Strategic Sourcing - Overused and Little understood

The ‘S’ word is getting a real hammering these days, often wantonly, often inappropriately, and often - just plain too often. If people thought more clearly about its real definition, then we would all be better off – so here is a view.
Most people sprinkle ‘strategic’ around in the context of having some sort of plan – ie ‘We have done a strategic category review’. This is not really a good use of the word – it is simply using a fancy word when ‘plan’ would do just fine. Of course it should be well thought through, be linked to the business needs, and have a longer term perspective – that doesn’t really qualify for the strategic title.
Secondly it is used to as a plea to become more involved – ‘we need to do more strategic purchasing’. Most of the time this just means that buyers don’t really get involved early enough, and want to be more a part of the business. Fair call – and not strategic.
There is only one clear definition of a strategic action:
Deferred Pleasure.
A strategic decision is one that, on the face of it, only makes sense in the longer term. If in military terms a location is deemed to be strategic, that means you should put disproportionate effort into defending or gaining it. The same is true in purchasing. You could take a position on a category, or with a supplier, where you are taking the risk that in the longer term you will be better off. Committing to 100% supply ( or indeed deliberately taking a supplier off your supply list ), taking a long term price fix and investing in joint development are all examples of strategic purchasing.
The interesting challenge lies for the wider business – just how many business unit managers would thank you for saying ‘I know you are paying more for this than you have to right now – but its strategic!’
We may want purchasing to be more strategic, and if we really mean it – are we or others actually ready for it yet?

Success factors for Professional Purchasing

High performance purchasing with long-term strategic orientation is a key factor for successful international competition. Therefore, purchasing is one of the most important issues in a company – material costs are the largest cost block in an industrial company. Due to this situation, efficient cooperation with suppliers is becoming increasingly important.
An important success factor for professional purchasing is achieving transparency, especially regarding company-wide purchasing activities, purchasing volumes, frame contracts as well as detailed information about current and potential suppliers. A company can attain this comprehensive view through integrated supplier qualification, contract management and spend analysis.
An active and targeted supplier management is the prerequisite for strategic purchasing. Cross-functional supplier rating identifies supplier strengths and weaknesses. Suppliers are categorized according to their performance and strategic significance based on a substantiated and objective supplier classification. This is the basis for targeted and structured supplier development including measures controlling. During this process, supplier goals are set, deadlines and responsibilities defined, sustainable optimization measures implemented and development progress monitored.
Experience indicates that the individual components must interact with each other in order to provide consistent process support and that maximum benefit can only be achieved through the consolidation of the corresponding information obtained.

Internet Transformed in a blink of an eye

We here at Sourcing Diaries like to think we're not backwards in coming forward when it comes to embracing the power of the Internet.
It would take a brave man to deny that the World Wide Web has transformed modern-day business, so you can imagine the excitement around these parts when talk of ‘the grid’ replacing the Internet, surfaced earlier this week.
The ‘grid’ is nothing new – a cursory google search reveals that a press release trumpeting it’s future was circulated in 2002, but recent developments in Switzerland have caused understandable ripples from Geneva to the Galapagos Islands.
Scientists in Switzerland claim the new ‘grid’ is 10,000 (yes, that’s ten thousand) times quicker than your average broadband connection.
The pioneer of the system, hardly surprisingly, is Cern – the particle physics centre that created the Internet – and it claims that grid will soon offer lighting fast capability for tasks such as high-definition video telephony (all for the price of a local call), and the downloading and sending of sophisticated images. All performed in the blink of an eye, and certainly before you can say ‘Shaan’.
David Britton, professor of physics at Glasgow University and a leading figure in the grid project, believes grid technology will not just revolutionise the way businesses do business but could also change society.
“With this kind of computing power, future generations will have the ability to collaborate and communicate in ways older people like me cannot even imagine,” he said.
Now that, is progress.

CSR and Procurement

Corporate Social Responsibility (CSR) is a concept with growing currency across the globe. It involves looking at how companies take account of social and environmental factors and how these can impact on their reputation among consumers and in the business world.
The involvement of procurement and supply management professionals in CSR policies is increasingly crucial. Sourcing from low-cost countries, for example, is an area fraught with dangers for the procurement function and the business as a whole. Senior procurement managers are ideally placed to input expert knowledge and experience in discussions of low-cost country sourcing in a way that can help reduce the risk of extremely damaging publicity or dealing with costly legal challenges.
It is therefore imperative for procurement and supply chain departments to build constructive relationships with key stakeholders while increasing business transparency and good governance. In this way they can play a pivotal role in shaping the business in a sustainable and competitive way, making sure the highest ethical standards are followed.
The mentality of "out of sight, out of mind" outsourcing is a serious mistake.

