Procurement Evolution: Purchasing, Strategic Sourcing and SRM

By Paulo Moretti

November 04, 2013 at 12:50 PM

Over time, most companies have made changes in the procurement function. Each starts with just Purchasing, evolves to Strategic Sourcing, and eventually adds Supplier Relationship Management (SRM). Because professionals in the field may have slightly different understandings of these terms, let me clarify what is meant by each.

Purchasing

Still today we can find companies where procurement activities are simply known as Purchasing. In those companies, procurement is just another function to buy “stuff” needed for company operations. Normally, they know one, two, or three suppliers for each product or service, and if they experience a price increase, they change to the supplier with the lower price. Little is required to perform the activities: Few processes or metrics, lower spend under management by procurement, and few skills—other than being a good negotiator.

Strategic Sourcing

Slowly, the Purchasing function evolves to Strategic Sourcing. This is mainly driven by manufacturing companies where the cost of their inputs ranges from 40% to 60% of their revenue. They start using Strategic Sourcing when they discover a huge opportunity—or need—for higher savings. Strategic Sourcing is the process that continuously improves and re-evaluates a company’s purchasing activities through the discipline of using five-, seven-, or nine-step sourcing projects. Besides a documented work process, metrics are created to drive behavior, with electronic tools (such as RFx, Auctions, Spend Analytics, and Contract Management) being offered in the market to automate the processes.

Most companies today have reached this level with varying degrees of sophistication, but no doubt a big portion of them wants to continue along this path because of the savings it brings to the company. The key question is how long this approach continues to bring savings year after year.

SRM

Most consultants today have embraced the concept of Supplier Relationship Management as the next evolution in Purchasing. The principle is very simple: Both Supplier and Customer are represented by people, people have interpersonal relationships, and relationships are dynamic systems that change continuously over their existence. If those relationships are not managed properly, they can deteriorate or terminate altogether. However, if key supplier relationships are managed, companies will maximize the value realized through those interactions.

Please note at the beginning of this text, I wrote that companies “add SRM” to their Purchasing strategy. This means that they continue to perform Strategic Sourcing to bring quick savings but can “add” SRM in order to elevate the value not obtained by sourcing projects. 

The attached white paper describes the SRM approach developed by Vantage Partners. It includes SRM Program Objectives, Supplier Segmentation, Supplier Engagement, Supplier Governance, Joint Business Planning, Two-Way Performance Management, and an Illustrative Engagement Frequency. Click here for the White Paper.

For those companies that believe they are doing SRM, I strongly recommend participating in the SRM Benchmark to be able to compare themselves with other companies. This powerful benchmark has been in practice for almost a decade. It is used globally, covers all industry sectors, has already 670+ respondents, and will be open to new participants by November.

To begin the survey, please click here

In December we will publish the results of this benchmark.  I hope you will join us.

Taking Purchasing to the next level, 

Paulo Moretti

To download a PDF of this blog, Procurement Evolution, click here.  



Tags: purchasing Supplier relationship management Supply management Procurement sourcing training
Category: Blog Post

Paulo Moretti

user_avatar

Paulo Moretti is Principal at  PM2Consult.com, a boutique consulting company focused on excellence in the purchasing function for manufacturing industries and market analysis of Chemicals & Plastics industries. 

Prior to becoming Principal, he was Senior Consultant at Vantage Partners, and worked 35 years at The Dow Chemical Company, where he developed experience in such diverse areas as Manufacturing, R&D, Sales, Marketing, Finance, Strategic Planning, e-Business, and Purchasing. 

A native of Brazil now based in the U.S., Moretti holds a Bachelor’s degree in Chemistry and Chemical Engineering, with Master’s degrees in Industrial Management and in Business and executive course certifications from Kellogg, Wharton, and MIT Sloan. 

 

 

 

 


Please add a comment

You must be logged in to leave a reply. Login »


Related Content

Supplier Segmentation Tools Help Drive Procurement Productivity

Paulo Moretti

The overall objective of supplier segmentation is to identify high-yield segments, that is, those segments most likely to be profitable or show good growth potential. According to Read More

3 Strategies for Enhancing Collaborative Innovation with Suppliers

Guest Editor

(This article is an extract from a kodiakrating.com article and is published courtesy of kodiakrating.com) The old leadership adage: ‘You’re only as good as your team’ truly applies when it comes to optimizing the innovation, supplier collaboration c… Read More

The 2018 EPIC Awards: Recognition of Those who are Evolving the Procurement Profession

Dennis Bouley

The EPIC Awards recognize and celebrate the most innovative, dynamic, and accomplished procurement leaders. This year, nominations will be accepted for Read More


Supplier Profiles

Staples

Staples Advantage is the one supplier that offers all the business solutions you need, all with the expertise of a specialty vendor. Read More

Digi-Key

It started in 1972 with an idea, a new concept in distribution. Today, Digi-Key Corporation is one of the fastest-growing electronic component distributors in the World. The stimulus for this growth is Digi-Key's customer-centered business philosophy… Read More

Lunney Advisory Group

Lunney Advisory Group was founded in 2007. Our firm is not your typical consulting company. Some members of our firm are highly qualified and experienced industry executives/practitioners while others are full time or adjunct university professors.… Read More


Webcasts

What CEOs Expect Of Purchasing

Guest Contributor

Procurement and supply management leaders have a seat at the table, and management’s expectations are high. But what do CEOs really want, and is purchasing delivering on these expectations? This webcast looks at how procurement and supply management … Read More

Growing Purchasing Influence On Indirect Spending

Guest Contributor

At world-class companies, purchasing’s influence touches just about every area of spending. But, how exactly do procurement teams get to the point where other departments approach them for help with sourcing such indirect categories as human resource… Read More

Procurement-Finance Collaboration

Guest Contributor

Procurement & finance are two business functions which are often at loggerheads with each other. One reason for this is the lack of perception alignment on an important metric of procurement and finance performance - 'savings'. Read More