“Closing the loop between Strategic Sourcing, SRM and Negotiation Planning”
Strategic sourcing, SRM and negotiation are subjects that you will find no shortage of advice on in books, journals and from consultants. The problem is, there appears to be a lack of literature dealing with these subjects in any integrated form.
Searching these terms on Google both collectively and individually revealed the following results:
1. Closing the loop between Strategic Sourcing, SRM, and Negotiation = 366 hits
2. Strategic Sourcing = 1.3m hits
3. SRM = 9.5m hits
4. Negotiation Planning = 12m hits
On examining the hits from the first search it was clear that none of the results were taking an integrated approach to these subjects. Purchasing Practice therefore decided to shine some light on the combined process:
Definitions:
Whilst we can argue about the precise definitions, at Purchasing Practice we believe most procurement professionals will accept the following as acceptable:
· Strategic Sourcing is a systematic process used to ensure the optimum supplier(s) is selected for goods or services that support the overall business objectives of the organization.
* Strategic SRM is a systematic process used to manage both the relationship and the performance of suppliers. This process treats suppliers differently by segmenting the supply base to determine each supplier’s strategic relationship the organization.
* Negotiation Planning is a systematic process used prior to conducting negotiations used to determine suitable strategies and tactics to optimize the negotiation outcome.
And, when asked about their importance, procurement professionals will answer that they are a critical aspect of purchasing and supply chain management. The problem is too many companies who think of themselves as “the best of the best” at these processes, generally lack a detailed understanding of them, and do not apply them consistently and with sufficient rigor to derive best value for their organizations. For example, how many sourcing organizations pay lip service to supply market analysis, and in doing so skip a key part of the planning that leads to adoption of a sourcing strategy and subsequent negotiation? This is clearly not a good foundation for strategy development.
The importance of planning as a prerequisite for successful negotiations cannot be overstated, and SRM and strategic sourcing are directly related to the negotiation planning process. Data from the day to day management of suppliers must first be captured and then inputted to the sourcing process, as part of defining requirements and setting goals for the future. This is usually done by profiling the category, and market analysis, which can also be used to determine each party’s power base, and to determine the appropriate negotiation style.
In order to ensure these processes become integrated, they must be clearly defined, and evaluated, to gain an understanding of the extent to which they are followed. In Purchasing Practices experience the more comprehensively and systematically these processes are followed, the more likely it is that a thorough negotiation plan is created. If the sourcing process is comprehensive and thorough, it in turn should direct the negotiation approach.
SRM helps determine the appropriate negotiation style by applying supply base segmentation and via steps 1-3 in the strategic sourcing process. These steps support the development of the strategic negotiation plan whist step 4 supports the negotiating plan at a tactical level.
Negotiating styles generally fall into two categories:
* Distributive negotiation is considered a combative or win-lose negotiation.
* Integrative negotiation is considered a collaborative or win-win negotiation.
Too many supply management organizations do not use SRM or the sourcing process outputs to determine the correct negotiation style; and instead, rely on corporate culture (combative or collaborative) to determine their negotiating style, regardless of the strategic sourcing process or SRM outputs. Such an approach is at best, hit and miss and at worse organizations will be using inappropriate negotiating styles to gain the best negotiated outcomes. For example if a corporate culture is collaborative and market analysis shows that the sourcing team are in dominant market position, then a “win win” approach may not be the optimum strategy. Supplier segmentation analysis can therefore be used to determine the correct strategy. SRM helps companies develop and execute critically important sourcing strategies in order to develop the kind of supplier relationships that add significant business value.
Companies that always use the “win-win” approach” and treat the relationship as more important than the immediate outcome are likely to be leaving large sums of money on the table and ultimately will be swallowed up by a more astute competitor or found lacking after a strategic integration.
To avoid these pitfalls supply management leaders must ensure process integration. These processes in isolation will not lead a sourcing team to the optimum outcome for a given buy. The team members must understand the importance of all the steps to fully integrate the results from strategic sourcing and SRM into the negotiation plan. In Purchasing Practices experience the most successful companies ensure this by setting up a strong governance framework for supply management to ensure strict application of best practice process steps to overcome strategic sourcing implementation shortcomings.
By setting up a series of review gates in the sourcing process the sourcing team reports to a senior team to review progress, the processes used and the stakeholder views involved. It also serves as a platform to discuss the proposed strategies and tactics etc and how these have been integrated into the negotiation plan. These gates ensure a rigorous application of the processes and also serve to ensure stakeholder support and empower the team to move on to the next phase in the process.
Supply Management leaders must therefore ensure their staff, has a thorough understanding of the strategic sourcing, SRM and negotiation planning processes. Control of these processes can be a potent source of power, one that lets you steer the proceedings toward the outcomes you want. This calls for meticulous attention to designing the processes and influencing the negotiation agenda. Strong processes and governance lay down a framework from which, knowledge and critical skill sets can be developed until they become routinely engrained within the organizational culture and capability. Then the focus must shift to managing the risk that this very “routine” starts to become ineffective.
Look out for the September edition of “Transform” where we will publish the first of a three part series on developing a corporate level negotiation capability. Visit: www.purchasingpractice.com/information
