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Sourcing and Procurement

Commodity management: Going from ‘reactive’ to ‘strategic’ sourcing

Is your commodity sourcing strategy proactive or reactive? Are your buying decisions focused on matching your budget? Are you carefully executing a buying strategy, or raising purchase orders as needs arise?

The answers to these questions will determine the state of your organization’s purchasing process. Your responses will also indicate the strength of your strategic sourcing.

For businesses that manufacture and sell products, the cost of procuring raw materials is probably the single most significant one. Rising tariffs, ongoing trade wars, and increasingly turbulent geopolitical state of the world, along with rapidly shifting consumer preferences and evolving regulations and technology, are making commodity markets volatile. Yet, in the current scenario, when market unpredictability upends procurement strategies without warning, commodity management needs seasoned sourcing experts to help tide over a wide range of sourcing scenarios.

And that is exactly why commodity councils or strategic sourcing teams matter more than ever.

Commodity councils for strategic sourcing

Commodity councils are cross-functional teams responsible for strategizing the enterprise-wide sourcing of certain categories of products or services at the lowest costs. These team members may belong to various functions - engineering, finance, procurement, and manufacturing - and have long-term expertise to drive the following objectives:

  • Develop a central strategy to procure high-quality materials and services at the lowest total cost.
  • Establish centralized contracts for enterprise-wide needs for certain commodities.
  • Capitalize on cost reduction strategies and leverage buying power with the help of market experts.
  • Form strong relationships with preferred suppliers.

Moving beyond regulating processes to reduce costs and mitigate risk, today’s commodity councils are focused on identifying and eliminating hidden inefficiencies and uncovering new sources of value. They are geared to leverage data, business knowledge, and analytics for deep market, customer, and spend insights.

Advantages of commodity management council

Here are some of the key advantages of commodity councils that make them attractive to organizations.

  • Commodity councils can fetch discounts on large lots and improve process efficiencies, which are difficult to achieve by departments in siloes.
  • They also reduce the onus on strategic sourcing by eliminating multiple contracts for similar items - this gives you one optimized supplier base.
  • Commodity councils can simplify product configurations, drive down technical support and spare part costs, and save time.

Commodity councils keep the focus on the following key procurement KPIs

A good commodity management team can create a robust procurement strategy or help you adapt your strategy to the current and forecasted market elements. This aims to achieve the following.

Spend management and analysis:

It is critical for an organization to analyze its current vs. forecasted spend on procuring raw materials. This requires them to aggregate total purchases across all organizational divisions.

Tracking actuals against budgets:

It is essential to use budgeting accuracy to stay aligned with finance, a vital stakeholder.

Meeting the targeted cost saving:

Combining several strategies, such as the following, for cost saving:

  • Choosing long-term contracts
  • Buying in bulk
  • Distributing the spend optimally across various business units
  • Leveraging supplier competition

Avoiding additional costs:

Helping absorb otherwise ineluctable costs arising from dynamic exchange rates, inflation, gratuities requested by clients, and more.

Total cost of ownership (TCO)

Beneficial average payment terms:

Optimizing the working capital through well-negotiated payment terms and service level agreements (SLAs).

Optimizing the number of suppliers:

Driving efficiencies with the right number of suppliers mapped to the right commodities and avoiding supply risks.

Driving vendor accountability:

Ensuring cost efficiencies and added value with a strong vendor performance measurement system, which closely monitors lead times, defects, and delays.

Keeping a majority of the spend within the boundaries of contract coverage:

Reducing costs and avoiding credibility loss by staying compliant and eliminating out-of-contract buys.

How strategic initiatives in commodity sourcing can add value

Reviews of top purchasing organizations such as Honda, John Deere, Toyota, Hewlett-Packard, and Cessna Aircraft have indicated that strategic sourcing laid the groundwork for tremendous cost reductions, increased productivity, improved quality, and higher ROI.

Deere & Co. developed procurement strategies for four material classifications - unique, critical, generic, and commodities, comprising 49 direct and 15 indirect materials. This helped Deere to bring down the number of their suppliers from 1,675 to 20 and cut the costs by 13 percent.

Cessna Aircraft Co., through its procurement strategy implementation, realized an 86% improvement in supply chain quality, a 28% improvement in material availability, and 113% improvement in production inventory turns.

Take on the future with cutting-edge procurement strategy

The sourcing and procurement services by Infosys BPM leverage artificial intelligence to provide advanced capabilities, ensuring faster, better decisions.

  1. Design thinking (DT):

    Procurement consulting companies need to look beyond their clients’ stated problems and design solutions that are fit for purpose, and proactively solve end-customer issues.
  2. AI and robotics-led automation:

    Infosys BPM leverages Infosys Nia, the next-generation enterprise AI platform that combines machine learning with a deep understanding of the customer, to provide 70-90% improvement in transactional processes.
  3. Advanced analytics and reporting solutions:

    CPO dashboards present procurement metrics through descriptive, diagnostic, predictive and prescriptive analytics solutions. Advanced analytics, in combination with AI, offers category digital cockpit and procurement insights services for senior stakeholders.
  4. Strong category management capabilities:

    Investment in advanced skill sets and commodity councils for complete category coverage across direct and indirect categories.

A technology-driven and well-executed procurement strategy gets you much more than discounted deals.

Elements of a procurement management system

Even though every organization’s requirements are unique, a typical technology-based procurement management system has the following elements.

  1. Data
    1. PO data
    2. Spend data
    3. Contract data
  2. Dashboard
    1. Global visibility with granular drill-down
    2. Identification of savings opportunities
  3. Project identification
    1. Sourcing projects identified based on various levers on dashboard
    2. List of identified vendor-wise and category-wise projects
  4. Project feasibility validation and implementation
    1. Activities post identification of opportunities
  5. Price variance analysis
    1. Obtain better prices
    2. Quick payback
  6. Contract bypass analysis
    1. Analyzing non-contracted purchases and bringing them under price lists
    2. Moving spend from non-preferred vendors to preferred vendors
  7. Competitor analysis
    1. Identifying competitors by tagging similar material number purchased
    2. Executing benchmarking exercises

Conclusion

Organizations want to optimize the resource usage while maximizing profits. Reducing the vendors and purchase orders while keeping profitability at par is necessary. Commodity councils, AI, robotic process automation (RPA), and CPO dashboards are perfect for transforming the commodity procurement strategy.

Get in touch with us to learn how you can make the most of technology and market expertise for strategic sourcing that drives value throughout the year.