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Knowledge Based Sourcing: Achieving Greater Impact through Advanced Sourcing Approaches

Ash Bedi, Principal, Booz & Company

"Knowledge Based Sourcing" (KBS) is a competency consisting of a set of powerful techniques used to identify high impact value drivers whereas traditional sourcing approaches can result in limited benefits or fall short of desired strategic outcomes. Application of KBS results in increased understanding and knowledge of ideal cost structures, including current supply base gap to ideal. These economic insights can be used to develop better relationships with suppliers, focused on reality based improvement plans, rather than year-over-year give-backs. In addition, KBS enables speed and efficiency in optimal design, market testing using supplier specific models or tables, and informs decision-making for product design changes. KBS is applicable for a variety of spend categories, including direct and indirect spend across both products and services, and is especially applicable for more complex spend areas.

KBS is fundamentally different from traditional market-based sourcing approaches. Market-based sourcing is focused on embracing supply markets competitive context and/or obtaining the best competitive outcome possible, primarily through pricing. KBS, however, is predicated on a deep understanding of cost drivers, the supply market, and spend category context. The ultimate goal is to develop an ongoing business advantage, often in collaboration with the supply network and internal stakeholders.

Some basic characteristics contrasting traditional market-based sourcing approaches with KBS approaches include:

KBS is focused on developing a deep contextual and analytical understanding of several critical areas associated with the spend category, including:

Supply market economics and cost drivers Drivers of price in the supply market (beyond costs) Variation in supplier capabilities and cost structure (and its drivers) Spend category economics, including internal usage economics as well as cost/performance trade-offs Spend category impact on broader business objectives

KBS has broad based applicability across a variety of different spend categories. While the impact from sourcing can be enhanced from a deeper understanding of costs and suppliers in nearly all spend categories, KBS is particularly critical in developing appropriate sourcing strategies in more complex spend areas.

Examples of spend categories and their characteristics where KBS is fundamental to identifying appropriate sourcing opportunities include:

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KBS consists of a core set of analytical techniques that are utilized based on the specific spend category and contextual applicability. These analytical techniques require skills that are more advanced than those associated with market testing and managing Requests for Proposal (RFPs). These same competencies are specified by the Center for Advanced Purchasing Studies (CAPS) as critical organizational competencies for high performing sourcing and procurement organizations. Broadly speaking, many different (but related) representative analytical techniques can be employed either collaboratively with suppliers or independently, leveraging various sources of data such as external market and supplier research, plant visits, Requests for Information (RFIs), etc..

The following are examples of analytical techniques that are often employed as part of a KBS approach:

Industry value chain analysis Analysis of supply-demand dynamics Production process mapping Bottom up cost build up by component, plant or supplier Parametric modeling and regression analysis Comparative factor cost analysis across suppliers and locations Analysis of scale and utilization impact on costs

As previously mentioned, the insights arising from a KBS approach go well beyond typical outcomes from a market-based approach to sourcing and lend themselves to achieving far greater advantages for the organization. Market-based approaches result primarily in identifying the most competitive prices and price-related elements. KBS approaches open the door to developing more strategic supplier relationships where appropriate, and working with suppliers to jointly drive down costs in the longer-term, often lower than what price competition alone can yield.

Example insights from KBS techniques that can be used to inform sourcing strategy include:

Selecting cost-advantaged suppliers based on key factors such as the technology employed and buyer volume Identifying appropriate order quantities (aggregating internal demand) resulting in lower supplier costs and ultimately lower buyer total cost

Understanding the trade-offs between cost and product/service performance to better inform design and specification decisions Improving transparency on underlying supplier cost drivers to achieve win-win outcomes

Utilizing KBS techniques led by the sourcing and procurement organization is a critical component to driving greater value and business impact across the broader organization. These techniques lend themselves to developing robust sourcing strategies in collaboration with key internal stakeholders and suppliers. The results include better support of strategic business objectives as well as stronger positioning and credibility of the sourcing and procurement organization.

< Back to Inside Sourcing - June 2011

Tags: Booz, Inside Sourcing, knowledge based sourcing (KBS), knowledge management, sourcing tactics

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