State of Strategic Transportation Sourcing

Today, it's more than just about price. But how do shippers put together a transportation and supplier sourcing strategy that will earn them the capacity that they need at a price that works for all parties? Fortunately, for the past year industry analysts and thought leaders have been sharing strategic transportation sourcing tips designed to develop a collaborative solution.

Strategic sourcing in general provides the policies, guidelines and processes for operative sourcing, i.e. purchasing. So, what is strategic about sourcing?

According to Jurgen Anke, a research analyst based in Dresden, Germany with expertise in IoT (internet of things), logistics managers must first have a strategic goal. This means aiming to reduce overall spending, reduce dependency on suppliers with high bargaining power, and to improve security of supply with their transportation partners.

“To get a handle on this, you look at your suppliers, the goods and transportation services you buy, as well as the purchasing organization and its controlling factors,” he says.

The tools required for that are spending analysis (who spends how much on what?), supplier management (from whom do I buy what?), contract management (which framework contracts do I have with which conditions, to what extent are they utilized and when do they expire?).

To manage these tools logistics managers must first develop strategies related to local and domestic sourcing while weighing the risks and advantages of global sourcing; single vs. multiple sourcing; and just-in-time vs. case-by-case vs. stock procurement.

“It is important to find the right mix of price, security and dependency related to the importance and spending of a certain good or transportation service,” says Anke. “Finding the right suppliers can then be supported with approaches like reverse auctioning.”

Reverse Risks

In its basic form, a reverse auction is an online, real-time dynamic auction between a buying organization and a group of pre-qualified suppliers who compete against each other to win the business to supply goods or services that have clearly defined specifications for design, quantity, quality, delivery, and related terms and conditions.

According to analysts at CAPS Research in Tempe, AZ, these suppliers compete by bidding against each other online over the Internet using specialized software by submitting successively lower priced bids during a scheduled time period. This time period is usually only about an hour, but multiple, brief extensions are usually allowed if bidders are still active at the end of the initial time period.

The process is facilitated both directly and indirectly by a number of converging internal and external developments and forces, including:

• Widespread ability for buyers and suppliers to economically communicate in real time, worldwide, via the Internet.
• Development of robust, user-friendly Internet-based software systems to support worldwide reverse auction events that are either hosted by a third party or designed to be run by the buying company with little or no outside assistance.
• Recent order-of-magnitude improvements in quality and cycle-time reductions have resulted in buying companies perceiving superior quality and service as “givens.” Thus, they have shifted their emphasis toward low price as a major sourcing decision variable.

The birth and acceptance of reverse auction tools has not been without controversy, however. This is because, for some, its process is contradictory to the long-term benefits associated with collaborative/cooperative buyer-supplier alliances.

“While reverse auctions might be a useful tool for the strategic sourcing process in some situations, it's too often used in lieu of negotiations management techniques,” says Robert A. Rudzki a former Fortune 500 Senior Vice President & Chief Procurement Officer, who is now President of Greybeard Advisors LLC, a leading provider of advisory services for procurement transformation and strategic sourcing.

According to Rudzki, strategic sourcing has the capability to impact the four drivers of Return on Invested Capital, or ROIC, and Cash Flow.

“Those drivers are revenue, cost, working capital, and capital expenditures. When we work on all four of those things simultaneously, we can have a huge impact on the ROIC of the company. The problem is that most procurement departments are responsible for a relatively small slice of the pie,” he says.

His argument is that procurement should be involved in all areas, including revenue activities that can enhance a supply chain's responsiveness to customers, especially in transportation.

“What we're really talking about is transforming procurement from a paper- pushing, back office function to a strategic value creator,” he adds.

Trusted Advisor

For analysts at The Hackett Group – an intellectual property-based strategic consultancy based in Chicago – the ultimate measure of procurement's performance is its ability to support the company's strategic sourcing and overall business strategy. Becoming a “trusted advisor” is key.

“This will require some procurement organizations to make far more than incremental improvements,” allows Patrick Connaughton, Hackett's Senior Research Director. “As procurement's operating budget is expected to grow by just 1.1% this year, it can afford to fund only a select few of its highest- priority initiatives.”

According to The Hackett Group's 2016 Key Issues Study, virtually all companies will be facing economic headwinds and other challenges in 2016. Finding new sources of revenue growth remains difficult, resulting in pressure to protect margins through cost control.

