Strategic sourcing is a process driven by an identified goal or need and consists of:
Evaluating current and potential sourcing opportunities and relationships
Assessing their value and relevance according to long-term goals and overall business and supply management objectives
Formulating and applying action plans and processes for critical commodities or supply networks
Source: Institute for Supply Management Other Names: Procurement, Purchasing, Supply Management, Spend Management, Global Sourcing, Supply Relationship Management
Strategic Sourcing is Evolving Adapted from FreeMarkets Supply Evolution Traditional Purchasing Strategic Sourcing Global Supply Management Cross-functional teams Global Commodity Teams, Center-led or centralized Decentralized Buyers People Technology enablement across all strategic sourcing processes Auctions, eSourcing, Basic optimization Spreadsheets Technology Global; Highly collaborative across the enterprise and visible at executive levels Multi-regional, Some collaboration with related functions Local; Many suppliers Reach Balancing Total System Cost; Maximizing shareholder value; Enabling product innovation Supplier rationalization, Spend consolidation, Cycle-time reduction, Standardization Price, Transaction management, Compliance Focus Enablement Project Transaction Paradigm
Procurement Organization is Changing Center-Led is becoming the norm, and large companies are leading the charge. Decide where YOUR client is… Center-Led Procurement , Aberdeen, November 2005 A Model of Effectiveness , Procurement Strategy Council, 2004
Strategic Sourcing Often Leads to Supplier Consolidation
US Postal Service
Maintenance & Repair (MRO)
1,000 suppliers down to 2 suppliers
Savings of more than $250MM
Reduced 500,000 suppliers to 50,000
$278MM in cost savings over five years
95% of spend is with 6,600 suppliers
Had 27,000 to 45,000 suppliers (estimated)
Goal was to reduce by 20% each year
Continues to meet supplier diversity goals, even with supplier consolidation
Source: Supply Base Rationalization , CAPS Research , Jan 2005
Strategic Sourcing Drives Value Areas that procurement has not tapped are prime savings opportunities Source: Procurement Strategy Council, 2004 Percent of Respondents Estimated Savings as a % of Spend
Strategic Sourcing Process Analyze Spend Identify Requirements Analyze Market Implement Strategy Manage Negotiations Award & Contract Develop Strategy Traditional Procurement Strategic Sourcing
What are we buying across divisions?
How many suppliers do we use?
How does pricing compare across divisions?
Can we consolidate our spend by reducing suppliers and obtain better pricing?
Tools Spend Analysis
Even though companies are looking to consolidate suppliers, many are also looking to increase diversity spending
Identify Internal Requirements
What are the product and service requirements of the users?
Service performance expectations
Are requirements different across divisions?
Look for harmonization opportunities
Fully understand the client requirements fully so you can assess your capability to deliver them
Incumbents have a better opportunity to understand client requirements
Develop creative solutions for client requirements
There is more to the sourcing process than just selecting the lowest price
Methods & Tools of Strategic Sourcing An online bidding event where multiple suppliers are invited to compete in a small time window (e.g. one hour) for the best price on a product or service. Other factors are assessed in addition to the auction outcome before the award. Reverse Auction (always electronic) Buyers use a combination of RFI and RFP to ask questions about the company, the market, the service and the products, as well as obtain price quotes. Request for Proposal (RFP) (electronic or paper-based) Buyers use this when they know exactly what they want and they have qualified the suppliers that are quoting. Request for Quotation (RFQ) (electronic or paper-based) Buyers use this when they need more information about the suppliers and product or service offerings, before they can determine requirements for a price quote. Request for Information (RFI) (electronic or paper-based)
Determining the Negotiation Strategy Value Complexity Low High High Auction RFP Auction RFP Renegotiate RFP Few suppliers Complex Pricing Complex Services Many suppliers Transaction based Clear Requirements Many suppliers High volume Single source of supply Proprietary products Complex Pricing Partner Strategic Suppliers
Technology Is Growing Across Procurement Use technology to your advantage by understanding and embracing it. Spend Analysis KPI Reporting PO, Receipt, Invoice generation and handling eProcurement Content acquisition Catalog maintenance Online contract management Supplier Performance eCollaboration RFPs and negotiations Online reverse auctions Procurement Intelligence Operational Procurement Catalog Management Contract & Supplier Management Strategic Sourcing