Value-based Sourcing
One industry where procurement is not only looking at cost but at overall value creation is retail. What good does it do if you can buy something 10 percent cheaper but your customers do not like it? Always consider the overall value: the absolute margin per available shelf space you are driving with your sourcing decisions. Price per unit—and cost savings there—are not so important. What really matters is the absolute margin your supplier can drive on your shelf space. On one hand, this is driven by your suppliers 'level of innovation, their market funds, their promotions, and many other factors. On the other hand, it is also driven by factors such as the strength of the brand, substitution rates, volume lifts through promotions, and assortment constraints.
Many retailers focus on annual negotiations, market shares, and revenue. But the future lies in using advanced analytics tools to find the optimum value resulting from all the described drivers. This thinking is true not only for retail, but also for many other industries.