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Home : Articles : eSourcing : Strategic Sourcing Overview

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STRATEGIC SOURCING OVERVIEW

Strategic Sourcing Overview

by Glenn Wheaton, November 15, 2008

Strategic sourcing is the ongoing process of finding the best suppliers and using these supplier relationships to maximize value for an organization. Every organization has a sourcing program in place whether they know it or not. A sourcing program can either be "strategic" and meet its objectives and targets or it can be ineffective, inefficient, and poorly planned. Most sourcing programs lie somewhere in between. Since the cost and quality of goods or services purchased has a direct impact on the financial and operational results of an organization, it makes sense to devote enough thought, time, and resources to make sourcing both strategic and successful.

Strategic sourcing is not limited to a piece of software that a company can quickly implement to take care of all of its buying problems. Rather, strategic sourcing is a process or methodology that involves certain best practices. It also involved continuous improvement and ongoing assessment to make sure that the existing process fits the buying objectives and is structured in a way that best meets those objectives. This article will discuss the main parts of the strategic sourcing process. These include: assessment and strategy development, supplier identification, information or bid solicitation, response capture, evaluation / comparison, source selection / award, and ongoing monitoring and evaluation.

Assessment & Strategy Development

Good assessment and strategy development are crucial in order for a company to realize sourcing improvement. Prior to purchasing a commodity or item, it is important to review the current spend, develop goals, and to review the market. The next few sections explain these points.

Review Current Spend

It is important to understand where money is being spent and whether or not it is being spent well. Reviewing the current spend is something that is usually done across the whole company and involves breaking down the money being spent into categories and then into suppliers and projects within those categories. Understanding the amounts and types of spend within the relevant category and supplier helps identify opportunities for savings and discover ways to get better value for the same amount of money. With this data, purchasing personnel can develop high level plans for commodities. Once these plans are in place, they can then focus on high priority goods or service purchases and can give priority to worthwhile projects.

Once management has prioritized a particular project, it is important to gather additional data about the current spend for this particular product or service. This includes obtaining feedback from people within the organization that currently use or have contact with the supplier(s) delivering this product or service. These people could be in product development, warehousing, sales, management, accounting, or many other parts of the organization. It is also important to evaluate organizational needs to see if the current level of spend on this category is an accurate reflection of what the organization wants to accomplish in the future. Demand forecasts and estimates are an essential tool that help personnel understand the required or desired amount of particular good or service.

Develop Goals

Every organization should have a set of goals in mind when purchasing a product or service. These goals can arise from analyzing current spend for a category and can entail quantifying a specific opportunity for cost savings (Ex: Save 10% on purchases from this category). They can arise from talking to stakeholders within the organization and learning that higher quality items are needed (Ex: Reduce the defect rate by 10%). Or a goal can arise from an urgent business need (Ex: Get these items immediately). A sourcing goal or target should also be difficult, but still achievable. A sourcing goal should also be measurable - you can't track improvement without some form of measurement. Some common measurements that can be used include: Price per unit, Total Cost of Acquisition (TCA), Total Cost of Ownership (TCO), Total Value Management (TVM), etc.

Once a goal or set of goals has been developed for a particular product or service, it is important to develop a strategy for purchasing the item(s). The strategy will depend on the goals or purpose of the project or purchase. A compliance project might employ a different strategy than a cost savings project or a supplier consolidation project. Another important part of the strategy is the method and the plan that will be used to purchase the goods. Will it be single source? Are there important technical requirements? What are the risks associated with this buy? The answer to some of these questions may determine whether the plan will involve competitive bidding, an RFI, a detailed screening process, or acombination of these. The strategy will also be influenced by other factors like budgetary constraints, organizational buying policies, diversity, or risk avoidance.

Review Market

Another component of strategy development involves assesing the market. This means reviewing the market for a particular good or service and determining the main supplier or suppliers. It also involves assessing marketing conditions such as market demand, pricing, and supply for the product or service. In some industries, there may be a lot of spare capacity and suppliers would have more flexibility on price. The size of a market and the size of the buy can also play a role in putting together a workable strategy and sourcing plan. A large purchase that accounts for a significant portion of the market for that good or service will demand a more detailed strategy. Purchasing a commodity that is readily available might entail a more simple spot buy plan.