“This in turn is straining business services functions' budgets,” says Christopher S. Sawchuk, Hackett's Principal & Global Procurement Advisory Practice Leader. “Our study found enterprise cost takeout is the most prevalent initiative on the business agenda, but all the priorities identified can be viewed as defensively-oriented. To support the enterprise agenda, procurement functions must continue to increase their own efficiency, upgrade their talent, become more agile, and ensure that their strategy is in line with that of the company as a whole.”

Against this backdrop, the study findings reveal a change in procurement's priorities from last year, when elevating its role to a trusted advisor was top-ranked. In 2016, reducing purchase costs placed slightly higher on the list. Balancing these sometimes conflicting goals will be difficult this year, add analysts.

Elevating the role of procurement to that of a “trusted advisor” is not an easy, analysts admit. They note that attaining this position is dependent on a new type of talent: one comfortable with technology, able to speak the language of the business, and politically adept enough to navigate complex organizations in order to drive change.

“Exceptionally-trusted advisors are not always the ones bringing the most innovative or transformational solutions to the table. In fact, when asked to name the most important characteristic of a trusted advisor, 77% of respondents chose “consistently delivering on the basics,” says Sawchuk. “The message is that in 2016, while procurement is building out its strategy to upgrade its role, it must not lose focus on its day-to-day responsibilities.

Big Data Considerations

When asked to identify the trend with the greatest potential impact on the way procurement does it job over the next decade, the majority of the Hackett Group study participants chose predictive analytics or forecasting.

Analysts observe that as procurement's role matures from transactional facilitator to trusted business advisor, proficiency with the next generation of analytics – a.k.a. “big data” – will be a key enabler. Big data, they say, has been a game changer when it comes to customer analytics, offering an unprecedented ability to quickly model massive volumes of structured and unstructured data from multiple sources.

Donna Wilcek, vice president and VP of product marketing for Coupa – a cloud-based spend management software company based in San Mateo, CA, agrees, noting that too much “noise” can be overwhelming.

“We believe that suppliers and transportation partners must work with your company to drill down through all the data and create a sourcing event,” she says. “Everyone from the CFO on down the command chain should have access to this transparency, so that risk is mitigated and costs are contained.”

“State-of-the-art” sourcing solution for all modes of transportation has never been a more difficult proposition, say anlaysts. Transportation sourcing, including carrier contract negotiations, is a complex, large-scale function, often not well supported by a Transportation Management System (TMS) or ERP suite.

Logistics procurement strategies also vary by transportation mode, whether truckload sourcing, LTL sourcing, ocean sourcing, air freight sourcing, or multi-modal transportation procurement. Transportation buyers should look at both price and non-price bid information from carriers, in order to make the best possible and lowest risk decision.

Coupa's recent whitepaper, Understanding the Sourcing Organization Maturity Model, posits that “immature” models may not have much of a process for project planning at all– sourcing projects are handled on an ad hoc basis.
“As sourcing organizations move up the maturity ladder, projects are managed centrally but still may not be planned upfront,” says Andy Chiang, ‎Director of Product Management at Coupa.

Further up the ladder, says Chiang, sourcing projects are strategically planned out and results are reported to the CEO. The best-in- class companies are continuously updating their category knowledge and spend information, and feeding that back into the sourcing process.

“Another aspect of sourcing maturity is the process for executing sourcing projects and when it's used,” he adds. “Often companies in the early stages of development don't even have a standard sourcing process defined. As companies mature they establish a standard strategic sourcing process.”

Companies at the strategic stage of development are incorporating TCO and other risk factors into the sourcing process in order to effectively evaluate their supply base, analysts agree.

The best-in-class Sourcing Organizations have a standard set of key performance indicators or KPIs that include things like savings goals and spend under management, which are continuously updated and reported, and which drive action from both the buyer and the supplier.

The goal for best-in-class organizations is to achieve 95% spend classified, with 95% accuracy. The only way to achieve this is to employ technology.

“Technology is the underpinning that supports the process and people, so that the organization can become best-in-class,” says Andrew Bartolini, Chief Research Officer of Ardent Partners, a Boston-based strategic sourcing consultancy. “

Without solid technology, Sourcing Organizations can only hope to reach the reactive stage of development. Regarding e-Sourcing software. “If you're doing strategic sourcing, I think you have to strip out the word ‘strategic’ if you’re doing offline sourcing today.”

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