Strategic Sourcing, what is it all about?

Strategic sourcing processes introduced in the mid-nineties have proven to be so robust that even today they remain broadly similar.

This quick overview is not an absolute step-by-step template, because each organisation is unique and each deployment, although broadly similar, will be unique. It is not designed as a one-size-fits-all approach as this will not align your sourcing strategies with what your organisation wants to achieve. One thing that has been learnt from multiple deployments is that successful organisations drive deployment of strategic sourcing in their own way. 

Definitions

stra·te·gic [struh-tee-jik] – adjective

1. Helping to achieve a plan, for example in business or politics;

2. Pertaining to, characterised by, or of the nature of strategy: strategic movements;

3. Of an action, as a military operation or a move in a game, forming an integral part of a stratagem: a strategic move in a game of chess.

sourc·ing [sawr-sing, sohr-] – noun

1. Buying of components of a product or service delivery from a supplier.

Strategic sourcing is an integral part of a wider business strategy to improve profitability and, in turn, shareholder value. It is directly linked and specific to the business, and illustrates opportunities within the supply base to either reduce cost or increase the value of products or services required by the business. Typically, it includes demand management and supplier management. However, increasingly it is becoming important to factor in total cost of ownership (TCO) and sustainability. 

Demand management

Understanding the specification and volume requirements from the business ensures that needs can be appropriately met and that resources are not being wasted. Demand management is not about reducing contract volumes. Rather, it is about ensuring that contract volumes are appropriate for meeting the needs and objectives of the organisation. A core process that will contribute to the strategic sourcing plan is the sales and operations planning process (S&OP).

The S&OP is an integrated business management process through which the business continually achieves alignment and synchronisation between all functions of the organisation. It generally includes:

• an updated sales plan;

• a production or delivery plan;

• inventory holdings;

• customer lead times and commitments;

• a new product development plan;

• a strategic initiative plan;

• a financial plan.

The strategic sourcing team would ultimately be involved in several of these areas, to contribute towards capacity planning and to understand how each feeds into the overall plan and influences demand profiles.

Supplier Management

Understanding the capability, costs and capacity within the supply base ensures that business requirements can be appropriately matched without incurring higher costs. Systematic improvements in supplier management not only improve cost of goods and services but can also improve relationships with suppliers. This can lead to supplier relationship management (SRM) – tools and processes that enable the proactive management of an ongoing business relationship to secure a competitive advantage for your organisation.

To deploy SRM, an organisation needs to decide on a segmentation approach that considers the internal needs of the business, spend, and also accounts for risk to the business. Broadly speaking there are four high-level categories of suppliers.

Transactional suppliers are where little or no relationship or performance management activity is undertaken. Either the suppliers are utilised infrequently or the supplier is of low value to the business. These suppliers can be easily switched for another if required.

Performance-managed suppliers focus on ensuring delivery of the contracted goods and services to the required cost and service levels, rather than on building a collaborative long-term relationship.

Relationship-managed suppliers have some strategic value, so elements of SRM needs to be applied here.

Strategic suppliers are typically either business critical suppliers, or high spend suppliers. Generally the most effort is expended on this category to drive a mutually beneficial collaborative relationship. This is an effective route to improving costs through the Value Add or Value Engineering (VA/VE) process. A close working relationship with strategic suppliers also leads to a greater understanding (and reduction) of the TCO of products or services. 

Total Cost of Ownership

Understanding TCO is becoming increasingly important to procurement. Legislation concerning the environment is affecting the way we do business either through EU directives such as the Waste Electrical and Electronic Equipment (WEEE) Regulations or through corporate social responsibility programmes that drive different behaviours from the business. It is important to factor in not just the acquisition costs but also the cost of doing business with the supply base and any return flows or on-cost from recycling. 

Sustainability

The fourth element of strategic sourcing also provides part of the rationale for driving it within the organisation. Being able to sustain the supply of goods and services while de-risking the supply chain as well as balance the total costs is ultimately the responsibility of procurement.

A coherent approach

Tying all activities together into a coherent plan will transform the business, as only the procurement team can do. Internal ‘silos’ are built as a company grows. Although each silo represents the company’s acquisition of knowledge and improves the ability to deliver value to the customer, they can also create inefficiencies in the business, leading to organisational inertia. This can slow the pace of change and reduce the capability for innovation. Creating a plan balanced across the four areas ensures you will engage with the business and supply base.

When creating a communications plan, consider each of the four areas and how they might affect the stakeholder. Simple, bite-sized statements work well for those in more senior levels of the organisation. However, greater detail will be needed for others, especially where they perceive they might have to change what they do. Build in the wider plan, so each stakeholder can see all issues and organisational levels have been considered.

Develop your plan and highlight the best solutions for each area of the business. Consider using a SWOT analysis (see below) to develop the ideal outcomes.

 

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