SCM - Strategic Sourcing
Strategic sourcing can be defined as a collective and organized approach to supply chain management that defines the way information is gathered and used so that an organization can leverage its consolidated purchasing power to find the best possible values in the marketplace.
We cannot build up the significance of operating in a collaborative manner. Several decades have witnessed a major transformation in the profession of supply chain, from the purchasing agent comprehension, where staying in repository was the criterion, to emerging into a supply chain management surrounding, where working with cross functional and cross location teams is important, to achieve success.
Strategic sourcing is organized because of the necessity of some methodology or process. It is collective because one of the most essential necessities for any successful strategic sourcing attempt is of receiving operational components, apart from the procurement, engaged in the decision-making and assessment process.
The process of strategic processing is a step by step approach. There are seven distinct steps engaged in the process of strategic processing. These steps are explained below in brief.
Understanding the Spend Category
The first three steps involved in the strategic sourcing are carried out by the sourcing team. In this first stage, the team needs to do a complete survey on the total expenditure. The team ensures that it acknowledges every aspect regarding the spend category itself.
The five major regions that are analyzed in the first stage are as follows −
- Complete previous expenditure records and volumes.
- Expenditures divided by items and sub items.
- Expenditures by division, department or user.
- Expenditures by the supplier.
- Future demand projections or budgets.
For example, if the classification is grooved packaging at a customer goods company, the team has to acknowledge the description of the classification, application patterns and the reason behind specification of particular types and grades specified.
Stakeholders at all functioning units and physical locations are to be determined. The logistics, for instance, needs an updated report regarding the transportation specifications and marketing requirements to acknowledge some quality or environmentally applicable features.
Supplier Market Assessment
The second step includes frequent assessment of the supplier market for pursuing substitute suppliers to present incumbents. A thorough study of the supplier marketplace dynamics and current trends is done. The major element of the key products design is should-cost. Along with it, an analysis on the major suppliers’ sub-tier marketplace and examination for any risks or new opportunities are also important.
Now, it is not recommended to analyze the should-cost for every item. There are many instances where conservative strategic sourcing techniques tend to work better. But in the instances where the application of strategic sourcing is not applicable, the should-cost analysis supplies a valuable tool that drives minimizing of cost and regular progress efforts of the supplier.
The third step is developing a supplier analysis for both incumbent and potential substitute suppliers. This analysis assists in examining the skills and abilities of a supplier. In the meanwhile, data collected from incumbent suppliers is used for verifying spend information that suppliers have from their sales systems.
The survey team considers the above-mentioned areas for gathering information. The areas are as follows −
The analysis is done to examine the potential and skills of the market to satisfy the customer demands. This analysis helps in the examination done at the initial stage to find out if the proposed project is feasible and can be delivered by the identified supply base.
This analysis also supplies an initial caution of the customer demands to the market and enables suppliers to think about how they would react to and fulfill the demand. Here the motto is to motivate the appropriate suppliers with the right structural layout to respond to the demands.
Building the Strategy
The fourth step comprises constructing the sourcing strategy. The merger of the first three steps supports the necessary elements for the sourcing strategy. For every region or category, the strategy depends on answering the questions given below.
How willing is the marketplace to oppose the supplier?
How supportive are the clients of a firm for testing incumbent supplier relationships?
What are the substitutes to the competitive assessment?
Generally, these substitutes are opted when a purchasing firm has little leverage over its supply base. They will depend on the belief that the suppliers will share the profits of a new strategy. Thus, we say that the sourcing strategy is an accumulation of all the drivers thus far mentioned.
Mostly, the competitive approach is applied in general cases. In this approach, a request for proposal or bid needs to be prepared (e.g., RFP, RFQ, eRFQ, ITT) for most spend classifications or groups.
This defines and clarifies all the needs for all prequalified suppliers. The request should comprise product or service specifications, delivery and service requirements, assessment criteria, pricing structure and financial terms and conditions.
In the fifth stage, an interaction plan needs to be executed to allure maximum supplier interest. It must be ensured that each and every supplier is aware that they are competing on a level playing field. After sending the RFP to all suppliers, it is to be confirmed that they are given enough time to respond. In order to motivate greater response, follow-up messages should also be sent.
This step is all about selecting and negotiating with suppliers. The sourcing team is advised to apply its assessment constraints to the responses generated by the suppliers.
If information across the limitation of RFP response is required, it can be simply asked for. If done correctly, the settlement process is conducted first with a larger set of suppliers and then shortlisted to a few finalists. If the sourcing team utilizes an electronic negotiation tool, large number of suppliers can sustain in the process for longer duration, giving more wide suppliers a better opportunity at winning the enterprise.
Communicaction With New Suppliers
After informing the winning supplier(s), they should be invited to take part in executing recommendations. The execution plans vary according to the scale of switches the supplier makes.
For obligatory purposes, a communication plan will be set up, including any modification in specifications and improvements in delivery, service or pricing models. These tend to be communicated to users as well.
As we know, the company gains immensely from this entire process of creating a communication plan, making some modifications according to the customer demand and further forwarding this to the customer. It’s essential that this process should be acknowledged by both the company and the supplier.
For new suppliers, we need to construct a communication plan that copes with the alteration from old to new at every point in the process engaged by the spend category. The sections that have an impact of this change are the department, finance and customer service.
In addition, the risk antennae will be particularly sensitive during this period. It is essential to gauge closely the new supplier’s performance during the first weeks of performance.
Another essential task is to grasp the intellectual capital of the sourcing team, which has been developed within the seven-step process, so that it can be used the next time that category is sourced.