Realize the benefits
Executives are beginning to understand that procurement is a key
part of the business or supply chain process. It is typical for
businesses to spend more than 60 percent of revenue purchasing
goods and services; and it is estimated that approximately 70
percent of all potential savings from purchasing can only be
achieved through the Strategic Sourcing process. The results of a
well-managed Strategic Sourcing initiative can be impressive and the
benefits can be extended well beyond cost reduction.
Impact the Bottom-line
Cost reduction is typically the primary goal of most Strategic
Sourcing initiatives, because savings in cost of goods sold (COGS)
fall directly to the bottom-line. For example, let’s assume that a
business reduces COGS by $1 million. If that business has a 10%
margin on sales, it must sell $10 million worth of products to
achieve the same $1 million in reductions or savings. Again, every
dollar from reducing COGS comes directly off of the bottom-line.
This is critical in a business environment where it is more difficult to
increase revenues.
When properly executed, Strategic Sourcing focuses on total costs
and not just the purchase price. Often, procurement professionals
consider the “sticker price” versus the price of the complete lifecycle.
However, other costs should also be taken into account such as
carrying costs, service and repair expenses, and end-of-life/disposal
costs.