Source of High Costs Could be the Source

If you've been at a staff meeting and heard your business manager talk about sourcing, your first impression may have been that he or she was role-playing a news director.

But don't worry. Your accountants don't have newsroom ambitions. They are talking about a procurement discipline that's saving Fortune 500 companies like Disney hundreds of millions of dollars a year.

Achieving that kind savings is perking up a lot of ears around the table, and the industry. If you need to find reliable sources for the growing importance of sourcing, look no further than the attendees at the annual conference for the industry's finance professionals hosted by BCFM.

The concept behind sourcing has been around since the 1930s. Companies like General Motors began using it in the 1980s as a way to improve supply chain management in the face of growing competition.

Today, it is a mandated practice within the U.S. government and has been widely adopted by a host of industries. The attraction for companies as diverse as GM, Disney, Wal-Mart and Meredith, is the ability to improve both the price and the quality of the goods and services that they require, whether it's office equipment, car bumpers or syndicated television programming.

On the cost side, a five percent decrease in supplier costs can equate to a 30 percent increase in profit margins, our conference attendees learned. They were also told that strategic sourcing could help their companies to re-align their procurement processes with their long-term strategic business objectives.

"By divesting themselves of their non-core activities, companies are realizing that they can focus their energies on areas where they have the competitive advantage, differentiate themselves from their competitors, and take full advantage of the cost savings from outsourced functions," according to the Everest Group.

The Purchasing Group found that strategic sourcing also changes vendor relationships. The customer looks at the outsourcer as a long-term asset, a source of ongoing value to the company.

Ron Jackson, manager of sourcing and procurement for The Walt Disney Co., explained that part of the organizational change that needs to occur involves centralizing the coordination of the sourcing process while still allowing local units to execute against the agreements.

Among other benefits, centralized management allows the company to negotiate master agreements with companies that supply multiple business units and to measure overall performance against the company's quality standards and financial benchmarks.

However, achieving the same results as Disney isn't easy.

"Strategic sourcing can be like nailing Jell-O to a wall," Randy Worthen, strategic sourcing category manager at Meredith Corp., warned.

"The scope and requirements are always changing shape, participants may want different flavors and the process can fall apart under too much pressure," he said.

Getting solid results requires making sure that a number of key ingredients are in the mix, Worthen noted.

They include a commitment from the top and buy-in from local stations or other business units.

This can be accomplished more easily by beginning with a few projects that demonstrate value.

Strategic sourcing practitioners also need to allocate adequate human resources to the initiative and to have a clear understanding of the company's goals and objectives, which may include consolidating the supplier base and optimizing its IT systems, as well as achieving cost savings.

"You need to remember to think strategically and not tactically," Worthen counseled.

He also pointed out the importance of becoming the customer of choice. "Strategic sourcing isn't about getting the best price; it's about getting the best value."

The takeaways from this session also fit within the global landscape painted by several of our conference keynoters, including Jeff Henley, chairman of Oracle Corp., and Brian Cox, senior vice president and chief economist for the Federal Reserve Bank of Dallas.

Cox, who also hosts a business radio program, reminded attendees that there is an upside when outsourcing extends beyond our borders.

By creating opportunities for other markets to increase local wealth, a larger base of their citizens can afford to purchase our services.

With entertainment ranking among the top U.S. exports, media companies that may have an insufficient domestic market for niche services can tap into a global market, Cox suggested.

He noted that while a number of movies lost money with their U.S. debut, none of them lost money after global distribution.

Henley, formerly Oracle's CFO, shared a few tips from the company's experiences that illustrated the operational benefits of strategic sourcing with suppliers beyond our shores.

The company adopted global operating standards and uses a shared services model to meet many of its operational excellence objectives. Oracle believes that its global integration strategy can be particularly helpful to media companies.

In addition to learning from the management processes Oracle used, the company's clients can tap into Oracle's resources when "make versus buy" analysis favors outsourcing.

Election year rhetoric and our own experiences with customers, colleagues, and friends who have lost their jobs in a move to outsourcing can make this approach seem wrong somehow.

That's why it's so important to make sure that sourcing decisions complement company strategies, that they allow us to concentrate our resources in areas that will move the business forward.

In many instances, strategic sourcing has helped TV stations and cable systems to increase their support for minority enterprises and small businesses in their markets.

By focusing on the big picture, we can make sure that we remain our customer's best supplier as well as our suppliers' best customer.

Mary Collins is the president and CEO of the Broadcast Cable Financial Management Association (soon to be the Media Financial Management Association), a professional society for addressing the diverse needs of financial and business professionals in the broadcast, cable, and electronic media industries. Her column appears here every other Friday.