What is strategic Sourcing?
Strategic sourcing is a proactive and systematic approach to procurement within the supply chain. It involves the process of identifying, evaluating, and selecting suppliers to meet an organization’s material and service needs in the most efficient and effective manner possible.
The goal of strategic sourcing is to optimize the supply base by finding suppliers who can provide the required goods or services at the best possible value while considering factors such as quality, reliability, innovation, and total cost of ownership.
The Role of Strategic Sourcing in Procurement:
Strategic sourcing stands at the forefront of the procurement model, dedicated to finding and contracting with suppliers who can effectively meet an organization’s material and service needs.
When the need for new materials or services arises, the strategic sourcing process is initiated. It commences with an opportunity assessment, which determines the specific requirements, quantities, timelines, and critical elements associated with the new material or service.
Analyzing Demand and Identifying Suppliers:
While analyzing demand for established products may seem straightforward, it becomes more challenging when dealing with new components for new products.
Accurately predicting sales volume, product lifecycle, and future replacement part needs can be complex. In such instances, the procurement function collaborates with other organizational units to conduct demand analysis and build contingencies to handle unexpected variations.
For example, imagine the challenges faced by an Apple employee responsible for sourcing parts for the first-generation Apple Watch. Ensuring the availability of quality suppliers capable of meeting production requirements becomes paramount.
Researching Potential Suppliers:
The strategic sourcing process relies on thorough research to identify potential suppliers. This research involves reaching out to existing suppliers, conducting internet research, reviewing trade magazines and professional societies’ literature, and fostering collaboration with peer organizations.
Many corporations establish commodity councils to facilitate knowledge sharing about specific suppliers and commodities across different geographies and divisions. This practice helps leverage spend and mitigate effort and risk associated with researching new suppliers.
Formal Proposal Process: To ensure fairness and transparency, many organizations employ a formal proposal process to identify and evaluate potential suppliers. This process often begins with a request for information (RFI) to identify a set of suppliers who demonstrate willingness and capability to engage in further discussions leading to a potential contract.
Requests for proposals (RFPs) are then issued, providing detailed documentation outlining the specific product or service needs. RFP responses are evaluated using criteria scores and weighted scorecards, which help identify a shortlist of vendors for final discussions and selection.
Auctions and Supplier Selection: With the rise of internet-based tools, auctions have gained popularity as a means of quickly communicating requirements to a broad range of potential suppliers. Auctions are particularly efficient for commodity-specific needs. However, for highly specialized requirements that demand a deep understanding of unique product and service specifications, auctions may not be the most suitable approach.
In the strategic sourcing process, the final step involves supplier selection and contracting. Regardless of how the supplier is identified, final negotiations take place, culminating in the creation of a contract that specifies pricing, service requirements, legal terms, and other essential aspects of the supplier relationship.
Considering Total Cost of Ownership:
While some may advocate for a narrow focus on securing the lowest purchase price per unit, a more prudent approach is to consider the total cost of ownership (TCO). TCO encompasses all expenses associated with purchasing, deploying, using, and retiring a product or equipment. It factors in costs such as service, repair, insurance, freight costs, proposed inventory ownership policies, return policies, and the ease of interaction with suppliers.
By adopting a TCO approach, procurement personnel can make more informed financial decisions that reflect the true long-term value and impact of their purchases.
Summary: Strategic Sourcing steps
Strategic sourcing encompasses a series of essential stages to optimize procurement processes. Let’s explore these stages in detail:
Analyzing Product Categories and Processes: The initial step in strategic sourcing is to thoroughly examine the product categories and processes within your organization. It involves gathering detailed information such as quantity, locations, and utilized processes. This data must be diligently documented to provide a comprehensive understanding of the sourcing requirements.
Conducting Supply Market Analysis: The next stage involves conducting a thorough analysis of the supplier’s marketplace. It includes assessing potential risks and identifying opportunities within the supply market. Consideration should be given to all costs involved, ranging from raw materials to transportation, in order to develop a holistic understanding of the market dynamics.
Determining Sourcing Approach: To determine the most suitable sourcing approach, it is advisable to assemble a cross-functional team. Evaluate your existing suppliers and explore alternative options to ensure competitiveness in the supplier market. This stage involves careful consideration of supplier capabilities and availability.
Thoroughly Researching Potential Suppliers: In this stage, it is crucial to conduct comprehensive research on potential suppliers. Request proposals from suppliers based on specific specifications encompassing delivery, product quality, cost, and legal terms and conditions. Thoroughly evaluate the proposals received to identify the most suitable suppliers.
Supplier Selection and Negotiation: Once all proposals are received, the strategic sourcing process progresses to supplier selection. Evaluate each proposal meticulously and seek clarification where necessary. Engage in multiple rounds of negotiations to establish a mutually beneficial agreement with the selected supplier(s).
Effective Implementation through Communication: Effective communication plays a vital role in implementing strategic sourcing. It is crucial to ensure that suppliers are kept well-informed about any changes in requirements. Open and transparent communication facilitates smooth implementation and minimizes potential disruptions.
Monitoring Supplier Performance: Continuous monitoring of supplier performance is imperative to ensure that the full value is being achieved. Regularly evaluate the supplier’s adherence to contractual obligations and assess their overall performance. This stage involves tracking key performance indicators and promptly addressing any areas of concern.
By following these stages diligently, organizations can optimize their strategic sourcing efforts, improve supplier relationships, mitigate risks, and drive overall procurement success. Remember, strategic sourcing is an ongoing process that requires continuous evaluation and adaptation to meet evolving business needs.