing Toolkit of a CPO and finding the right balance in your supplier management strategy can make a significant difference to your bottom-line while delivering a sustainable competitive advantage.

Authors:

Jan-Vidar Hugsted & Aravind Venkatesh