Strategic Sourcing is an organized and collaborative approach to leveraging targeted spend across the organization with select suppliers that are best suited to create a competitive advantage and value in the customer-supplier interface.
Procurement Services is a vital function of any business organization, with real impact on bottom line performance. Businesses typically spend over 60% of their revenues purchasing goods and services from various vendors and suppliers. One of the most important steps of the procurement process is to constantly seek out creative ways to reduce costs, assure and improve the quality of the final product and achieve a faster delivery of goods and services with flexibility for negotiations. Consequently, Strategic Sourcing is one method that procurement professionals can use to help achieve these objectives.
What is Strategic Sourcing? An organized and collaborative approach to leveraging targeted spend across the organization with select suppliers that are best suited to create a competitive advantage and value in the customer-supplier interface. The strategic sourcing process requires an organized approach or method that provides an in-depth review of spend across the organization culminating with selection of strategic vendors and suppliers who can deliver significant savings, while improving bottom line performance.
Objectives of Strategic Sourcing targets reducing cost while maintaining or improving overall quality:
Improve the value-to-price relationship (achieve cost reductions while maintaining or improving quality/service).
Examine supplier relationships across the entire organization.
Leverage entire organization’s spend.
Understand category buying & management process to identify improvement opportunities.
Develop and implement multi-year contracts with standardized terms and conditions across the organization.
Share best practices across the organization.
All sourcing models, regardless of origin, contain the following essential elements:
1. Conduct In-depth Analysis of Spend Targeted Areas
2. Development of Sourcing Team(s), Strategy and Communication Plan
3. Gather Market Information
4. Development of Qualified Supplier Portfolio and Develop a Future State
5. Negotiations and Selection of Suppliers’
6. Supplier Relationship Management
Step 1. Conduct In-depth Analysis of Spend Targeted Areas. Mandatory step towards achieving significant cost reductions, continual process improvement and value creation for any organization. Critical to this step is the assessment of current spend, assessment of current supply chain and total cost analysis. A successful strategic sourcing program hinges on the ability of any organization to thoroughly understand its spend categories with current supply chain so that the initial areas of assessment match the future goals and objectives of strategic sourcing for the organization.
Step 2. Development of Sourcing Team, Strategy and Communications Plan. Collaborative effort to obtain buy-in from the Executive Sponsorship Team on the development of a sourcing team(s), its strategy and communications plan. Having endorsement from the highest executive level possible will pave the way for eliminating or reducing resistance from operational levels and provide the confidence necessary for success. Members selected to work on the sourcing team must come from cross functional areas of the organization (finance, accounting, engineering, maintenance, information technology, etc.). More importantly, solicit feedback and information regarding their objectives and strategies from cross functional areas that will contribute to the success of the initiative. Successful marketing of the strategic sourcing initiative along with an effective communication plan will increase buy-in to the process and guarantee its success.
Step 3. Gather of Marketing Information. Essential step to find out what are the current suppliers and vendors capabilities in the marketplace. Interviewing key suppliers and industry experts will produce information to determine qualifications regarding quality of programs, financial stability, service capabilities, plant locations, organizational structure and a mired of “other than price issues”. Building strong and trustworthy business relationships with strategic suppliers and vendors who offer value added capabilities and industry competencies can be very beneficial to the organization.
Step 4. Development of a Qualified Supplier Portfolio and Future State. Qualified suppliers and vendors who meet the criteria to become strategic partners are added to the “Bidder’s List” and will receive Request for Proposals (RFP’s), Invitations to Bid (ITB’s), Request for Qualifications (RFQ’s), etc.
Comprehensive review of completed RFP’s, ITB’s, RFQ’s, etc. by the sourcing team, along with determination of those strategic suppliers who will be given future consideration is a very important step, to ensure all objectives and expectations of performance are addressed. Further develop of criteria for evaluation of RFP’s, ITB’s, RFQ’s, etc., based on customers’ expectations of quality, service, cost and performance. The evaluation process also entails development of a business case, performing a gap analysis, developing a total cost of ownership, and performance expectations of the future state.
Step 5. Negotiating and Selecting Supplier(s). Strategic sourcing focuses on vendor relationships that can result in faster lead-times, higher quality of goods and services, reliable delivery, with flexibility for negotiations. During this step, the team may elect to shortlist the suppliers to begin the final interviews and negotiating process. Once this has been accomplished, the short list should be presented to the strategic sourcing team, prior to notification to suppliers and vendors of either making the final stages or being eliminated from consideration.
Points of interest the sourcing team should adopt during the negotiating and selection stage:
Think longer term agreements to fully realize savings.
Implement multi-year agreements with standard terms and conditions.
Allow for supplier/vendor innovations to increase savings.
Finalize Performance Measure Matrix.
Develop Win-Win relationships and sense of commitment to succeed.
Step No. 6 Supplier Relationship Management and Maintenance (SRM). To achieve maximum results, best-in-class organizations work closely with key suppliers and vendors long after a deal has been signed. Two-way communication, which requires both buyer and seller to jointly manage the relationship is more effective.
The primary objectives of SRM with key suppliers include:
Establish a strategic scorecard to allow parties to monitor performance.
Provide mechanism to ensure that the relationship stays healthy and open.
Create a platform for problem resolution.
Develop a continuous improvement goals with the objective of achieving value for both parties.
Ensure that performance measurement objectives are achieved.
Establish an effective SRM program to realize the savings and improvements that were initially targeted early in the sourcing process. During this step, the team should focus on improvement of supplier performance, delivery of efficiency and value, refining performance matrix to drive down risk to get the most out of your supplier/vendor relationships.
CXS helps companies dramatically improve supplier performance, while delivering significant savings by providing a comprehensive range of strategic sourcing processes.