China vs. Rest of the World: The Evolution of Sourcing Offices
Article 18 Oct. 2017

China vs. Rest of the World: The Evolution of Sourcing Offices

Over the past decade, sourcing offices have become a major part of the globalized footprint of Western distributors. Asian countries and China in particular have been preferred destinations for these entities due to the attractiveness of costs in this area.

After a first era of development and opportunities, a catching-up is now observed, characterized by constant purchasing gains in alternative areas. Most of these sourcing offices are looking for a second wind. Caught between suppliers who gradually increase their prices to keep pace with costs (labor, public services, quality ...) and their internal counterparts who expect added value (purchasing gains, flexibility, services. ..), they must redefine and strengthen their model.

Sourcing offices, a growing demand for added value

In order to increase the Added Value produced by the Sourcing Offices, three types of actions are recommended.

# 1 Streamline Processes

A quick process mapping exercise shows that support functions can account for up to a third of non-value added operations and another third of “waste” operations. Sourcing offices are no exception. Existing expectations, overlaps, and rework damage performance. This increases the workload of teams who tend to sacrifice value-added tasks such as sourcing suppliers and products.

On this axis, everything starts with the definition of added value by the teams

  • What do customers expect?
  • What are they willing to pay?

Once defined, the rationalization exercise will aim to map and gradually improve or eliminate all the tasks that do not help to create added value for customers. This is an opportunity to redefine the operating standards and expected results for each process.

# 2 Structure of Advanced tools

As the demand for high-value-added services has increased, sourcing offices often show a cruel lack of methodology for key structuring activities. The job description as defined today in sourcing offices is limited to day-to-day business execution (supplier integration, product development and qualification, order processing, etc.). Strategic actions such as defining the buying strategy or preparing for negotiation are not properly documented.

This requires, while working on operating standards, creating standard approaches and models for strategic processes.

For example, on the Purchasing Strategy axis, this means: providing a structure or an analysis model that will be used by each category to set up a medium-term vision and an associated roadmap. When preparing for negotiations, best practices show that having a standard spreadsheet per supplier centralizing key figures (turnover, discounts, changes in the price of items compared to the cost index …) helps buyers to better prepare for negotiations.

# 3 Connect Processes and tools to the Organization

The tools are generally not adapted to the needs of the teams and do not provide the right vision for the teams to monitor their activity. Information systems do not cover the entire value chain, nor all of the key performance indicators. In addition, dashboards are lacking, and sometimes several information systems coexist without being connected to share information.

Not surprisingly, the solution comes from the information system itself. Several solutions already offer end-to-end management of information and physical flow. In addition to cross-coverage, the system’s ability to deliver personalized and visual dashboards is also part of the ideal solution.

A 360 ° View of the Players, a Performance Factor

Organization is a key element in the performance of the sourcing office. It therefore requires putting the right level of skill and experience in front of each task and each interlocutor.

A lack of maturity in the organization will result in a general disorder where the sales teams (merchandiser, product manager, department manager …) will tend to monopolize conversations within the company for each subject evaluated (Quality , Supply Chain …). It is also common to see overlaps between members of the sales team.

In this context, three types of actions can be taken to improve performance.

# 1 Refine Roles and Responsibilities of the Sales Team

The sales team (merchandiser, product manager …) is at the heart of a sourcing office. This is the team responsible for set up and deploy the procurement strategy (suppliers / products) by matching internal customer expectations to market offerings.

Within the business hierarchy itself, it is important to separate the strategic tasks and operational tasks, in order to ensure that the upper hierarchical level will devote time to strategic matters and stop overlapping other levels on operational matters.

 

# 2 Position Operational Functions as Key Players in Performance

The operational teams (mainly Quality and Supply Chain) are essential to continue the activity and provide value-added services to customers.

Positioning them as key interlocutors on each of their subjects makes it possible to secure production (qualified product, on-time delivery, etc.) and avoid overlaps with the sales team.

 

# 3 Structure of Transversal Relations

To ensure proper execution of processes and ensure delivery of expected performance, communication within the organization is vital. To provide a framework and force teams with various goals to work together towards a common goal, matrix management may be relevant.

A referent is appointed by function in order to follow daily / weekly, with the referents of the other teams, the achievement of the key stages (selected product, qualified product, validated order, launched production …).

Working on the organization through these 3 axes will force the need for standardized R&R. This is where the RACI (Responsible, Accountable, Contributor, Informed) definition exercise becomes important. It will clarify newly defined roles and responsibilities through “waste” reduction workshops.

In terms of management, we cannot leave room for interpretation. Management habits and the principles of animation are often considered well known subjects but the execution suffers from a lack of definition and discipline on the part of the managers. They must be part of the new standard definition, with predefined owners, milestones, and frequent and expected results.

Upstream, the Need to Educate Suppliers

Streamlining processes and organizational alignment aren’t just for internal supply chains. Developing the maturity of counterparts is a natural and essential step in strengthening the distributor’s Supply Chain. Tier one providers are among the first to focus on in this approach.

Maintaining precise knowledge of the strengths and capacities of the supplier, aligning its processes with internal requirements, dealing with the right contacts for each function (Commercial / Quality / Supply Chain) are all bases for mastering the upstream channel.

Obviously, this also implies having regular checkpoints around the predefined dashboards and KPIs in order to get a live view of the progress of the execution.

To guarantee purchasing gains at a sustainable level of quality with the most important and strategic suppliers, it is also becoming common practice to launch supplier development programs. This implies, for sourcing offices, the appointment of resources specialized in Operational Excellence who spend time at the supplier’s site and help them improve their overall productivity through Lean workshops.

Downstream, the Need to Educate Internal Customers

Today, there is no standard sourcing organization, each distributor has developed their own approach with different levels of centralization leading to different degrees of penetration of sourcing offices in current business (penetration represents the ratio of cases handled by sourcing offices compared to the total purchase amount for a group).

Perfectly aligned organizations position sourcing offices at the heart of their strategic plan. They work together on product development and cost calculation, are responsible for the quality delivered and act as an inevitable service center to deal with upstream players. Sourcing offices do not necessarily cover the entire portfolio, but a set of predefined strategic categories (best-sellers, non-food categories, raw materials, etc.), they have the prerogative

The Example Offered by Perfectly Aligned Organizations

In Europe, Ikea, Decathlon or Zara are well-known examples of perfectly aligned organization. Their business model is reflected throughout the value chain, geared towards cost optimization and the ability to focus on the value expected by customers.

At Ikea, it’s all about reducing operating costs and the customer experience through an integrated design approach. For Decathlon, this is a strong internal alignment around the development and merchandising of internal brands. At Zara, we aim to reduce your time to market by integrating each function to design collections more quickly.

The Mixed Approach

Apart from the organizations mentioned above, other distributors mix approaches allowing entities (or grouping of entities) to deal directly with suppliers while developing their own resources in a structured sourcing office.

The more aligned you are at the group level, the less open you are to the day-to-day execution of procurement tasks by internal customers. This leads to a systematic grouping of volumes: the more volume you give to your sourcing office, the more value they will bring you. This is a key success factor in strengthening sourcing offices and giving them the best conditions to develop their potential.

Conclusion

While industrial purchases are still on the agenda given the constraints of the BtoC market, the pursuit of some good practices outlined above remains a definite avenue for improvement.

The apprehensions existing in the mindset of management, in the maturity of the organization and in the alignment of tools and processes, can and must be addressed in order to continue to position the sourcing offices as contributors to the performance.