You want to be a strategic buyer!

The separation of procurement tasks in operative, tactical and strategic might sometimes be a bit artificial and difficult to explain. Distinguishing between operational procurement (focusing on in-time, in-quantity, in-quality deliveries) and tactical procurement (optimizing prices) is straight forward. Process-oriented people call these „source-to-contract“ (the tactical process) and „procure-to-pay“ (the operational process) which makes very clear where the difference and their interface is.

But what is strategic procurement and how does it differ from the two before mentioned? A simple explanation might focus on the pivotal object that goes through such a process: in operational and tactical buying it is a piece or bundle of demand (parts, services, machines, etc.) but the interesting aspect of strategic buying processes is that they are detached from such a concrete demand. One could even call them „meta processes“ in procurement.

Some of these processes we combine under the umbrella of supplier lifecycle management (short: SLCM), where the supplier as such becomes pivotal object.

What is SLCM?

Adding the term „lifecycle“ (many people only use „supplier management“ but mean basically the same thing) is key to bringing all supplier oriented processes together into a simple-to-understand structure. Mapping the life cycle of a supplier through his relationship with a customer, nicely lets us form an integrated process model.

Along this model we follow a new (potential) supplier from a phase-in process to the actual participation in operational/tactical buying, across a set of purely strategic activities focusing on documentation, performance and risk down to either a phase-out (if we are unsatisfied with the supplier) or through development measures to raise the supplier’s added value for our company back into the cycle.

A typical time horizon for the SLCM cycle is one year. Depending on the maturity of these processes and available resources for SLCM, companies perform this cycle on more or fewer suppliers each year. Worthwhile mentioning is the central monitoring function since one of the major goals of SLCM is to gain better transparency and better access on the „supplier base“.

What is your target with SLCM?

So, to put it all together: operational buying is immediate demand fulfillment with an external supplier; tactical buying lays the basis for operational buying through optimizing prices and conditions; strategic buying, in turn, lays the basis for both by optimizing overall knowledge and transparency, strategic conditions, organizational structures, demand specification and last but not least the supplier base itself: this is SLCM. SLCM supports buying processes by the following activities:

  • Find the right supplier(s) and build a systematic connection
  • Define which supplier fits best for which share of demands (qualitatively and quantitatively)
  • Document and store agreements in a transparent, standardized and available format
  • Prepare the supplier for buying processes, e.g. by communicating forecasts, integration into e-tools, etc.
  • Evaluate, whether suppliers fulfill expected performance (timeliness, pricing, quality, service)
  • Assess supplier related risks (e.g. too few, too many, unable or unwilling suppliers, etc.)
  • Terminate relationships with undesired suppliers (e.g. low performers, high-risk or just too low value added)
  • Develop desired suppliers to become more performant or less risky

What makes your SLCM job hard?

Certainly, SLCM is a sophisticated procurement management technique, which requires expertise, experience, tools and the ability to have good ideas and develop them into actual change. On the other hand, many problems SLCM makes visible and the solutions it may provide for these problems are typical management tasks involving data analyses, communication with people, acquiring new tools and processes and rationalizing others. A pattern that we see, though, is that small companies typically staff too little resources on SLCM, whereas large companies spread the tasks of SLCM on too many shoulders.

When ambitious procurement managers in small/medium companies strive for a more strategic procurement approach by spending time on SLCM they are often limited by available resources – quantity wise and quality wise. A bad but logical consequence is that these companies truncate SLCM to an absolute minimum and then „cram“ it into the purchase-to-pay or source-to-contract process. This does not only put additional rationalization pressure onto SLCM but also compromises the underlying purchase-to-pay process and produces delays and failures. By this means a vicious cycle starts which leads to ever more reduction of SLCM activities and an ever worse reputation of strategic procurement, overall. Small companies often struggle to see the value in strategic procurement at all or misinterpret it as an act of mere „administration“. Thus, today, a typical procurement strategy for a small/medium company in fact needs to foster strategic elements and consequently facilitate operational efficiency gains and up-skilling of their staff.

On the other side of the spectrum, in large companies many highly specialized departments or functions, e.g. called „procurement excellence“, „supplier development“, „corporate risk management“, „master data management“, „procurement engineering“ etc., or more traditionally, IT, Legal, Controlling all do SLCM tasks. This fact typically leads to double work, non-value-adding-activities and the loss of an integrated view on the whole SLCM cycle which is necessary to make the right decisions like: investments in the right tools, management of the whole supplier base and actual transparency gains on the whole process.

A beneficial procurement strategy needs to strive for a consolidation and harmonization of activities and effective cooperation models for all these players who typically have different backgrounds (technical, law, business) and may even sit in different countries or legal entities.

What can make your SLCM job easier?

Strategic sourcing in general and especially SLCM is currently a booming field for IT and service providers. We hear that SAP currently invests €1 bn per month(!) into its flagship product S4/HANA and hence also into a highly strategic vision of the future procurement process landscape. But not only large players, also an armada of start-ups (most of them heavily IT-driven) recognizes procurement as target field for new products and services. A recent survey among Austrian procurement professionals gave a good market overview on providers and solutions which currently have stakes in the market. We split these products and providers into four principal categories, which are not 100% mutually exclusive as products might offer functionality from more than one category. The following picture gives an extract of what we see on the Austrian market – it should be at least a good reference for the whole (Western) European market. Of course, this is just an extract or a snapshot as the number of products is already huge and the speed of development incredibly high.

  • ERP systems are the absolute basis for any transparency and produce the most valuable in-house data for procurement analysis, management and optimization
  • Software suites typically extend ERP systems‘ functionality to make processes more stable, more compliant and easier or more comfortable for users
  • Specialized software covers one aspect or sub-process of SLCM and sometimes extend pure technical functionality by certain professional expertise in a narrow domain
  • Service providers offer „business process outsourcing“ for particular SLCM problems; most of them use digital methodologies to be more efficient and effective

Evaluate these indicators for your own company and compare them to peer companies – this is a perfect start into good SLCM! And by doing these analyses and deriving initiatives based on such numbers you are performing highly relevant, highly effective and purely strategic procurement management.

Boris Blazej, Supply Chain Partners

Conclusion: get grip on good SLCM and solve typical procurement challenges!

All procurement problems ultimately lead to higher costs, longer lead-times and worse quality, but these effects are typically concealed among many influencing factors and, hence, not easy to determine or measure. Even, if you saw them openly: what should be done to improve? Therefore, we need „upstream“ indicators to identify contribution of good or bad processes to our costs, times and qualities. For SLCM we distinguish three relevant indicators and some widespread root causes:

  1. (Too) many FTE applied to SLCM processes – these can potentially indicate e.g.: too many suppliers, non-value-adding activities, double work, low automation rate
  2. High single source supplier quota – will probably produce: supplier related risks or noncompetitive prices
  3. Low delivery reliability (time, quality) and high supplier induced damage – think about: too high requirements, wrong supplier base (suppliers cannot better or do not want to do better), SLCM processes (esp. supplier development and risk management) are weak or missing