Very often, when a procurement professional is asked to explain the objective of strategic sourcing, the answer would most probably be related to cost containment. And naturally so, considering the fact that cost containment is usually one of the most important key performance indicators (KPIs) in the procurement sphere. However, making cost containment the key objective in any procurement process is failing to look at the procurement process holistically. And that’s where strategic sourcing comes in.
For strategic sourcing to be effective, it must bring value to the organization in all aspects of the business. Essentially, apart from cost containment, other goals that should feature in the list of KPIs in strategic sourcing initiatives include:
- Reducing risk. Natural disasters, technical disruptions and negative geopolitical events can happen anytime and affect businesses badly. Employing strategic sourcing should enable you to sustain continuity of supply in the face of unexpected disruption to the operations of one or more suppliers.
- Improving supplier performance. Poor delivery records, quality issues, and bad service can negate any savings that you managed to obtain at the start, bringing you back to square one when it comes to procurement.
- Encouraging innovation in the supply base. A competitive business environment necessitates innovation to stay ahead of the game and secure market share. By strategically sourcing for suppliers, you will be assured of a constant stream of innovative ideas to give your business that competitive edge.
- Supporting social responsibility goals. Today’s organizations support diversity, environmental responsibility, and other philanthropic goals. Decisions made as part of strategic sourcing should consciously help move the organization towards those goals and not away from them.
It’s interesting to note that in the list above, suppliers are specifically mentioned as one of the key stakeholders that can help an organization reach its business goals. So, in addition to strategically sourcing for products and services, an organization must also source strategically for its suppliers. The question is, how exactly do you do that?
Be clear on the reason for the expenditure
For example, if a company that manufactures and sells haircare products is looking to purchase essential oils, it must understand the definition of the category of the essential oils used, the usage patterns in the final product, the quality or environmental characteristics of the oils, and why the particular types and grades were specified. This is so that the procurement team is clear on why the purchase is needed, past purchase practices for he product, as well as the types of suppliers they should approach to purchase that product. The five key areas of analysis are:
- Total historic expenditure and volumes
- Expenditure categorised by commodity and sub-commodity
- Expenditure by division, department or user
- Expenditure by supplier, and
- Future demand projections or budgets.
Carry out due diligence
The main objective when strategically sourcing for suppliers is to ensure that they are suitable for the business before actually entering into a deal. The supplier selection process itself also has several important steps:
- Having a supplier self-evaluate
- Performing a product qualification exercise, and
- Doing a site visit.
Having populated the list of potential suppliers, list down the requirements that you are looking for in a supplier and prepare a self-evaluation questionnaire. In many companies, a supplier’s self-evaluation process kicks off the buyer-supplier relationship. Getting the detailed answers you need about the products offered by each potential supplier may require you to meet them personally on their premises. To save time, you could have potential suppliers registering themselves by filling out a self-evaluation questionnaire on your company’s website.
Product qualification exercise
Or, you could also do a Request for Information (RFI) with an e-sourcing solution, which allows you to send the same RFI to several companies, saving you precious time. In an RFI, you can pose questions to suppliers through a questionnaire, making it much more efficient than sending an open-ended email to multiple suppliers. An RFI also allows suppliers to provide information about themselves and the products they offer. It helps to phrase questions in a way that allows the supplier to give straight answers such as yes, no, or partially, making it easier to review the answers. You could also request for their qualifications, such as certificates or other documentation.
Remember to benchmark potential suppliers against the supplier qualification requirements document, which specifies the expected qualification levels in each area of focus. Among the areas to include in the requirements are Management, Sustainability, Product, Process, Improvement, and Cost:
- Management: The answers suppliers give to questions in this section should convince you that they have management systems in place and follow both internal and external standards. Check for quality management certifications, such as ISO9001, or enquire about their company code of conduct. The idea here is to ensure that you are comfortable with the supplier’s style of business management, and is committed to being an honest partner.
- Sustainability: In this section, search for evidence that the company is financially strong and is an advocate and proponent of safety. If your business values corporate social responsibility awareness, there should be questions on the supplier’s social and environmental sustainability efforts as well.
- Product: Ask the supplier to provide copies of product test reports and certifications. Determine how product quality is safeguarded, whether there is product development process and version handling process, etc.
- Process: These questions will help you identify the processes the suppliers has emplaced to manage non-conformance and sub-vendors. The idea here is to know that the supplier is capable of identifying and fixing production issues in record time so that you’re the business supply chain is not adversely affected.
- Improvement: What have the supplier done to improve themselves over the years? An appreciation for continuous improvement process is a good sign, and shows to what extent suppliers are willing to cooperate with stakeholders.
- Cost: Finally, if they’re willing to share, ask for information on their product cost structure. This is important to ascertain factors that affect the supplier’s product pricing, which will give you an idea of what to expect when it comes to future cost fluctuations. It’s also beneficial to you to enquire whether they are willing to reduce costs and share these savings with you, the buyer.
Once you’ve identified the suppliers whose products and processes meet or exceed the qualification threshold, it’s time to proceed to the next stage: the site visit. During the site visit, discuss the product qualification questionnaire and product documentation with the supplier’s representatives and iron out any issues present. This session allows you to address any lingering questions you might have about the supplier. It’s also the time for you to determine the honesty of the potential supplier, and see if everything is indeed as stated. The site visit is also an opportunity to inspect the supplier’s premises and meet their staff. The main idea here is to ensure that the potential supplier is a really a good fit in real life, and not just in theory.
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