Strategic sourcing is the process a business uses to allow procurement to take the lead in satisfying business needs. With it, procurement can find ways to save money while also adding value. It involves internal collaboration with stakeholders and suppliers, as well as critical analysis of spend, and supplier risk management.
Benefits of strategic sourcing include increased profit as every dollar procurement saves directly affects the bottom line. In strategic procurement, you’re systematically looking for ways to save throughout your entire supply chain, which gives your company a competitive advantage.
You’ll also find it makes it easier to manage supply risks because current suppliers are evaluated for availability risks, quality risks, financial risks, and cooperation level. After identifying risks, you can develop a plan to mitigate them or avoid them altogether and seek new suppliers when and where necessary.
Because strategic procurement is an ongoing cycle of sourcing activities, you’ll find it is easier to sustain the business, because every category of spend will have a dedicated manager keeping an eye on things and looking for ways to add more value to the company with each cycle.
When you opt for a strategic sourcing approach, you’re going beyond looking for quick ways to reduce costs, trying to find ways to add more value at the same cost, decrease operational costs, or increase operational speed.
We focus in collecting data about your company, analyze the data, and build the framework. We divide the entire supply chain into various categories – each of which will be monitored seperately by a category specialist. Starting with high-level categories such as: direct/indirect, materials/services, critical/non-critical, or domestic/import. The important thing is to go deep – starting with a group, then dividing everything into subgroups, and assigning each subgroup to a category code with a description.
It is something which needs to be done with the big picture in mind, since one cannot change the categories too often. if changes happen too often it effects the ability to compare spending from quarter to quarter. thats is why we involve the entire team from top to bottom and in particular the design and engineering teams to get answers to more technical questions.
Once categories are in place, we will conduct a risk analysis, separating categories into baskets – based on their profit impact and their supply risk. We will work with your team to choose scope of each category. We chose the scope such that it is neither too high such that no supplier can address the need neither it is a single product in a category which results in high spends of time and energy, the key is finding a spot in the middle.
Spend analysis with historical data, which is collected from your existing ERP, or from your accounting department. if not available then we check with your suppliers.
COST STRUCTURE ANALYSIS
We do this on the items you purchase, to ascertain the total cost of ownership.
SUPPLY MARKET ANALYSIS
In this step, we begin your supplier market research to find suppliers and identify the ones you want to send requests to. There are four parts to this process: the supplier market analysis, demand analysis, supplier interviews, and category risk level analysis.
SUPPLIER MARKET ANALYSIS
Determining the scope for your market – global, regional, by country, or local supplier. We collect data for the supplier base that could potentially supply each categoryand go beyond the suppliers that you’re already working and research them all.
Now, splitting your spend by supplier, we determine how strong of a player you are by comparing your spend to the supplier revenue. When you see how much of your spend covers the total demand market, you’ll know how valuable you can be to the supplier.
We request for information from potential suppliers and look at data from current suppliers to know costs and such for what you’re buying. This will help determine if you want to stay with your current suppliers or if you can get better deals from other companies.
CATEGORY RISK LEVEL ANALYSIS
By conducting a category risk assessment to determine whether working with this supplier is worth the risk or not. We evaluate each supplier based on availability, quality, finances, and cooperation level.
ANALYZE CURRENT SOURCING PROCESS
In this step, we will determine benchmarks for suppliers and products, and identify knowledge gaps to create a list of opportunities.
“By looking at your current process you’ll be able to identify areas for improvement. Without this benchmark, your efforts are wasted.”
Benchmarking products for cheaper alternatives and for products for alternative processes. Also we benchmark products for alternative suppliers considering hidden costs and how they impact our final output. We benchmark suppliers and products on the global level, even if we don’t intend to source from overseas, so we have the data from a global point of view.