Oil rising up agenda as price rise shows no sign of slowing

If oil wasn’t topping procurement’s agenda at the turn of the year, it certainly is now. With the cost of crude rise near to a potentially ruinous $140-a-barrel.
Hardly music to procurement’s ears given that a recent CIBC World Markets Report claimed that once oil hit $120 a barrel, “Every 10% increase in trip distances translates to a 4.5% increase in transportation costs.”
Busch uses the example of the cost of shipping a container from Shanghai to the eastern seaboard of the US having risen 250 per cent since 2000 (when oil prices were a relatively benign $20-a-barrel).
Clearly the latest price hikes are going to put more pressure on those organisations that lean heavily on global sourcing. Any further rises and they may start to ask, if they haven’t already, if the strategy is really delivering the results it once did.

Why e Sourcing is good for suppliers

This post is from the Procurement Leaders network, It tries to dispel a few myths people hold on the e Sourcing tool.

Myth #1: e-Sourcing is all about lowering prices. False. Thanks to tightening supply markets and maturing sourcing methods (and e-sourcing functionality), price-only negotiations have gone the way of Member’s Only jackets. Advanced auctioning capabilities enable buyers to evaluate suppliers on a myriad of price and non-price factors, such as lead-time, delivery, quality, and payment terms. Nearly all e-sourcing users engage in multi-threaded negotiations (e.g., e-RFI-to-e-RFP-to-auction), enabling qualification and evaluation on all attributes of a supplier’s capabilities and costs. And many optimization-based sourcing tools allow suppliers to offer alternative bundles or bids that boost their profit margins and further differentiate their offerings.
Myth #2: e-Sourcing is unfair to suppliers. Untrue. In most cases e-sourcing introduces greater integrity into the sourcing process than existed in the offline mode. e-Sourcing mandates that buyers clearly articulate their selection criteria and award decision framework to all participating suppliers. Suppliers go into a negotiation full knowing how they will be judged and how the award decision will be made. Any clarifying questions asked by suppliers and corresponding answers from the buyer are available for all suppliers to see, further leveling the playing field. This was best summarized by a VP of Sourcing at Cadbury Schweppes “We emphasize fairness and open disclosure on both sides of the sourcing process. We have shut down ‘backdoors’ for internal stakeholders and suppliers.”
Myth #3: e-Sourcing is unfair to incumbents. Nope. Competitive incumbents are in a better position to be exposed to more business volume and new business opportunities, particularly considering that any strategic sourcing initiative goes hand in hand with a supply base rationalization effort. Better e-Sourcing tools also enable the ability for users to incorporate “transformational” elements that give “credits” (in the form of switching costs or innovation credits) to good performing incuments. As a result, incumbents don’t need to be the lowest price bidder in order to win the business. Consider the approach taken by Eastman Kodak: “We sat down with incumbents to explain why we were [using e-auctions] and prepare them with the right strategy and techniques to competitively participate in the event.”
Myth #4: e-Sourcing makes it difficult to win new business. On the contrary, e-sourcing dramatically shrinks sourcing cycles. These efficiencies alone enable buyers to negotiate more spend volumes, across more spend categories, with more suppliers. As noted in the previous example, qualified incumbents in good performance are in a position to expand existing business and be exposed to new business opportunities. One large industrial manufacturing used its e-sourcing strategy to cut the number of MRO suppliers from nearly 2,000 to just 20. Incumbents retaining the business are doing 4X to 10X the volumes than in the past, and they’ve added new, more profitable revenue streams, such as integrated supply relationships.
Myth #5: e-Sourcing lengthens the sales cycle. There is ample evidence that e-sourcing shortens sourcing and, hence, sales cycles. And as an old boss of mine would say, “In a sales cycle, getting to no fast, can be as valuable as getting to yes.” His point was getting to “no” enables you to focus your salesforce on the opportunities they can win.
Myth #6: e-Sourcing burdens suppliers with new cost, technology, and resource requirements. Wrong again. There is compelling evidence that e-sourcing also reduces overall SG&A costs. A recent study from the University of North Texas found: “A supplier can reduce its cost of sales (salesperson commissions, advertising, etc.) using reverse auctions.”
Myth #7: e-Sourcing eliminates buyer-supplier relationships. I recently asked a supply management executive at a major life sciences company how he was able to drive such aggressive use of reverse auctions. His response, “I tell suppliers, ‘If you believe your customer relationship is all about negotiating, then you don’t have a relationship.’” This isn’t just rhetoric. Many companies have begun partnering with suppliers to remove cost from the entire supply chain. New multi-tier sourcing, co-sourcing, and buy-sell approaches are being embraced by a wide range of enterprises (particularly in the aerospace, automotive, and high-tech sectors) looking to gain better visibility into costs and risks inherent in the sub-tier supply and to aggregate spend volumes and remove costs from the total supply chain.

