Sourcing and Procurement Focus: Our Weekly Feature Article on Topics of Interest to Sourcing and Procurement Professionals or Related Supply Chain Functions  
 
 

- April 20, 2010 -

Supply Chain News: Re-Looking at Total Best Value Sourcing

Concept has been Strained by the Recession, and becoming Something of a Lost Art; Three Keys to Success


 
 

 

SCDigest Editorial Staff

SCDigest Says:
It is important to recognize that when a company begins going down the path toward total best value sourcing, it is changing the role of the sourcing professional from "order filler" to "change agent."

Below is a “classic” procurement article, modified slightly for 2010, that appeared a few years ago in the Supplier Selection and Management Report, the content rights to which SCDigest acquired.

 

Basing a buying decision on price alone does not necessarily deliver the most value for your money, which is why it is important to make a “total best value” purchase.

 

Total best value elevates sourcing to its highest and most effective level, because it is about attaining the best quality, performance, and price for goods and services a company buys. It also factors in the quality, performance, and capability of the supplier’s company.

 

Therefore, total best value sourcing evaluates the quality of the goods or services a company is purchasing and the quality of the supplier from which the goods and services are being purchased.

Total vest value was making a comeback in corporate procurement organizations, but has been tested by the recent economic climate, when unit-based price reductions from suppliers have largely been the focus.

But overall, companies usually understand that every sourcing decision should be a total best value decision, and not one solely based on price reduction – even if they don’t always execute that way.

 

For example, before the concept of strategic sourcing, many companies targeted price reduction as the only goal to measure performance of a purchasing organization. Reverse auction technology, for one, encouraged companies to focus on making most buying decisions based on price alone.

 

While total best value sourcing has been around for a long time, it almost has become a lost art, primarily because company leaders at the highest level under appreciate the value of sourcing, particularly total best value sourcing. Even though management is under pressure to improve bottom line results and shareholder value, it does not view sourcing as a strategic element of its plans to deliver those results.  Additionally, companies have been tightening their belts because of market pressures and, therefore, have been focusing on reducing costs. This cost-only focus forces buyers to do more with less.

This appears in various forms such as staffing reductions in purchasing organizations, cutbacks or eliminations of training programs and departmental spending, and a concentration on price reduction as the only performance measure for purchasing professionals.

Total Value Sourcing and the Supplier Community

Measuring a supplier’s company performance is an important component to achieving total best value sourcing.  There are many hidden costs that can be associated with a supplier’s performance, such as scrap rate, staffing charges, and managing inventory levels.


Through incorporating total best value sourcing into purchasing decisions, sourcing organizations can uncover some of the hidden costs and evaluate each supplier on a “level playing field” to select the top performing supplier with a proven track record of excellent quality, performance, and capability.

Sourcing goods and services from a total best value approach is much more than selecting a supplier on price alone. In a price-only sourcing approach, the amount of savings that can be delivered by a sourcing organization is limited by the suppliers own costs and need for sufficient margin to remain viable.

(Sourcing and Procurement Article - Continued Below)

 
     
 
CATEGORY SPONSOR: SOFTEON

Learn More about Softeon's Innovative Supply Chain Solutions

 

 
     
 


With total best value sourcing, in contract, every bit of waste and inefficiency in a company’s spend database becomes an opportunity.

Think of how significant that is. Each time a particular spend is sourced, buyers have the opportunity to aggregate that spend company-wide and look at how to improve the supplier’s effectiveness in providing those goods and services for each area in the company that spend affects.  This enables a sourcing organization to maintain an effective and efficient sourcing process and provide great value to the company as a whole.

How to Implement, Conduct, and Maintain a Total Best Value Sourcing Approach

There are three key factors to effectively and efficiently implementing, conducting, and maintaining a total best value sourcing approach in any purchasing organization:

  • A purchasing organization must gain executive leadership conviction at the highest levels of the company: It is important to recognize that when a company begins going down the path toward total best value sourcing, it is changing the role of the sourcing professional from “order filler” to “change agent.” This individual is now leading a cross-functional team that will effectively select suppliers and manage that supplier relationship.

 

Asking the tough questions, challenging existing processes and methods, replacing suppliers, and investigating and examining all spend require strong leadership conviction and support. Management must understand, demonstrate, and support the value of total best value sourcing so that the sourcing process can deliver optimal results.

  • A purchasing organization must develop a well-defined and disciplined sourcing process: The emphasis must be on planning, collaboration, and data-based decision making (see illustration below). Before the top-performing supplier can be selected, a buyer must know what the requirements are, what attributes make a supplier superior, and how to collect the appropriate data to determine which supplier is superior.

 

 

The process also must emphasize a study of the market condition and an examination of supplier capabilities so that company requirements can be presented to the group of suppliers most efficiently. 

  • A purchasing organization must leverage buyer capability: This concept is not brain surgery or nuclear science. With well-defined processes, quality training, and effective sourcing and enterprise supplier management solutions, any company can develop a group of highly effective sourcing professionals.

 

Maximizing the results of total best value sourcing means raising the effectiveness and efficiency of the entire sourcing organization. This is done most successfully utilizing supplier management software solutions, and institutionalizing best practices. 

Total best value sourcing gives companies the edge they need to deliver an increase in bottom-line savings and more shareholder value. Achieving this value is only a matter of enriching a company’s supplier database by qualifying suppliers based on factors other than price and streamlining processes.

 

Where do you think most companies are at in terms of total value sourcing? Is it a lost art, and did the approach take a hit during the recession? What are other keys to success? Let us know your thoughts at the Feedback button below.


 
     
Send an Email
   
     
.