SUPPLY CHAIN ANALYSIS
Looking at the geographic reach of your supply chain, we compare local suppliers with overseas suppliers by looking at factors beyond procurement price. Transit time may increase so you’ll have to buy larger batches to make up the difference and save on logistics – but increasing your stock level. Comparing total supply chain costs to make sure you’re getting the best deal. We benchmark your existing chain with local and global alternatives, including delivery and transit times, batch order size and stock levels.
Once we have these gaps and opportunities, we present them to your team then work together to confirm they are indeed gaps and not misinformation that needs to be clarified. Then, get ready to develop the strategy to bridge the gaps in the next step.
CHOOSING SOURCING STRATEGY
There are two common strategies we use as a base for your strategic procurement: Porter’s Five Forces and A.T. Kearney’s Purchasing Chessboard.
The five forces model looks at industry competition, potential of new entrants into the industry, supplier power, consumer power, and threat of substitute products to help determine the best way to work with a supplier.
The Purchasing Chessboard relies on four purchasing strategies and 16 levers to give you a total of 64 methods to use based on your needs and where you stand. It’s a bit more complex but is good for high-level theoretical analysis.
Once we have an idea of what we need and who we want to work with, we can use these strategies or a combination of the two to negotiate the best possible deal with the vendor you choose in the next step.
VENDOR SELECTION PROCESS
After self-evaluating the vendors, we send each one you’re interested in working with an RFI or an RFP so we can benchmark everything. Clearly define your requirements, and ask detailed questions to help address management, sustainability, the product, processes, continuous improvement policies, and cost. Once we get the questionnaire back from each potential supplier, create a scorecard to benchmark their scores against requirements, and set a threshold to determine what level they must score to qualify a vendor.
RFQ MANAGEMENT PROCESS
Now that we have the short list of qualified companies who could become vendors, we challenge existing supplier by sending an RFQ, or a request for quotation. This adds an element of competition, so you can be sure to get the best value – whether in terms of cost savings or added value.
There are four steps: preparation, tender, awarding, and closing. We prepare documents for each vendor, including a description of your company, the project, and background information. Attach general terms and conditions to provide a framework to follow when the supplier makes a bid. The clearer you are here; the less time you can spend in negotiation should you decide to close the deal. We include a pricing template so we can compare the quotes in the same format. Also we include the prequalification requirements and questionnaire if we haven’t already run an RFI.
We keep the process transparent and include the awarding selection criteria and weights so everyone knows how the winner will be chosen. We share the same information with everyone to keep everything fair.
Once we get everything back, you can decide who to award the project to, based on the price template and awarding criteria. After you’ve chosen a winner, set a meeting with the vendor to close the deal and sign the contract. Once you’ve signed the contract, you can announce the winner publicly and close out the RFQs with the other vendors you did not choose.
At this point, we have everything you need to keep the cycle running. We keep working to find additional improvements in the next round and beyond. We prepare to analyze and reflect on everything which have been done and how it’s helped the company and look for ways to keep that momentum going. What went according to plan? What didn’t? How can you adjust your strategy next time?
STRATEGIC SOURCING TOOLS
Our Platform is an adequate and powerful tool for spend analysis, requisitioning, RFX events, and supplier relationship management. Your spend analysis tool makes it easy to determine what you’re buying and at what price, whom you’re buying it from, the volume you’re buying, and how you’re buying.
The requisition is the first step in the P2P process, which is completely automated for highest efficiency.
CATEGORY TEAM SELECTION
The final step involves selecting the team members for each of your categories so everyone on the team is responsible for something, and no single person on the team has to do too much work to keep the strategic sourcing process in place. Choose team members based on their geographic location, their business and functional area the category scopes we developed early in the process cover. Once the team is in place, agree on the rules and working guidelines. Have document sharing culture in place to make it easy to share information across time zones and departments. Allow team members to play a role in the decision-making process and encourage everyone to keep the lines of communication open at all times.
Strategic procurement processes are ongoing and should aim to serve the business in the long run. A single category manager cannot and should not go through the process alone. Though it can take some time to go through all the steps we outlined in this step-by-step strategic sourcing, it is well worth it for your business.