Potential Supplier Identification

Identifying suppliers that would be capable of delivering a particular product or service is often a difficult task. It involves determining the required capabilities, reviewing the current supply base, and locating new suppliers. Determine Required Capabilities

Contracting with the best supplier involves knowing what being the best supplier entails. This means defining the organization needs in detail and can be one of the most difficult parts of the process. Talking to the people, group, or department that will use the goods or services is the best way to find out what is needed. Purchasing personnel will also need to talk to other departments (quality control, warehousing, etc) that should have input on the purchase. Purchasing should then put together a detailed requirements document. This is a draft of what will later be sent out (as a solicitation) to prospective suppliers. It will be continually refined and edited during the sourcing process in response to new information.

Review Current Supply Base

If the organization has purchased these goods or services before, it is also helpful to review the current supply base to assess the performance of the existing suppliers for that good or service. If the company tracks the performance of supplier over time (it should) then there should be performance data available for review. Looking at the Key Performance Indicators (KPIs) for those suppliers can also be helpful to make sure that the requirements document is complete. Purchasing personnel should note any problems that have arisen with the supplier and take those into consideration when writing the new requirements document to prevent a repeat of these same problems in the future. The key here is in trying to determine what is good about he relationship with the current supplie(s) and what needs to be improved. Locate New Suppliers

To contract with the best supplier, you must find and contact that supplier. You can not develop a relationship with a supplier that you do not know exists. Locating new suppliers is an art and takes creativity and work. For some products and services, all of the suppliers may be listed in a trade group or publication. For other commodities, it may be helpful to check a marketplace where buyers and seller meet. Sometimes a simple web search can be a good plan as well. For global suppliers, it might make sense to obtain the services of a consultant for that industry who deals with all of the suppliers day in and day out. For some events, it may be advantageous to include brokers or middlemen since they can help to drive the price down. In locating new suppliers, there is no hard and fast rule. Rather, one or more of these methods should be used to get the best results.

Information or Bid Solicitation (RFX, RFI, RFP, RFQ, etc.)

The solicitation should develop naturally from the requirements document. In addition to stating the requirements, there are other things that the soliciation should cover. There are also specfic best practices and ways that a solicitation should be written.

Solicitation Coverage

Once purchasing personnel have put together a list of suppliers, the next step is to obtain the information from these suppliers that is needed to make the optimal buying decision. How this is done will depend on the sourcing strategy that the company has selected and the technology being used for this process. At this point in time, the requirements document will be refined and edited to become an RFX, RFI, RFQ, RFQ, survey, etc. This document will be referenced and referred to throughout the remainder of the sourcing project. The key purpose of this document is to cogently communicate key purchasing information to suppliers. This information usually includes key terms, project goals, bid collection methods, time lines, product or service requirements, award criteria, delivery times, or other relevant information. Since this document will be shown to suppliers, it usually needs to be approved by all departments with a stake in the purchase.

Solicitation Tips

The solicitation document should tell suppliers what is required of them and should give them instructions for how to submit their bid and/or response. This document should also be written in a clear and concise manner. Unclear or needlessly long solicitations will result in lower supplier participation and bids that are not optimal or not targeted for the requirements. The solicitation should be easy for suppliers to follow and should specify the responses required for each point. For events without auctions, the pricing format should be specified for easy comparison. Moreover, a solicitation should specify the award criteria so that suppliers can provide offerings that match the requirements and will score highly during the evaluation phase. The technology that will be used to deliver the solicitation should is also important. Many companies use sourcing software for this purpose in order to have a process that is not subject to fraud and is fair and transparent.

Solicitation Response Capture

To get the best results during the solicitation or bid response process, it is important to respond to questions and comments from prospective suppliers. This should be done in a way that does not give an unfair advantage to a particular supplier. It should also be done in a timely manner. Often, supplier questions will reveal areas that the company may have overlooked when the company created the requirements. Purchasing personnel should then modify the solicitation to include the new information and provide clarification as needed. If the event is a multi-stage event, purchasing personnel should remove unqualified suppliers from consideration before proceeding to the next phase.

