What Happens When the Sourcing Luck Runs Out?

If you have been doing something in the same way for a long time, it probably means you’re pretty good at it. But there’s a little catch – just because it’s familiar, doesn’t mean it’s always right.

Sourcing is one of the key instruments in procurement. But it is not the answer to everything procurement has to address and especially not if it is done with limited analytic ability and insubstantial mobilization of internal stakeholders. Before you can answer any question, you first have to ask a lot of them.

My wish here is to give you an example where some people in our community missed a golden procurement opportunity. I can scream strategic procurement until I’m blue in the face, but this example can unite us in the thought that we never want to miss a gold mine again.

So what’s this amazing procurement’s regret?

In the period between 2011 and the beginning of 2016 the price of aluminium, copper, steel, stainless steel, electricity, oil, gas, plastic and soft commodities experienced an unbelievable price drop between 30-70 % (71% for oil).

 

I’m sure a lot of you will say that you saw this situation coming miles away and congratulations to everyone who managed to squeeze every drop of potential during these 5 years. However, I also observed that some people simply continued with good all sourcing and fixed price frame agreements while prices continued to drop believing some minor fluctuations were indicators of a rise. Others didn’t see how long the drop lasted and there were people who missed it all together. Even industries that were not buying commodities or engineered products directly were affected. The whole procurement community had something to gain. What a waste that was.

What’s the situation right now?

Steel and oil prices are rising sharply this year, others are waiting on the sideline to start the race. If you haven’t seen suppliers demand price increases yet, they soon will – and it will intensify in the next years when all commodities join the race.

Sourcing is currently not able to deliver enough to get people out of this pickle. Not to mention that digitalization is also kicking traditional sourcing to the curb. A change of behavior is necessary.

How to change?

Our job is to deliver value and, of course, to secure our business the best deals in volatile market conditions. And preparation is always half the battle. There are quality business intelligence tools that can make our professional lives more informed and prepared. The other thing, and this is where I start to get bluish in the face, is truly devoting yourself to strategic thinking and tools.

Never again will five years of opportunity pass if procurement’s foundations are implemented – highly structured Category Management, proactive Risk Management and Supplier Management for key suppliers. After that groundwork is in motion, it’s time to throw in the intuitive sourcing skill in the mix. Sourcing needs to become just a tool that adheres to category strategy and not a go to reaction. As far as commodity prices go, only then will it become clear when the right time is to let prices fall and pursue cost reductions, and when the right time is to make long term price frame agreements. This decision is not “always A or always B”, but a dynamic approach based on market intelligence.

Overall, skill & strategy beats the market & competition.

These kind of opportunities don’t come very often and I wish you all the strategic wisdom (not luck!) to always recognize them in the future.

 

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Drasko Jelavic is a strategic procurement expert and Cirtuo’s CEO & founder. With almost 20 years of experience in strategic transformations, his knowledge was continuously upgraded in a top consulting firm in a variety of business industries.