25 years a procurement consultant: 7 step sourcing
Today marks my 25th anniversary of being a procurement consultant. In January 1995 I kicked off my first project at Daimler. I was double fortunate. Not only did I have a prestigious client, I also had the privilege of working with the team that 10 years prior had conducted the Global Sourcing project with GM’s Ignacio Lopez.
As to be expected, I found myself on a steep learning curve. While being a mechanical engineer by training, my focus at university had been on jet engines and later on artificial intelligence. Therefore, a lot of the automotive terminology was new to me.
What was even more novel, was procurement. Like many other graduates, I had heard about accounting, marketing and general management but I could not recall procurement ever being mentioned in any of the classes I had attended.
The good news was that my new colleagues had a crystal-clear approach to deliver the high savings that our client expected. It was called 7 step sourcing. At that point in time, it was revolutionary. Before 7 step sourcing, procurement was merely an administrative function focused on processing paperwork with suppliers. With 7 step sourcing, procurement had a razor-sharp tool to deliver the breakthrough savings that CEOs wanted. In a way, 7 step sourcing got procurement into the board room.
For those of you too young to remember 7 step sourcing, here is a quick overview:
Step 1 – Determine commodity profile
Here we found out who buys what from which supplier. Companies did have this data structured by divisions or by products they sold. But we needed it by commodities that were relevant for suppliers. The result of shoveling around tons of data was a spend cube.
Step 2 – Develop commodity strategy
We had three commercial strategies and three technical strategies. Picking a strategy depended very much on intuition or in my case on the experience of my seasoned colleagues. Today, we have the Purchasing Chessboard with 64 differentiated methods and a clear guideline how to pick the right one for a specific situation.
Step 3 – Generate supplier portfolio
Those were the days before the internet. Access to information was hard. We had heavy reports with list of suppliers in Iberia, Eastern Europe, Mexico, India and even China. But these were also the days when German companies bought from German suppliers, French companies bought from French suppliers and US companies bought from US suppliers. Our lists turned out to be powerful.
Step 4 – Select implementation path
Here we brought everything together and estimated the cost benefit ratio of the emerging alternatives. We also looked at how much time the alternatives would require and what the associated risks were. The outcome was a recommendation for action that we would align with management.
Step 5 – Determine competitive price level
Looking back, I believe that in those days a lot more emphasis was put on preparing negotiations. The Harvard approach with MDO, LAA and BATNA was commonplace and hip shooting was frowned upon.
Step 6 – Implement competitive price level
In case of leverage back with incumbent suppliers, this was just updating the prices in the ERP system. But supplier switches were frequent. Lots of supplier validation and proving sample parts were required. I vividly remember a supplier driving prototype shock absorbers over the Alps in a snowstorm in order to get them installed in trucks departing for a winter test in Norway.
Step 7 – Ensure sustainability
Letting the prices swing back was not an option. A clear plan to maintain pressure on suppliers was part of the package and expected by the client.
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Procurement was a contact sport then. We assembled boxes with drawings and specifications to be sent to suppliers. We had to keep the fax machines going. Negotiations verged on the brutal.
Procurement has made great progress since. Lighting fast analytics. Clear decision support. Real time access to suppliers. But maybe it has become a bit too sophisticated and sterile. A healthy dose of the can do, make happen mindset of the 1990s might be helpful.
Check put the related YouTube video.