The responses to information requests that suppliers provide should be in a format that can easily be compared across suppliers. This reduces work for the group making the award and prevents suppliers from inserting other unnecessary information or terms into the response. A good sourcing solution can greatly assist in this process. When dealing with competitive bids, a sourcing solution can also be helpful in running sealed bid or reverse auction events. It is very important for the bid collection process to remain in the format agreed upon in the strategy and plan designated for this item. To accept a bid submission outside of the plan can result in a violation of policy and can diminish the effectiveness of a good process. It is also important for suppliers to know that their response/bid has been submitted successfully and they should receive some form of confirmation.

Response Evaluation and Comparison

Once all of the bids or responses have been collected, they should be arranged for comparison. The key stakeholders in the project should also be involved in this process. If the solicitation and the response collection process has been structured correctly, then the bids/responses should be organized in an easily quantifiable format. This format should allow scoring of the responses and can provide a building block for analysis based on key metrics and targets that were set at the beginning of the project. It can also be helpful to look at the best bids using multiple frameworks for analysis since sometimes different scenarios and evaluation criteria can produce very different results. Another consideration is to look at the overall total value that is provided to the organization rather than a stright cost measurement.

Further Solicitation and Comparison

If the first stage of the solicitation was an RFI or was designed to obtain information or supplier qualifications, it may be necessary to create an RFP or and RFQ to obtain pricing and other information. This stage of the process will involve repeating part of the process again and evaluating the responses or bids that arrive for the second round. Sometimes, if the organization is unable to reach an agreement with a supplier, it may be necessary to repeat the solicitation process again to obtain another supplier. Often, the second stage or a sourcing project will be the auction or competitive bid portion. This will be done once all unqualified suppliers have been removed.

Source Selection or Award

The source selection or award portion of the sourcing process involves supplier notification and contract creation.

Supplier Notification

Once the analysis is complete, it is time to award the winning supplier or suppliers. Sourcing personnel should send the supplier(s) a written notice of award. Suppliers that were not awarded should receive notice that they did not win the award. This helps to maintain the relationship in case the winning supplier does not work out or for the next time these goods or services are required by the organization. If there is a change one one supplier to another, it is important to handle the award decision in a way that will ensure a smooth transition and prevent problems. The way that this should be handled can vary depending on the particular situation.

Contract Creation

After the supplier is notified, the company should create a contractual relationship with the supplier. The contract, along with the solicitation, is extremely important for maximizing the benefits of an effective sourcing process. The contract should accurately reflect the proposed business relationship and should be a natural outgrowth of the terms outlined in the solicitation. If there are any problems with how the solicitation was structured, these problem can surface during this contract phase. Automation can also help to build and manage agreements with suppliers. Once the contract is signed, it is important to make sure that all new contract terms (pricing, delivery schedules, payment terms, etc) are updated throughout the organization. Often companies have one person that moves this transition process along and spearheads these efforts.

Implementation, Monitoring and Evaluation

The ongoing process of monitoring supplier performance is crucial for realizing all of the cost savings and benefits that are available. This step of the sourcing process has two important parts: performance metrics and performance tracking.

Performance Metrics

If the contracting company does not have a plan in place for monitoring supplier performance on an ongoing basis, much of the savings from the sourcing process will be lost. It does take effort to realize these savings however. This involves monitoring for compliance to the contract. Compliance to contract can often include comparing the invoice to the contract, making sure the products or services are delivered on time, monitoring the quality of the items, assessing the risk of non-performance, and many other things. The organization should determine what performance metrics are essential (KPIs) and have a system in place for measuring these over the course of the contract. Software systems and automation make this process much more feasible to implement.

Performance Tracking

With the measurements for these key performance indicators on hand, purchasing personnel will be better able to determine what went wrong and to evaluate potential risks. Only by being able to measure poor performance and then identifying the cause of the poor performance quickly can the company determine an effective solution. This solution often involves working with a supplier to develop an improvement plan and helping the supplier implement it. In some cases, it may be necessary to switch suppliers. The process of monitoring supplier performance is an ongoing process and does take time and effort. However the benefits of doing this are significant and the risks of not monitoring supplier performance are very large. Tracking performance can also help purchasing personnel to make better buying decisions in the future.

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