Tuesday, September 23, 2014
The Strategic Sourcing process
Traditional sourcing in amanufacturing organization depends on identifying and locating suppliers for the materials required for their products. The process however might not be so straightforward as the amount of raw materials, ingredients, equipment parts and the number of buyers involved increases. The risks of buying from the wrong supplier can have impacts that ripple or ‘bullwhip’ throughout a business. In addition to that, if the selected suppliers are unable to deliver on time or cannot contribute to reducing costs, then the organization will head towards serious losses. This is where strategic sourcing comes in.
What is strategic sourcing?
It is a core activity in purchasing and supply management. It is centered on building value through the purchasing process. Strategic Sourcing can be defined as the process of evaluating, selecting and partnering with suppliers to achieve operational improvements which are in line with the organization’s business strategy.
A sourcing strategy aligns the organization’s business strategy with the sourcing objectives. When it is properly defined, it can utilize the knowledge of the existing supply market and assist the organization to plan for both short and long term objectives.
- The process begins by identifying and dividing the total corporate spend into categories that relate to the supply markets and then further divide the categories by business units. The goal of this step is to identify the key categories and develop a potential sourcing strategy for each category.
- Understand the buy/spend category. In this stage, there is a thorough analysis on the workings of the category. For example, the total historic expenditures, expenditure by division, future demand projections or budgets. This is followed by a supplier market assessment and market survey which would evaluate the supplier capabilities and their capacities to meet your requirements. It enables you to assess at an early stage about the feasibility of the project and whether it can be delivered by the identified supply base.
- The next step is building the strategy. There is no one strategy that fits all organization and groups. The strategy for each identified category will depend on how competitive the supplier market place is and whether alternatives exist. This is the stage where it is worth considering other alternatives such as collaboration with suppliers. Collaboration can reduce cost and improve productivity. The final strategy is based on all the factors above.
- Once the strategy is finalized, it needs to be operational as soon as possible. This is usually done through request for proposals (RFP) or bids to all the potential suppliers. It should include product or service specifications, delivery and service requirements, financial terms and conditions etc.
- Once a suitable supplier has responded committing to the terms and conditions, there should be a suitable plan by both parties to implement the changes in the organization.
While it is true that strategic planning can help reduce cost and increase efficiency, it is not a fail-safe method as it is prone to exogenous factors like recession, natural calamity in the market that can affect the supplier. Is it possible to overcome such issues or provide some room for anticipating failures and switch between different strategies at tough times?