CFOs need to support efforts by their procurement groups to design and execute a modern approach to strategic sourcing that prioritizes cost optimization and aligns with the organization’s new supply chain risk management frameworks.
By the numbers: According to our latest global survey of finance leaders, 45% of finance organizations consider cost optimization to be their top priority — and effective supply chain management for both direct and indirect spend is a key component of optimizing costs.
Bottom line: While strategic sourcing is performed by the procurement group, the finance group’s core competencies and the CFO’s strategic mindset are crucial in standing up and strengthening this increasingly vital capability.
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In case you haven’t heard, a pricing-centric approach in the procurement group no longer cuts it.
As boards and executive teams clamor for more resilient supply chains, CFOs need to support efforts by their procurement groups to design and execute a modern approach to strategic sourcing that prioritizes cost optimization and aligns with the organization’s new supply chain risk management frameworks.
The fundamentals of strategic sourcing are not new. The building blocks include robust spend analysis; supplier identification; and discovering, vetting, onboarding and nurturing new sources of supply. Although chief procurement officers might say, “Oh yeah, we’ve got that covered,” that’s rarely the case nowadays. Multiple moving parts — tariffs, geopolitical conflicts, climate-related disruptions, quality issues, reputational risk, labor scarcity, currency vacillations, regulatory requirements, supplier reliability, demand fluctuations, and a lack of transparency — put sourcing and, in some cases, overall operations at risk.
These issues are top of mind for CFOs. According to our latest global survey of finance leaders, 45% of finance organizations consider cost optimization to be their top priority — and effective supply chain management for both direct and indirect spend is a key component of optimizing costs.
Despite the growing attention focused on supply chain fragility, trading networks remain susceptible to breakdowns. This vulnerability typically stems from an outsized reliance on a small set of suppliers and an overemphasis on reducing pricing. The level of resilience sought by boards and investors requires a new sourcing mindset, one that extends beyond traditional analyses biased toward strong supplier relationships and tight coupling of supply chains and distribution channels to operations with the primary objective of driving costs out of processes and products while also adhering to quality standards. While this objective remains relevant, an organization needs more detailed, nuanced and data-driven understandings of the true nature of the company’s relationship and spend with its suppliers. The CFO’s expertise and guidance are crucial in deploying a genuinely strategic sourcing capability.
Three elements of strategic sourcing
Procurement groups can no longer afford to identify a handful of suppliers and then repeatedly bid them down pennies of cost on a unit. Of note, in our same survey of CFOs and finance leaders, among organizations taking steps to enhance their supply chain management, nearly one in three (31%) are diversifying their supply chains to include multiple sources and multiple regions.
CFOs should work with their procurement leaders to strengthen supply chain resilience and responsiveness – while simultaneously reducing the total cost of ownership (TCO) — by adopting a sourcing strategy that not only considers how the enterprise’s suppliers are identified, onboarded and managed but also maps out fresh approaches to supply chain planning and inventory visibility.
These approaches require new thinking: What’s the purpose behind our purchasing? Can we source from different countries or regions? How do we identify and nurture quality supply bases in new locations? Where are we exposed to geopolitical risk? Where can we replace products with services? Where can we replace services with technologies?
Answers to these questions will shape the priorities that guide the development of a new, or overhauled, strategic sourcing capacity. This work involves the following strategies:
- Data cleansing and spend analysis: Before evaluating and adjusting supplier relationships, procurement and finance groups should analyze current spend by category, business unit, geographical location and supplier. Conducting robust supplier and category enrichment to accurately and consistently classify spend data using industry standards and customized taxonomies strengthens the analysis and drives better business decisions. Procurement teams also should address the mechanisms by which bad data are being created (common culprits include requisition and purchase order processes).
- Category management, sourcing, and supplier identification and onboarding: Strategic sourcing focuses on the drivers that inform supplier selection. Procurement professionals should explore internal stakeholders’ risk tolerance and understand how supplier capabilities, innovation, scale and other factors are valued within the enterprise. The CFO should be an active participant in these discussions. When identifying suppliers, cast as wide a net as possible. Larger organizations often divide this work across category managers. Smaller to mid-sized companies can tap into data and certifications from trade groups and professional associations to narrow lists of prospective suppliers. From an onboarding perspective, it is important to equip new suppliers with clear policies and requirements related to product specifications, performance targets, system integrations, the use of portals, purchase order and invoicing details, and more. This information provides a roadmap for optimal performance.
- Supplier management: This ongoing work involves evaluating the importance and scale of each relationship and managing it accordingly. Classifying suppliers into tiers that correspond with varying levels of communications and performance monitoring helps ensure that high-value and high-risk relationships receive appropriate attention. Effective supplier management — which addresses performance, compliance, risk and relationship management — requires a robust set of performance measures and related KPIs so that suppliers can strive to achieve quantitative and qualitative targets. These data points should populate dashboards that help mitigate risk, support forecasting activities and strengthen the organization’s bargaining position when renegotiating agreements.
These activities also enhance supply chain planning and inventory visibility by producing data and metrics that illuminate:
- Customer expectations and demand;
- Suppliers’ capacities and operational risks; and
- Trading partners’ internal constraints (for example, related to warehousing, fulfillment, logistics, labor availability and lead times).
Where finance expertise comes in
This description of strategic sourcing is very much a high-level summary; under the CFO’s leadership, extensive cross-functional collaborations and work among finance, procurement and supply chain groups are needed to develop a full-fledged strategic sourcing capability. Much, if not most, of this work requires the finance group’s expertise, including the following approaches:
- Data analytics, metrics and KPIs: Finance can help broaden the procurement team’s pricing-centric view of supplier and vendor performance. This involves instilling a TCO mindset and assisting procurement with identifying KPIs that measure quality, reliability, risk management capabilities and capacity for innovation. Finance groups also should provide oversight of sustainability-related data management and reporting requirements that are part of strategic sourcing. Remember, CFOs are ultimately responsible for ensuring the efficacy of sustainability data, metrics and related documentation required and/or expected by regulators, customers, insurers, bankers and other stakeholders.
- Integrations and connections: Reliable strategic sourcing data and KPIs help strengthen supply and demand forecasting as well as inventory management and supply chain risk management activities. Finance can orchestrate and help govern this data-sharing. The FP&A work done by finance can benefit from this integration as well.
- Risk management and scenario planning: Finance groups are well-versed in assessing and mitigating the geopolitical, financial, operational and reputational risks driving the need for more resilient strategic sourcing. This knowledge is valuable in the design of risk-intelligent supplier selection and management approaches. The finance group’s scenario-planning expertise helps procurement teams run simulations to assess how vendors might respond to disruptions.
- Investments in talent and technology tools: Strategic sourcing requires new thinking and new skills, which translates to investments in upskilling and, in some cases, hiring new specialists (e.g., data analysts). Other procurement groups will need new supporting automation and technology tools, including those with AI, machine learning and data analytics functionalities.
While strategic sourcing is performed by the procurement group, the finance group’s core competencies and the CFO’s strategic mindset are crucial in standing up and strengthening this increasingly vital capability.
This article originally appeared on Forbes CFO Network.
