The Sourcing Strategy Process

sourcing strategyWhen you’re putting together your sourcing process, it pays to be strategic. This in itself is a bit of a buzzword these days, and all strategic sourcing really means is implementing a procurement process into your organization, to ensure that you are constantly re-evaluating all of the purchasing actions your company is making. This forms a crucial part of supply chain management, especially in organizations focused on driving their costs as low as possible. If you’re new to the supply chain management process as a whole, this course has a great example of how it applies to a retail organization. If this interesting for you as a career, check out this recent post and learn the basics behind becoming an ace project manager, which will give you the skills you need for success in this business.

To fully understand how to build a sourcing strategy, you need to break it down into measurable steps that can be easily applied, no matter what your industry. As follows are the easiest way to create your own strategy for sourcing:

Understand What is Currently Being Spent

Your first task is to get a complete picture of the company’s current spending habits. Find out:

  1. How much in total is being spent
  2. Divide the spend into separate categories based on what’s being supplied
  3. Divide the categories even further into the business units doing the purchasing

This analysis is not required to be 100% accurate, use your own judgment and make estimations where appropriate. So long as it’s mostly (read: above 80%) accurate it will be very relevant, and will give you valuable insight into how the company is currently spending money. Later on when you need the specific breakdowns, you can usually get much more accurate information by reaching out to the suppliers for details.

Look at each of the products being supplied, and assess how competitive your pricing is compared to the competitiveness in the marketplace. You should also rank how important each supplier is to the organization. Once you have the overall picture, the business needs to determine which categories need to be immediately addressed, or which will be delayed until the conditions are better. When you know which category needs immediate attention, you can start the strategic sourcing process:

Understand Every Aspect of the Category Where Money is Being Spent

This is a key process done by the sourcing team, and it’s required that they fully understand every aspect of why a particular product is being bought, as well as the impact this has on the business. You’re required to do this all the way down the supply chain so that for every product being bought, you know why that particular product is being purchased.

Identify the stakeholders within all internal teams, as well as in the external counterparts. This would include teams like the logistics department, who need to know about any special shipping specifications, or marketing where certain environmental or quality characteristics may apply.

While you’re looking into every category, here are the five core sections you must focus on:

  • What has been spent historically, and the total volume purchased
  • Break down the commodities, and sub-commodities that have been purchased
  • Break down the data by certain teams and individuals
  • Break down the data to see how much is being spent on every supplier
  • Make projections on future demand, as well as the budgets available

Identify the Suppliers Present in the Market

In strategic sourcing, you should always be searching for alternative suppliers. You need to understand what the current developments are in the industry, and new market players and the latest trends. Within this analysis you should compare pricing across the major components of your product, so you have a clear understanding of who to call if your prime supplier suddenly cannot deliver. This course offers a great introduction to the different tools you can use in your supply side analysis. You should also consider the sub-tier marketplace of your suppliers, and consider both the risks and opportunities that may present themselves.

Conduct a Survey of All Suppliers

For all of your suppliers, and potential alternative suppliers you must develop a survey to help you evaluate the capabilities of each. You should also be validating all of the estimates you made in the first step at this point, as you cross check the purchase data that your suppliers have in their sales systems. Build into your survey every requirement you have from your suppliers, so that you can determine which suppliers can actually meet what you’re looking for. It is also a good way to let the market know what specifically you’re looking for, and have them consider how each will respond. Your ultimate aim is to get the right suppliers responding to you.

Build in the following sections into your survey:

  • Feasibility of all of your requirements
  • Capability of suppliers to deliver
  • Maturity of both the supplier, the market, and the components
  • Capacity and any restrictions that will limit growth and expansion

Putting the Sourcing Strategy Together

Following the first three steps, you now have the basis of your strategy. But what makes a massive difference in how you go about this is the competitiveness of the supplier’s marketplace. Now that you have the information from each supplier, you can develop an idea of the competitive landscape present in the marketplace. Remember to leverage the total purchases your company is making, and always communicate the seriousness of the sourcing exercise.

Your Organization’s Support in Testing New Supplier Relationships

Within an organization, there are two main internal stakeholders. The first are the people who use the components that are purchased, and the second are the executives who make the purchasing decisions.

Within the users of the components, they’ll usually accept cost reductions when:

  • The process has been started in another department
  • There isn’t a change in suppliers
  • The changes won’t jeopardize the existing suppliers relationships
  • The changes won’t jeopardize delivery reliability, component quality, after sales service, or payments

Within the executives, they need to

  • Be competitive on both cost and service as the key objective
  • Balance the pursuit of cost improvements as well as the users mentality to resist change

For anyone that is planning to implement a strategic sourcing process, you need to rally support from both the executives and the end users. The best way to do this is to communicate all of the benefits, as well talk through any concerns they have and ensure you have a plan to offset any risks.

Consider All Alternatives and Build Relationships

When there is a competitive supply base, you can leverage all of the suppliers to provide better pricing, or more favorable terms. Once you have decided on your suppliers you want to work with, start working with them to create a relationship. When a competitive approach isn’t viable, you should consider collaborating with suppliers because this can lead to process improvements across the supply chain.Send out your requests for proposal

This document defines all of your specifications, delivery requirements and conditions, which allows the suppliers to bid and compete on a level playing field. Always allow them enough time to respond.

Selecting your Key Suppliers

Work through your evaluation criteria and select the suppliers to begin the negotiation process. If you need extra information, don’t hesitate to ask for it. Narrow it down to a couple of finalists, and compare the total value that each will add. Consult with any other departments that are affected, and gain the approval of the senior executives before making the final selection.

Starting to Communicate

Once you have the winning suppliers, work closely with them to make the transition process smooth, they have lots of experience managing the supplier switching process. Keep all the users updated with timelines and ensure their expectations are managed throughout. You can learn more about building a supply chain model in this course and make sure you get it right, there are many departments like customer service and finance that will also be affected by the change.

After rolling out the new supplier, keep track of their performance and ensure that it is equal to or exceeding that of the previous suppliers. The key to doing successful business is always exceeding your customers expectations, which this course covers in detail. Finally, you should also keep your sourcing information current, in the case you need to add new suppliers it will make the entire process simpler next time around.