Strategic sourcing is a unique approach to supply chain management that formalizes the way how data is collected and utilized so that an organization can use its purchasing power to discover the best values for the materials in the market and align their purchasing strategy to business goals.
Strategic sourcing is possible only through continuous evaluation and re-evaluation of the sourcing activities performed in an organization. The main aim of strategic sourcing is to achieve minimum Total Cost Ownership (TCO) by minimizing the risks involved in the firm’s supply chain.
For creating a solid strategic sourcing plan, a lot of research work is undertaken which is necessary. If a firm wants to cut down on inefficiencies and unnecessary expenses, looking at its strategic sourcing plans is important.
Strategic sourcing helps businesses view suppliers and vendors as important partners in the business functioning and aims to build sustained and collaborative relations that are beneficial to both. Hence it reflects the organization’s liaison with its sourcing partners and an in-depth profile of the suppliers and their foundation capabilities is developed and aligned to the sourcing requirements of the organization.
Strategic sourcing is a long-term process that favors the firm if implemented successfully. For successful implementation of a strategic sourcing plan highly skilled personnel, technology platforms and tools are required.
Benefits of Strategic Sourcing
- Supply risk assessment is done with a proper strategic sourcing plan.
- Optimization of ideal suppliers.
- The cost savings of the firm increase significantly.
- Strategic sourcing improves decision making.
As we have already looked at the benefits of strategic sourcing and having it understood we should start developing a solid strategic sourcing plan and to build one it is necessary to implement all the 7 steps described below.
So let us begin with describing the ultimate guide of strategic sourcing
Step 1: Identification and categorization of spend profiles
The strategic sourcing process starts with identifying and categorizing the areas of spending in the firm. Identification of spending areas in the organization provides an opportunity for improvement in the firm. Understanding everything about the spending categories is an important aspect to develop a good strategic sourcing process. This includes characterizing the categories and commodities in it.
Categorizing of spend profiles can be done according to how critical or non-critical they are. When starting with the categorization of spends profiles, you should divide the entire supply chain based on various categories. You should always select categorization techniques that match perfectly according to the requirements of the firm. Once spend profiles are chosen, it is mandatory to do a risk analysis of the same. When making a categorization from zero always keep your team together and ask for ideas from them and make them participate equally in the process.
Step 2: Supply Market Analysis
The second step involves doing in-depth analysis and search of the current and prospective suppliers to evaluate their profiles related to the firm’s requirements. Studying the cost components involved in the procurement of key raw materials, and analyzing the supplier’s marketplace for risks and opportunities is essential. The supply market analysis is a four-part process: supplier market analysis, demand analysis, supplier interviews, and category risk level analysis.
Doing demand analysis is a process in which the future requirement of the product is done. Providing the suppliers your demand analysis beforehand is always beneficial in creating an efficient strategic sourcing plan.
Supplier interviews help us to filter suppliers which are capable and favorable for providing the firm with their services. Sending requests for receiving information regarding your products of interests and receiving answers help you to determine if the current suppliers of the firm are justifiable or not.
Category risk environment is a must when wrapping up with supply market analysis, it helps us to determine if the supplier is worth working with. When doing this availability, readiness, quality, and cooperation from the supplier side should be evaluated thoroughly.
Step 3: Choosing Your Sourcing Strategy
When forming a sourcing strategy you face the problem of choosing the right sourcing strategy. The two famous sourcing strategies are Porter’s five forces and A.T. Keaney’s Purchasing Chessboard. The major difference between the two strategies is that Porter’s strategy is focused on market competition whereas Keaney’s method relies on the four major purchasing strategies. When you are clear with your objectives and are all sorted out with the above two steps you will be able to identify easily which strategy you should proceed with.
Step 4: Building a Sourcing Strategy
This step involves how the team will work for the identified spend area. This step makes it necessary to create a communication flow so that everyone concerned with the sourcing strategy has a clear understanding of what the firm wants to achieve after developing this sourcing plan. While developing a solid sourcing strategy defining the firm’s objectives, goals and corresponding timelines are necessary to make the sourcing plan error-free.
Step 5: Supplier Selection
After the evaluation of vendors, it is easy for business firms to decide whether they can work with a particular supplier or not. Supplier selection should be done while assessing the competency of the suppliers. In this stage, it is important for the firm to clearly state its requirements to the suppliers. Documenting a questionnaire with all the questions stated clearly will help you get all the answers you expect regarding product, processes, cost and other important things.
Evaluating the questionnaire once you get them back will do so much work for you. After the evaluation of questionnaires, it will be easy for you to choose which suppliers are worth your firm’s trust.
Step 6: RFQ Management
An RFQ is a chance for suppliers to quote competitive costs. When you have shortlisted some of the suppliers, to get the best value for your money, an RFQ is necessary. RFQ management is another Four-step process in developing a solid sourcing plan. We start with preparation, followed by tender, awarding and closing of the process.
The preparation part consists of creating a formal document to be sent to every company that has been shortlisted.
The tender sub process helps in communicating the exact details of the project and the rules and regulations to be followed by the shortlisted firms. For firms that have not done an RFI previously it is advisable to attach a prequalification requirements section in the tenders who will help the firm to identify suppliers that match the exact requirements of the firm.
An RFQ may include a pricing template, designed by the firm previously and attached with the general documents of the project. If you want a quick evaluation of prices mentioned in the RFQ, including a well-structured price template is justifiable.
The awarding of the tender should be done fairly and the awarding criteria should be known to each participating supplier beforehand through the general documents of the tender. In most cases, after selecting criteria for awarding of tender, the suppliers that offer the most cost-saving to the firm are selected and awarded the tender. Awarding criteria can differ according to a firm’s requirements and field of working.
After awarding the tender, the contracting process starts to on-board the suppliers and they are then considered as an important part of the company’s functioning. Before this, a final meeting with the suppliers is done to know their final consent. If all is done well, the winners of the tenders can be then announced publicly.
Step 7: Additional Improvements
It is in this step when organizations look out for sustained improvements. This is the time used to analyze and reflect on the sourcing strategy created till now. This is the stage at which improvements can be made if there are any deviations found. This step should be done always in the loop and this will only benefit the firm.
Step 8: Strategic Sourcing Tools
Modern-day businesses spend thoroughly on using powerful strategic sourcing tools available in the market. Today strategic sourcing tools support a plethora of requirements like analyzing a company’s spending, requisitions, RFQ events, and the most important Supplier relationship Management.
The spend analysis tool should be able to store and retrieve all the information regarding the purchases made by the firm from various suppliers. It should be available in the ERP so that it can be accessed by anyone.
The requisition process should be highly automated to increase the firm’s efficiency.
The RFX process is the combination of all the formal requests which can be made by a firm during the negotiation process. So it is necessary to communicate with the suppliers. To establish communication with suppliers it is necessary to choose a SaaS service, rather than creating personalized software that can be expensive.
Step 9: Category Team Selection
This is the final step in developing a solid sourcing strategy. This step involves choosing teams for every category in the firm. The choice of team members should be done keeping in mind their geographical locations and capacity to handle tasks. It is necessary to introduce every person on the team to his/her responsibilities beforehand.
When you complete the above nine steps we guarantee you that you will have a solid strategic sourcing plan which will help your firm to succeed in cutting down costs and decreasing the TCO.
Try them out, these are just guidelines to succeed and as we all know the success of the firm depends on many other factors too. Don’t just merely depend on these. These guidelines will surely increase your firm’s chances to succeed in the market by providing it with a unique strategic sourcing plan.