Over the years, procurement professionals have evolved from being “purchasing agents” into “supply chain management professionals”—and with good reason.
The increasingly global marketplace and upsurge in consumer awareness and demand have forced industry professionals into a constant balancing act. This takes some serious technical, business and leadership skills, as well as a propensity to look to the future.
Besides the daily battle to manage company risk, SCM professionals invariably search for creative ways to save on resource costs, without sacrificing quality or service. Needless to say, procurement pros are under a lot of pressure to deliver. But, meeting these objectives doesn’t have to feel so overwhelming.
The transformation of the supply chain industry has led to a renewed emphasis on strategic sourcing—a business strategy used by procurement leaders to optimize performance and ensure continuous alignment with their supply chain goals. Today, nearly 70% of supply chain management professionals say strategic sourcing plays a prominent to crucial role within their organization.
According to Institute for Supply Chain Management, strategic sourcing is the “organized and collaborative approach to leveraging targeted spend across locations with select suppliers that are best suited to create knowledge and value in the customer-supplier interface.”
The definition is a bit long-winded to be sure, but we’re here to help you break it all down. Let’s take a look at the essential steps of a successful strategic sourcing program.
The Strategic Sourcing Methodology
In 2001, management consulting firm AT Kearney developed a 7-step strategic sourcing methodology to help companies “evaluate suppliers on costs, quality and services provides.” Since that time, a majority of supply chain companies have adapted the program to leverage their strategic sourcing initiatives (SSI).
The formal methodology includes the following seven steps:
#1 Choose a category with targeted spend
Supply chain managers first need to identify and define a targeted spend category that may be able to provide opportunities for improvement. Sometimes this is a big spend identified by executive management, and other times it may be a small-volume spend that could use some refining.
Following category selection, it’s time to nail down all the data surrounding the vendor account, including: who provides the resource or service, total costs involved, logistical considerations, contract length and terms, and anything else that impacts present or future spend.
#2 Generate a supplier profile
After an opportunity has been identified, it’s time to take a look at the supplier profile. What are the vendor’s strengths and weaknesses? What is their cost structure like? Is it possible to negotiate a lower a rate? It’s important to look beyond the numbers during this analysis, however. Current relationship, supplier flexibility, brand image, and other factors should be weighed before considering a potential alternative.
#3 Compare and speak with competitors
At this point supply chain managers will also designate a team to create a thorough list of competitor suppliers to gauge risk, process integration and innovation, and to compare services and costs with their current provider.
Once a list is generated, a supply professional may conduct interviews with new suppliers, submit RFIs or gather key market information on their own to determine how their current roster measures up. How a new supplier may affect customer perception should also be top-of-mind.
#4 Start the bidding process
Sometimes called a “sourcing event,” this is the stage supply chain professionals inform their current suppliers of the change, and make the call for RFQs or proposals. During the process, it’s imperative to facilitate open and honest communication with current and potential suppliers, as well as to establish performance metrics so your company’s expectations are clear from the start.
#5 Negotiate and select suppliers
When bid are received, procurement professionals must evaluate the offers and choose which vendors will make the most sense for your business. In the past, purchasing agents typically chose the cheapest provider, but today SCM professionals’ evaluations are much more thorough. After a shortlist is created, it’s time to head to the negotiation table to find which vendors will offer the most value and benefit.
#6 Implement contract agreements
Time to choose the winning supplier and draw up a contract. Once the new supplier has signed on the dotted line, supply chain professionals need to determine what the on-boarding process, performance review and relationship-management process will look like. Having a strong relationship with suppliers often leads to lower rates, increased speed-to-market times and improved service quality—all of which make your business better.
#7 Continuously strive for improvement
A supply chain management professional’s work is never done. In addition to staying abreast of supply chain industry trends, taking advantage of education opportunities, and finding new ways to effectively lead your team, it’s also necessary to perform regular check-ins on your strategic sourcing initiatives. Conducting value analysis, target costing and competitor benchmarking are all ways to ensure you stay on the path to improvement.
Benefits of Strategic Sourcing
Before beginning a strategic sourcing program, it’s important to remember that it is a collaborative effort that takes time. The Institute For Supply Chain Management says most strategic sourcing programs take about 4-6 months to get the desired result—and in complex spend categories, it could take even longer.
That being said, the benefits are worth it. The average supply chain company that undertakes SSI typically sees a 15% reduction in costs and significant boost to their bottom line. A successful strategic sourcing strategy also: allows procurement teams to think more creatively about spend, improves supplier relationships and internal communication levels, and leads to higher quality products and services.
If you’re just starting out, don’t be afraid to dip your toes in the water before plunging into a strategic sourcing program. This can lead to your teams becoming overwhelmed and may halt or harm your progress. Try to identify a few key areas to start. Celebrate small wins, and use the traction to get senior-level executives on board and to push your SSI efforts companywide.
Strategic Sourcing Requires Data Analytics
Of course, most of these steps aren’t possible without the assistance of sophisticated technology. That’s why many supply chain management professionals turn to supply chain analysis software tools for help.
Supply chain analysis gives supply chain leaders the ability to gather comprehensive, clean and accurate data, which makes it easier to identify inefficiencies—or find revenue-generating opportunities. This data can shed a light on everything from logistics and supplier costs , to performance metrics and benchmarking.
When you’re looking to optimize your supply chain with strategic sourcing, the data you need is far too complex to lend itself to manual errors.