Engaging with a strategic sourcing partner can be an effective means to improve your manufacturing company’s bottom line without affecting its operations, or perhaps even improving them, because the process allows operational and procurement managers to be better focused on the tactical aspects of running the operation.
Not all sourcing management firms are created equal, however, and like other vendor categories some will be a better fit with your manufacturing company’s culture and objectives than others. We suggest asking the following questions before selecting a strategic sourcing partner.
Do they work with a variety of industry players?
Part of the benefit of having a robust sourcing process comes from gaining a 360-degree view of the marketplace, including the competitive dynamics, strategic direction and unique capabilities of various players. It can be a red flag if vendors refuse to participate in a process coordinated by certain firms. This may be a sign the facilitator has preconceived notions and tends to play favorites. Explore whether a disproportionate share of business is channeled to a short list of suppliers. The less favored players see no value investing time and effort into a process they’re pre-destined to lose. It also implies your company may not receive appropriately impartial advice.
How do they manage the communication process?
Be wary of firms whose Request for Proposal (RFP) model imposes a “no contact” rule, cutting off all direct communication between the manufacturing company and existing/prospective suppliers. For one thing, vendors strongly dislike this model. From a pragmatic standpoint, your ability to establish effective lines of communication with prospective partners should be a key factor in your vendor selection. Besides, any out-of-bounds contact or attempted back-channel dealings provide useful data points in the evaluation process in themselves.
How do they evaluate cost savings?
Most strategic sourcing partners earn their fee by retaining a percentage of savings generated. This is a win-win model in principle; the challenge comes in determining the baseline from which savings are calculated. For many technology services, market pricing is on an overall downward trend. In fact, it has been reported that some sourcing firms encourage high baseline offers to provide greater headroom for reductions. A sound methodology provides for a realistic starting point that fairly reflects your partner’s contribution.
Are their interests fully aligned with yours?
Be sure your strategic sourcing partner’s revenue model does not create disconnects from your company’s objectives. For instance, front-loaded proposals – including signing bonuses and/or “teaser” one year rates – can obscure Total Cost of Ownership (TCO) and make the negotiator look like a hero, steering a greater share of savings to their side of the ledger. Clearly, TCO should be a primary decision factor; however, we believe the market should dictate a contract’s structure. If special circumstances lead a manufacturing company to prefer savings in certain periods, these nuances can be addressed after ongoing costs are first managed down.
Although such situations are rare, ensure there are no “pay-to-play” provisions attached to the RFP for participation. This is an ethically questionable practice – a partner should not be accepting income that potentially limits your company’s options.
As with most fields, there are multiple, effective approaches to strategic sourcing management. Some will fit better within your manufacturing company’s culture, however, and some practices are simply ill-advised. It’s best to determine upfront how well you align with prospective partners.