Product/ TPM/RM-PM/ Vendor Coding systems

These four codes are the pillars on which the entire materials spend analysis rests. In this section we explore the logic behind each of the codes & how they help the material spend analysis file as well as the product cost sheets work. These would also aid us in further expanding the analytics and get us to perform various permutations & combinations.

The codes have been developed with a view to accommodate all the business processes of the organization and it is the developer’s vision that the codes would be used universally.

To begin with we analyze the product codes that have been developed:

Product Code:

The products marketed by us have been given a 12-digit code. To illustrate the working of the codes we explain by taking an example.

Serotin AST 100ml Physician Sample
3VST2010100P


First Digit: The first digit of any product code represents the marketing division that handles the product. This helps the spend analytic software to perform analytics for each division. Also it helps segregate products based on the division that is concerned. In this case we have provided the following nomenclature:

1 – ABC
2 – DEF
3 – HIJ
4 – KLM

There is provision for expansion of Divisions so that any new segregation can be done easily.

For e.g.: In this case Serotin AST 100 ml Physician sample is marketed by HIJ hence the first digit is ‘3’.

Second Digit: The second digit of any product code represents the therapy area that the product handles. The same benefits as segregating the product on the basis of the marketing division helps us by segregating on the basis of the therapy area. The software can analyze the portfolio of each therapy area therefore providing essential information on the particular therapy area. In this case we have used the first digit of the therapy area to be represented in the code.

G – Gastroenterology
N – Neuroscience
P – Pain Management
M – Metabolics
U – Urology
V – Vitamins
A – Antibiotics
H – Hospital Care
O - Others

For e.g.: In this case Serotin AST 100ml Physician sample belongs to the therapy area Vitamins, hence the second digit is ‘V’.

Third & Fourth Digits: The third and fourth digits are the first and last digits of the brand whose code has been defined. These are only provided to enable the human mind to identify the product.

For e.g.: In this case Serotin AST 100ml Physician sample has the first and last digits of the brand name as ‘S’ & ‘T’. Therefore the code contains ‘ST’ as the third & fourth digits. Similarly Glaco Total is ‘GL’ and Glaco OD is ‘GD’.

Fifth Digit: The fifth digit represents the type of packing that the product has undergone. This is one digit, which would need further refinement. As of now the nomenclature stands as follows.

1 – Tablets/ Capsules in blister/ PVC/PVDC or foil
2 – Bottles whether they contain capsules or liquid.
3 – Injections/ Vials

The above coding system allows users to identify the kind of primary packing and develop appropriate distribution/ Packing strategies.

For e.g.: In this case Serotin AST 100ml Physician sample is packed in bottles in liquid form therefore the code contains the fifth digit as ‘2’

Sixth, Seventh, Eighth Digits: The sixth, seventh, eighth digits represent the potency of the drug. This helps users differentiate between two drugs with the same brand name and with the same packing. A classic case in question would be Blickan 200, Blickan 400 & Blickan 600. These are only differentiated by the potency of the drug involved.

In this case, 10ml of Serotin is the recommended size of dose. Therefore the sixth, seventh, eighth digits are ‘010’ respectively.

Ninth, Tenth, Eleventh Digits: The ninth, tenth, eleventh digits represent the pack size of the drugs. They help the user identify the primary pack size. A classic example would be Blickan 200 9’s pack and Blickan 200 15’s pack. The last three digits help in differentiating each other.

For e.g.: In this case Serotin AST 100ml Physician sample is packed in bottles of 100ml each. Therefore the ninth, tenth, eleventh digits are ‘100’

Twelfth Digit: The twelfth digit if left blank represents a sale pack and if denoted by ‘P’ represents the physician sample. The digit has been provided only to distinguish between a sale pack and a physician sample pack.

The product codes may be expanded to include other details as well. In a few exceptions, where the names of the products are very similar the third and fourth digits have been appended with one more small case digit. This differentiates between two similar products with similar spellings and similar attributes.

Third Party Manufacturer Codes (TPM Codes):

The TPM codes are fairly simple and the following is the nomenclature. To explain the coding system we take three examples.


A110 – AKMA
A120 – ACOM
B400 – BLODIA.


First Digit: The first digit of any TPM code is the first letter of the TPM name.

