PHASE 1: SELECT TEAM/ SPEND ANALYSIS/ WORK PLAN DEVELOPMENT Identification of spend areas

3.3.1

According to Engel (2004), spend areas are usually identified by top management and involves the selection of areas in the company that could lead to process improvement and cost reduction. Any improvement project can only work with the necessary commitment from top management, which is normally the case when an improvement project matches the company’s strategy and goals. Substantial business improvement success is only possible if top management selects projects that affect as many areas as possible in the business.

86 If a specific business unit has the biggest spend, then a local sourcing effort would be more appropriate (Engel, 2004). This is true as the biggest opportunities exist where the biggest spend takes place. Focussing on big spend areas first will allow the company to get to the

‘low hanging fruit’ first.

Creating and developing a Sourcing Team 3.3.2

In this phase, the establishment of the Strategic Sourcing team for a specific product or service is an essential step for the success of the implementation of the sourcing process, as these team members will plan the process, analyse all the data from the product and supplier, formulise the sourcing strategy and implement the expected benefits to the company.

According to Engel (2004, p. 3), “most initiatives in Strategic Sourcing provide team members by seconding them on a part time basis”. The implementation of a Strategic Sourcing process for a specific product is seen by departments as a project to improve the company’s current financial position. It is thus a project that has a starting date and end date. This means that the company cannot employ additional people for a short duration, although such a sourcing process for a specific product can take up to a year to complete, depending on the complexity of the product, the industry and the supplier base. “Rarely do sourcing initiatives have the luxury of having full time team members devoted to just the sourcing effort”, according to Engel (2004, p. 3). Strategic Sourcing is a process where collaboration is critical to the success of the process. This means that getting departments and functions involved is crucial to the sourcing effort. The process thus relies on the commitment of senior managers across the business to eliminate or reduce resistance at operating levels.

“Team members must be selected across most functions of the organisation such as finance, accounting, engineering, maintenance, operations, human resources, tax, research

& development, information technology, health/environmental/safety, marketing, sales, and others” (Engel, 2004, p. 3). The reasons for the involvement of so many role players across the business will become clear during the discussion of the detail phases found in the Strategic Sourcing process. A cross functional team will add value throughout the process, from product/service selection, to implementation and benefits reporting to ensure realisation of the expected company benefits.

87 Development of a strategy and work plan

3.3.3

After the team selection, it is important that the team members from the various departments in the company develop and agree on a work plan for the successful implementation of the sourcing process. According to Cuomo (2013), after the team selection is complete the members should conduct a kick-off meeting, where they can identify and prioritise opportunities and finalise a work plan.

Engel (2004) explained that this phase involves the development of a strategy on how to approach the identified spend area. He elaborated that “the team will normally develop a charter or mission statement with specific goals and objectives”. It is essential that the team understands the future requirements of the product as well as the capabilities of the suppliers. They will identify and establish timelines and milestones as a road map to accomplish the team’s objectives (Engel, 2004). After agreeing on the high level strategy the team members should also finalise a more detailed day-to-day work plan. This is important to ensure that all the members understand their different roles and what is expected of them. This will also give them early insight of what the expected work load will be, considering that most of them will still have their normal responsibilities in their current jobs. Cuomo (2013) listed some of the activities that should be included in a typical work plan as:

a. Industry, customer and vendor analysis.

b. Regular team meetings.

c. Define category scope.

d. Obtain copies of existing contracts.

e. Identify potential spend for procurement.

The activities listed above are hardly an indication of all the activities that could take place during a sourcing process. The purpose of this chapter is to list and discuss all the activities that do take place during a detailed sourcing process of a specific product. An essential part of this phase is to develop a communication plan that outlines how the team will convey updates and progress. Engel (2004, p. 4) noted that “an effective and constant communication will keep the company informed and provide a key element of credibility to the project”. The purpose of this communication is to keep all decision makers who will be influenced in this specific spend area involved in the direction of the sourcing process.

88 Data collection and analysis

3.3.4

Gager (2004) suggested that all the materials and services that are sourced by the company should be evaluated for similarities and broken down into commodity categories.

He further noted that this phase should start with data cleansing. Data cleansing is a process that is used to create the different commodity categories by selecting and grouping similarities and creating different categories. Commodities can be grouped by region, specification, usage, supplier, application, etc. He also noted that the development of the category baseline helps the company to make informed and intelligent decisions going forward. Commodity data can be used to determine buying patterns, one-time purchases, high volume buys, what volume is with what supplier, etc. Due to the visibility of the spend, the baseline will help to identify improvement and savings opportunities that can be used to formulise sourcing strategies.

The model in Figure 20 below illustrates that the best commodities to focus on are those where the capturing is fairly easy and the savings opportunities are the biggest, explained Gager (2004).

Figure 20: Data collection and analysis, adapted from Gager (2004)

89 The best opportunities are where the largest spend takes place; even a small percentage of a big spend can be a fairly big saving for a company. Gager (2004) concluded by emphasising the importance of data collection and analysis in this phase, as this will enable the company to clearly identify the specifications for each item in a specific product category. This important step will enable the company to leverage spending and negotiate preferential contracts, leading to crucial savings which will improve the company’s bottom-line.

Phase 1 Conclusion 3.3.5

Figure 21 below illustrates the first phase of the Procurement (Strategic Sourcing) cost reduction process developed through the literature review during this chapter. The activities that were identified in this phase of the sourcing process are team selection, data collection, spend analysis and work plan development.

Figure 21: Procurement Cost Reduction Process (Phase 1)

3.4 PHASE 2: ACCESS REQUIREMENTS AND INTERNAL/EXTERNAL ANALYSIS