Closing the Strategic Sourcing, SRM and Negotiation Loop

Closing the Strategic Sourcing, SRM and Negotiation Loop: Strategic sourcing, SRM, and negotiation are subjects that you will find no shortage of advice about 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:

•     Closing the loop between Strategic Sourcing, SRM, and Negotiation = 366 hits
•     Strategic Sourcing = 1.3m hits
•     SRM = 9.5m hits
•     Negotiation Planning = 12m hits

Examining the hits from the first search, it was clear that none of the results were taking an integrated approach to these subjects.

We therefore decided to shine some light on the combined process:

Definitions:

While 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.

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 lack a detailed understanding of these processes 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 step that leads to the adoption of a sourcing strategy and subsequent negotiation? Clearly, not a good foundation for strategy development.

Aligning SRM, Strategic Sourcing & Negotiation Planning:

The importance of planning cannot be overstated, as a prerequisite for successful negotiations.

SRM and strategic sourcing are directly related to the negotiation planning process. Data captured from the day to day management of suppliers is inputted to the sourcing process, as part of defining requirements and setting goals for the future. Usually completed by profiling the category, and through market analysis, the data gathered can be used to determine each party’s power base and provide input to the negotiation stratgy and appropriate negotiation style.

To ensure the processes are integrated, they must be clearly defined and evaluated, in order to gain an understanding of the extent to which they are adhered. It is important because in our experience the more comprehensively and systematically adhered to these processes are, the more likely it is that a thorough negotiation plan will result. Also, 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 while step 4 supports the negotiating plan at a tactical level.

Negotiating styles are typically defined by two categories:

1. Distributive negotiation is considered a combative or win-lose negotiation.
2. Integrative negotiation is considered a collaborative or win-win negotiation.

Too many organizations do not use SRM or the sourcing process outputs, to determine the correct negotiation style. Resorting to  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 results in inappropriate negotiating styles adopted and sub-optimum negotiated outcomes. For example, if a corporate culture is collaborative and market analysis shows that the sourcing team is in dominant market position, then a “win-win” approach is unlikely to be the optimum strategy.

Supplier Segmentation:

SRM & Supplier segmentation analysis can, 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.

Integration through governance:

To avoid these pitfalls process integration is needed. Used in isolation, they 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 our experience, the most successful companies achieve 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 governance board to review progress, the processes used and the stakeholder views involved. It provides a platform to discuss the proposed strategies and tactics, etc. and how their integration into the negotiation plan achieved. These gates ensure a rigorous application of the processes and also serves to ensure stakeholder support and empowerment of the team to move on to the next phase in the process.

Closing the Strategic Sourcing, SRM and Negotiation Loop

Conclusion

Supply Management leaders must 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.

Meticulous attention to designing the processes and influencing the negotiation agenda is required. Strong processes and governance lay down a framework from which, knowledge and critical skill sets are 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.

Nuff said …