Strategic Sourcing: How to Create a Breakthrough Cost Reduction By Designing an

Effective Scope

The scope of your sourcing strategy is one of the most important parts of your sourcing strategy.

Get it wrong and it will severely affect the size of the cost saving you can make as well as the innovation and service improvements you can make.

The scope sets out what you can and cannot consider when creating your sourcing strategy.

Suppose you are going to market for a cleaning contract for a number of offices.

If you tender just for that the price you get may or may not be better than the one you currently pay.

But if you add to the scope other, related services then you are increasing the value of the contract and so your leverage with suppliers.

You may also reduce the number of capable suppliers who can deliver these services which reduces your leverage – so be careful!

But how about going further?

You may decide that you want to outsource the whole of your property management or even sell and lease back the properties.

This will dramatically increase the value of your contract and take you into a different cost savings league but will also increase the complexity of the tender and the subsequent contract management.

A further development from this would be to sell off your property portfolio and buy in a service in which the supplier provides a defined office space per person together with everything that staff member needs to perform their job – such as heating, lighting, furniture, telephone, computer and so on.

Build in the flexibility to scale up or down the operation as your business needs change and you have converted a fixed cost into a variable one.

Eliminating waste in the form of excess office space can yield dramatic results.

If the supplier can bundle your requirements with those of another organisation then even better results can be achieved.

Other questions you can ask in order to define your scope include whether there are any geographical boundaries.

This might be the result of market capabilities (for example, the technology you need is not available in certain parts of the world) or because of your sustainable procurement strategy (for example, only buying renewable resources).

Another question could be what time period should the strategy cover?

For example, if your selected supplier will need to make an investment in equipment in order to fulfil the contract, you will need to give them long enough to recover that cost.

There might also be organisational boundaries that your scope needs to consider.

For example, your scope might already be covered by a collaborative agreement with other organisations and you are contractually bound to honour this.

The output from this process of defining your scope should be a simple statement of no more than one or two sentences. For example …

All residential care homes in the countyIT maintenance that includes all laptops

All grades of boron, carbon and high strength steels for manufacturing plants in Europe

What the cleaning contract example shows is that by considering the capability that you are sourcing instead of the narrow product or service definition, you can generate options that substantially increase the value of the contract.

In our example we did this by thinking about the capability as being the management of the working environment.

This led us from a very narrow scope (cleaning) to options that included outsourcing our property portfolio.

The result of doing this is more options for creating a breakthrough reduction in your costs.

Want more Top Tips on sourcing strategies?

Then download my free booklet “57 Top Tips” booklet by going to …

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