In today’s competitive business scenario, the market decides the price of the product and hence the profit of any organization depends on controlling the cost of operations. In most of the manufacturing organization, 60% to 70% of the cost is spending on the procurement function. Hence, there is a significant opportunity in improving the bottom line through Strategic Sourcing
“Strategic Sourcing is a comprehensive process aimed at obtaining maximum advantage on cost, technology, process and quality, by leveraging the company’s buying power”
“Strategic Sourcing is a comprehensive process designed to pursue all value levers by leveraging a company’s buying power with select suppliers, conducting best price evaluations, sourcing globally and conducting company/supplier joint process improvements”
The strategy is to shift the company’s focus from the current “transaction” oriented independent buying of goods and services to a “product” oriented strategic approach.
THE STRATEGIC SOURCING APPROACH IS DESIGNED TO
- Drive reduction in total cost of acquisition of goods and services
- Drive a thorough understanding of both the supply market and internal company requirements
- Deliver significant earnings to bottom line
- Deliver improved value to all
HIGH VALUE OPPORTUNITIES
How can a company identify the highest impact cost reduction opportunities? To begin, they must understand what they buy and from whom they buy it. Thoroughly reviewing accounts payable history and mapping expenditures, can provide tremendous insight into corporate savings opportunities. There are varieties of solutions to address:
- Increase customer leverage and buying power – By harnessing intra-company expenditures and selecting fewer suppliers in each buying category, companies can gain significant leverage. They can also deepen their advantage through inter-company aggregation and supplier rationalization.
- Rationalizing product specifications – By developing processes that clearly define the need before translating that to a specification, companies can avoid unnecessary costs
- Source more effectively – By engaging a large number of qualified suppliers during supplier selection and creating a more competitive negotiating environment.
- Improve financial controls and contract compliance – To achieve bottom line benefits, buyers need to buy against contracts easily and need to control spend activity through a procurement tool.
- Doing Procurement Right – To extract the maximum value from procurement, companies need to understand their spend, select the best approach to source, procure each set of goods and services and continuously monitor performance.
THE SIGNIFICANT STEPS
So how can a company effectively achieve measurable and sustainable cost savings? They must address the entire procurement value chain from savings identification, to negotiation and must importantly, realization. The THIRTEEN essential steps are described below:
STEP 1 – ASSESS THE OPPORTUNITIES:
A complete spend assessment will provide visibility in company’s needs, their total buying power and the degree to which they are leveraging that power
STEP 2 – SOURCE FOR SAVINGS:
An effective sourcing methodology will address product specification rationalization, recommend standard buying practices, use the most appropriate sourcing and negotiation strategy for the category and achieve the lowest total cost
STEP 3 – TURN CONTRACTS:
Enable buyers and suppliers turn contracts into commerce – to realize savings, they must not only connect users to contracts but also ensure that users can accurately and confidently buy against those contracts
STEP 4 – MANAGEMENT TOOLS:
Transact through management tools to capture savings – by utilizing computerization, companies not only drive compliance against contracts but also streamline processes and increase control on spending
STEP 5 – IMPROVEMENTS:
Manage continuous improvements – in order to maximize and sustain savings, companies need to drive improvements and manage suppliers
STEP 6 – CATEGORIZATION PROCESS:
This involves a detailed analysis for all the purchases made by the company for the past one or two years and broadly classify the spend in few major sourcing groups (SG)
STEP 7 – SPEND-PROFILE EACH SOURCING GROUP:
Each of the Sourcing Groups need to be clearly defined by identifying sub-groups, spend profile of each sub-group, cost drivers involved and the supply market behavior for each SG.
STEP 8 –DEVELOP STRATEGY:
Each SG is analyzed with respect to the supply market. For the sourcing group with low market complexity, buyer has a strong position compared to supplier and should exploit its buying power through the tools of volume concentration, best price evaluation and global sourcing.
STEP 9 –DEVELOP SUPPLIER PROFILE:
Develop a list of current and new suppliers and prepare profiles for later use. Define minimum requirements necessary to be met by any supplier and screen the preliminary supplier list. Establish qualification criteria to evaluate suppliers and to agree on shortlist of suppliers with whom to conduct negotiations. Request for Information and develop a comprehensive pre-qualification questionnaire (PQI) to seek detailed information from suppliers to develop their profiles.
STEP 10 – IMPLEMENTATION METHODOLOGY:
For the competitive selection process, and request for quotation (RFQ) is prepared to obtain a detailed understanding of the supplier’s profile, scope of work/services, cost, specifications, alternatives etc. Supplier development approach is generally recommended when the company is very confident of its key supplier with regards to their price, quality, delivery and reliability. Here, the company works together with their key suppliers towards joint process improvements, standardizing specifications and relationship restructuring.
STEP 11 – COMPETITIVE SUPPLIER SELECTION:
The responses to the RFQ issued, are thoroughly analyzed for price and non price factors. This price analysis forms the basis for subsequent negotiation strategies, enabling the team to drive the best overall agreement. The price analysis forms the basis for subsequent negotiation strategies, enabling the team to drive the best overall agreement.
STEP 12 – INTEGRATE THE STRATEGIC AGREEMENTS INTO OPERATIONS:
With strategic alliance agreements in place, it is of utmost importance to ensure the use of these agreements by all concerned throughout the company. Top management’s conviction and total support is a must for integrating the strategic sourcing agreements with the day to day operations of the company
STEP 13 – BENCHMARK TO IMPROVE:
This step ensures that sourcing group strategies continue to be effective and the supplier capabilities, arrangements and the purchasing process remain the leading edge. Continuous benchmarking of external and internal factors is must to continue moving ahead on the success path.
CATEGORIZATION OF ITEMS
Identify the various items of procurement and categorize them in the following FOUR quadrants based on the VALUE and CRITICALITY. The Sourcing Strategy would depend on the position of the group of items in the four quadrants as indicated. The high value and high critically would call for Strategic Sourcing while low value and high criticality would be covered by long term rate contracts. On the other hand, high value and low criticality (bulk items) can be covered through Internet, while the low value and low criticality items, are ideal for reverse auctions.
TIPS FOR SUCCESS
Strategic Sourcing is an important activity for which certain basic features are must to ensure its success and they are:
- Total long term commitment from top management
- Considerable involvement in terms of money and manpower
- Empowering the strategic sourcing teams
- Disciplined and consistent practice
- Continuous monitoring and tracking the progress
- Effective use of electronic tools like internet, e-mail etc., for quick and effective communication.
- Rationalization of suppliers – weed off non performing suppliers and add best-in-class suppliers through continuous vendor rating process.
- Material cost reduction – increase share of business for performing suppliers and develop cost sheets. Introduce two-bin and Kanban system, collect materials through milk runs to achieve JIT supplies
- Supplier development – audit suppliers for process improvements and create capacity for increased demand, by introducing new suppliers. Introduce group buying and look for global buying opportunities including e-sourcing.