A regular column on producing spend intelligence and conducting strategic sourcing in companies. APRIL 2014: Strategic sourcing in the extractive industries

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• To maximize profits/minimize losses under all recovery scenarios…
Estimating the ultimate recovery of a commodity from current properties is often a
subjective exercise. Actual recoveries may vary significantly from earlier
estimations. To maximize profits or minimize losses under any actual recovery
scenario, the costs of recovery must be kept as low as efficiently possible. Your
operation needs strategic sourcing of supplies and services to ensure the cost
efficient recovery of commodities.
• … and under all revenue scenarios…,
The ultimate price at which recovered commodities can eventually be sold to
customers is subject to market price volatility. It means that the revenue the
company will receive for a specific volume, will be determined long after the
costs of recovery have already been paid. The company must therefore be committed
to a strong cost efficiency ethos in its recovery activities, in order to maximize
profits/minimize losses under any actual revenue scenario. Strategic sourcing is
needed to ensure such cost efficiency.
• …you must avoid a Procurement quagmire.
The signs of inefficient sourcing practices are many. When categories have a
greater number of suppliers than supply security reasons justify, the company is
likely losing out. Lost opportunities could be in the form of lost volume
discounts that could be achieved through supply consolidation. More suppliers also
lead to a higher internal administration cost. Another sign is that the same
supplier supplies the same product or service to different company operations
under different contracts (with different pricing). The company could also be
confused about its current contractual status with key suppliers, leaving it in
the dark about how the pricing was contracted e.g. a decade ago. The company could
as a result lose potential discounts on increased volumes that it procures today.
Confusion about contractual status could also lead to internal stakeholders buying
from freely selected suppliers. Such maverick spending could lead to lower profits
for the company. Furthermore, some of your suppliers may be about to go bankrupt
without you knowing it, although the indicators are already there. If your
operation suffers from some or several of these symptoms, you may be in a
Procurement quagmire.
• Avoiding the quagmire through strategic sourcing
Strategic sourcing is the gate to the way out of this quagmire. When your sourcing
activities follow a commercial strategy which is based on actionable spend
intelligence, and is implemented through a solid category and contract management
process, your company can avoid the Procurement quagmire. Your company can then
maximize profits or minimize losses under any recovery or revenue scenario that
your extraction activities are subjected to.
Thoughts on Spend Intelligence
Newsletter : April 2014
Strategic Sourcing –
Ensuring cost efficiency in the extractive
industries
Ari Korpinen, Procurement Specialist