For e.g.: The first digit of Akma and Acom is ‘A’. Therefore the first digit ‘A’ represents both the codes. The first digit of Blodia is ‘B’ hence represented by ‘B’.

Second Digit: The second digit of any TPM code is the CST applicable when the product is billed from that location.

For e.g.: The CST applicable when the products are billed from Akma or Acom is 1% therefore the code given is ‘1’.

Third Digit: The third digit is the serial numbers to differentiate between two TPM’s with in the same location and with the same starting letters. A classic example is Akma & Acom. Since both begin with the same letter the serial no 1 & 2 have been used to differentiate the two.

Scope of Expansion:

The fourth digit has been left blank on purpose. The same may be used to denote a TPM located in the excise free zone Vis a Vis a TPM located in the non-excise free zone. Alternatively any other important attribute may be used to signify the fourth digit.

RM/PM Code:

The RM/PM code developed is in a very rudimentary stage as the different attributes of the RM/PM need to be understood before defining the codes. Nevertheless it allows for functioning and currently the following have been incorporated in the codes.

The first 2000 digits 0000 to 2000 represent the Active Pharmaceutical Ingredient that go into the product. The code for each of the API is given alphabetically. Based upon further important criteria, codes may be modified.

The digits from 2001 to 5999 represent excipients, which aid in binding, sweetening and other properties. The structure followed to code the excipients is as given below.

2001 – 2300: These are the Binders. The unique codes for each of the product are given alphabetically.
2301 – 2800: These are the Coatings. The unique codes for each of the product are given alphabetically.
2801 – 3000: These are the Glidants. The unique codes for each of the product are given alphabetically.
3001 – 3300: These are the Fillers. The unique codes for each of the product are given alphabetically.
3301 – 3400: These are the Disintegrants. The unique codes for each of the product are given alphabetically.
3401 – 3600: These are the Lubricants. The unique codes for each of the product are given alphabetically.
3601 – 3900: These are the Preservatives. The unique codes for each of the product are given alphabetically.
3901 – 4800: These are the Flavors & Colors. The unique codes for each of the product are given alphabetically.
4801 – 5000: These are the Sweetners. The unique codes for each of the product are given alphabetically.
5001-5999: These have been left blank intentionally to accommodate for any expansion in the excipient category/ excipients.

The digits from 6000 to 9999 represent the Packing material that is used to pack the product. The different kinds of packing used are Primary, Secondary & Tertiary packing.

The primary packing material is further subdivided into bottles, foils etc. The coding system is as given hereunder.

6000 – 7499: Primary packing material. The primary packing is further subdivided as follows.
6000 – 6099: These are the Plastic containers & Caps. The unique codes for each of the product are given alphabetically.
6100 – 6350: These are bottles. The unique codes for each of the product are given alphabetically.
6360 – 6599: These are the caps. The unique codes for each of the product are given alphabetically.
6600 – 6699: These are PVC foils. The unique codes for each of the product are given alphabetically.
6700 – 6799: These are PVDC foils. The unique codes for each of the product are given alphabetically.
6850 – 7139: These are Aluminum foils. The unique codes for each of the product are given alphabetically.
7140 – 7249: These are Blister foils. The unique codes for each of the product are given alphabetically.
7250 – 7349: These are Glassine foils. The unique codes for each of the product are given alphabetically.
7350 – 7399: These are cups. The unique codes for each of the product are given alphabetically.
7400 – 7499: These are miscellaneous primary packing items. The unique codes for each of the product are given alphabetically.

7500 – 7949: Secondary packing material. The secondary packing is further subdivided as follows.

7500 – 7849: These are cartons. The unique codes for each of the product are given alphabetically.
7850 – 7949: These are Catch Covers. The unique codes for each of the product are given alphabetically.

7850 – 9999: Tertiary packing material. The tertiary packing is further subdivided as follows.

7950 – 7959: These are Hologram labels. The unique codes for each of the product are given alphabetically.
7960 – 8299: These are Labels. The unique codes for each of the product are given alphabetically.
8300 – 8789: These are DFC’s. The unique codes for each of the product are given alphabetically.
8790 – 8839: These are Shippers. The unique codes for each of the product are given alphabetically.
8840 – 8999: These are miscellaneous items provided for expansion of scope of products. The unique codes for each of the product are given alphabetically.
9000 – 9199: These are Gum pastes/ adhesives/ BOPP Tapes. The unique codes for each of the product are given alphabetically.
9200 – 9300: These are labels. The unique codes for each of the product are given alphabetically.
9300 – 9999: These are blank codes provided for expansion of scope of products. The unique codes for each of the product are given alphabetically.