In our last article, we highlighted the differences between Strategic Sourcing and Spot-buying (Tactical Sourcing). We will cover the latter topic in our future article on Purchasing operations. As for now, we will look at the mechanisms of Strategic Sourcing.
Strategic Sourcing Process
Unlike Spot-buying activities, a sourcing initiative typically starts from an idea or an anticipation of an organisation’s need for supplies. The most common sources of information to kick-start strategic sourcing initiatives are financial budgets and operation/investment plans. The objectives for sourcing may be the bundling or concentrating of demand for common supplies used throughout an organisation, or simply re-negotiating existing supply agreements to secure cost savings. Regardless of the aim or purpose for strategic sourcing, a simple workflow or process that guides the sourcing initiative will be helpful to maintain control and visibility of the tasks. Thus, a typical strategic sourcing process is as follows:
A number of organisations, professional bodies and thought leaders have published their views and experiences on the strategic sourcing process. We will not debate on the advantages of one process over the other. But it should be emphasized that all processes for strategic sourcing should include the following tasks:
- Analyse the usage pattern from spend data and anticipate the demand for supplies. A brief specification or scope of services should be documented and agreed with business users. At this stage, the specification for the commodity and service should be harmonized and standardized within the organisation as much as possible, to increase the bundling effects.
- Analyse the supply markets, industry trends and identify potential suppliers. Electronic and web-based marketplaces and business directories are good tools for discovering suppliers at this process step.
- Develop a strategy for sourcing the supplies based on the analysed data. Use one or more levers that can deliver the desired results and anticipate the potential risks and associated expenses for the choice.
- Create a plan for securing competitive quotes and the tactics for subsequent negotiations with suppliers. Keep in mind that best-in-class procurement organisations are more likely (56%) to use eSourcing tools to help them achieve impressive performance which translates into cost savings.
- Determine the criteria for evaluating and selecting suppliers, preferably involving the users directly and before competitive quotes are received. Executing this step before actual quotes are received will ensure that an impartial decision will be made based on objective facts and figures, and avoid subjectivity in the selection process.
- Create frame contracts with selected suppliers based on the agreed terms of supplies, and for a specified period. Retain the frame contracts and supporting documents for future references and as a basis for audit compliance and performance management.
- Implement the contracts with sufficient instructions and information to users and buyers alike. Some supply contracts may require the creation and maintenance of material or service catalogues to enable the organisation to order the supplies via eProcurement tools. Poorly implemented contracts will give rise to maverick spend which undermines the contract value and sourcing benefits.
- Finally, establish a feedback mechanism to collect, review and evaluate the performance of suppliers and the agreed contracts. Such operating data should form the input to the next round of strategic sourcing initiatives.
More detailed descriptions of the process steps, criteria (including adoption of eSourcing tools), and performance standards can and should be established to harmonize the process. The criteria and standards may be adapted and tailored to suit different categories of commodities handled, with exceptional processes included. However, it should be clear that exceptional processes should be used sparingly, lest the harmonized sourcing process is undermined.
To establish the right strategies for sourcing initiatives, Sourcing Managers rely on a number of levers to deliver the desired results from sourcing initiatives. A well-known and widely-accepted approach is the Sourcing Gemstone Model by A.T. Kearney.
The Sourcing Gemstone Model has no less than 20 prescribed sourcing strategies to address many situations and scenarios. For more complicated sourcing initiatives, more than one strategy or lever may be deployed to achieve the desired results.
There are no lack of training and knowledge articles offered or published by professional bodies and procurement practitioners on the use of this sourcing strategy model. But organisations have different priorities and objectives for strategic sourcing. Hence, it is advisable for new Procurement organisations and Sourcing Managers to establish a list of sourcing levers that can be easily deployed to address the most common sourcing scenarios they are expected to manage. It is not uncommon for newly established Procurement and Sourcing organisations to concentrate their efforts on the following strategies:
- Best-Price Evaluation (re-negotiate prices, compare total cost of ownership, un-bundle pricing)
- Volume Concentration (aggregate volume across units, re-distribute volume among suppliers)
- Product Specification Improvement (rationalize/standardize specifications, optimize life-cycle costs)
Through the repeated usage of the selected sourcing levers and the realisation of the benefits they bring, the entire business organisation will gain confidence in Strategic Sourcing and will more likely expand the scope of Procurement over time. This is one of the roles for Procurement as the change agent in organisations who are looking for longer-term improvements (see our earlier article on Procurement As A Change Program).
Once a high level of organisational and process maturity has been achieved from Strategic Sourcing, the natural progression for Procurement is Category Management. This is a holistic approach to managing a collection or cluster of supplies that support the overall business strategy of the organisation. Hence, the Category Management approach will cast a longer-term view of the supply and demand of supplies for the organisation, and can be called upon to mitigate supply risks, and drive innovation and continuous improvements.
The process for Category Management is similar to that of Strategic Sourcing. However, more detailed analysis of supply and demand patterns are expected. These analyses are likely to include the category positioning, (Porter’s) Five-Forces market analysis, supplier segmentation, supplier relationships and more. Best-in-Class Procurement organisations may implement annual reviews and updates of their category strategies, and publish market insights and recommendations which form input into the organisation’s budgeting and planning processes.
Looking at the Sourcing Gemstone Model, the strategies that are most appropriate for the Category Management approach are:
- Global Sourcing (eg. expand geographic supply base, exploit global supply-demand imbalance)
- Relationship Restructuring (eg. employ strategic alliances/partnering, examine strategic make-versus-buy)
- Joint Process Improvement (eg. re-engineer joint processes, support supplier operations improvement, develop integrated supply chain)
In the next and final article on Strategic Sourcing, we will examine the various performance indicators of Strategic Sourcing and look at some market benchmarks. Stay tuned.