Sourcing Strategy Development

Sourcing Strategy
Development
A Guide for Rapid Deployment

What is Strategic Sourcing?
• “Strategic Sourcing is an 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.”
– Robert J. Engle, “Strategic Sourcing – A Step-By-Step Practical Model” April, 2004
https://www.instituteforsupplymanagement.org/files/pubs/proceedings/fbengle.pdf
• We, as an organization of disparate functions, come together to find
out where we can achieve the most disproportionate return for time
and energy invested and focus on those areas FIRST.

Two key adjectives that should describe
sourcing strategy development
• “Organized”
• There is a process that has been defined as business best practice.
Incremental deliverables are provided for senior-level decision makers for
discussion, refinement, and approval. This allows the whole process to run
smoothly, without interruption or track-backs due to the “I wasn’t informed”
problem.
• “Collaborative”
• Supply Chain Management practices have evolved from a procurement-
focused mindset to incorporate more holistic views from all organizational
functions. Corporate Finance, Manufacturing and Operations, Engineering,
Research and Development, Sales and Marketing, and others should be
incorporated into the strategy development in order to provide cross-
functional perspectives on value.

Step 1: How are we
currently spending?
• Divide the total spending under
consideration into categories that relate
to supplier markets
• Can further sub-divide into geographic
locations, business units
• Total spend data can be provided thru
internal sources (purchasing records), or
external (directly from supplier’s records)
• THIS DOESN’T HAVE TO BE PERFECT!
Merely getting close allows for
diagnostics to provide value
• These diagnostics can be mapped into the
Kraljic Portfolio Purchasing Model
• Compares competitiveness within the
supplier marketplace to how important
they are to the organization
Source: <http://www.supplymanagement.com/sites/default/files/legacy/resource/Kraljic-
portfolio-purchasing-model.jpg>

Routine Products:
Low Risk, Low Impact
• These products:
• have many substitutes in the market
place,
• are often purchased off the shelf,
• have a high transaction cost from a labor
standpoint
• We employ a “set it and forget it”
mentality, where blanket POs allow
orders to be drawn against them so the
parts in this quadrant don’t receive many
touches
• You don’t get much bang for your buck
working on strategy in this quadrant

Leverage Products:
Low Risk, High Impact
• These products:
• have many substitutes in the market
place,
• are often commodity products or
services,
• have low costs to switch
• We’ll routinely send out competitive
bidding proposals, to leverage
competition and drive our costs down
• We identify suppliers we like working
with, who are willing to make concessions
and accommodate us due to our
purchasing power for their goods

Bottleneck Products:
High Risk, Low Impact
• These products:
• are relatively low value, but
• there are few alternatives, and
• perhaps are even in monopolistic or
quasi-monopolistic markets
• We’d like to secure supply for these
components, either through purchasing
agreements guaranteeing supply, or
utilizing distributors to bond inventory on
our behalf
• In parallel, we search for alternatives in
order to keep from being caught in a
single- or sole-sourced situation
• R&D/Product Development can work on
these issues for the most critical, perhaps
in conjunction with key suppliers

Strategic Products:
High Risk, High Impact
• These products:
• are high value,
• there are few alternatives, and
• Are critical to the viability of the product
• We must secure access to these
components first
• We should consider vertical integration or
partnerships in a Make vs Buy decision
• The components in this quadrant should
receive the initial scrutiny and effort in
order to realize the highest value from
the process

The Sourcing Team
• Many companies don’t have the luxury of a full-time team devoted
specifically to sourcing strategy.
• Even if there is a segment of the greater Supply Chain team dedicated
to constantly refining and implementing the strategy, there still needs
to be a collaborative basis formed by a cross-functional team
representing all key business processes detailed earlier.
• In addition to cross-functional, cross-locational membership is necessary if
the company is multi-site oriented.
• In either case, executive sponsorship is key to any sourcing strategy,
in that it provides an endorsement that can circumvent or eliminate
any resistance from lower-level operations.

Step 2: Supplier Market Assessment/Analyze
Spend Category
Once we’ve been able to categorize our spending, we can make an assessment of
where we want to spend our time and effort to achieve the greatest return.
The sourcing team should be working on two parallel paths once an area of focus
has been identified.
• The team must make sure it understands everything about the spend category itself.
Essentially, “Why are we doing what we’re currently doing?”
• Define the category
• Usage patterns
• Why are particular types/grades of product specified?
• In tandem, market surveys should be conducted to determine who could potentially supply
the company’s needs in this area.
• Pricing surveys can give an idea of what the product should cost
• Current dynamics in the supplier’s industry (a portion of a Porter’s 5 Forces-type analysis)
• It’s possible that a fully complete pricing landscape won’t be feasible to develop
• Any work done will give at least some context to the pricing received during an RFI

Step 3: Prepare/Submit a Supplier Survey
Once incumbent and potential alternate suppliers have been identified,
a supplier survey should be created. The survey should serve to gather
knowledge regarding:
• Feasibility of the proposed specs (assuming these are new requirements)
• Capability of supplier to meet technical requirements/specifications
• Maturity of the supplier
• Capacity to deliver
This will not only provide us with feedback, but will also signal to the
marketplace our intention. It encourages the right suppliers with the
proper structure to respond to us.

Step 3: Prepare/Submit a Supplier Survey (cont.)
Some topics to consider asking about in order to glean the information
needed:
• Quality programs in place
• Financial stability
• Service capabilities
• Manufacturing locations
• Local/National regulations
• Organizational Structure
• References from current customers
• Any “other than pricing” issues

Step 4: Reviewing responses to RFI and culling the
field
During this phase, after receiving back responses from potential suppliers,
the sourcing team begins to evaluate and set aside some suppliers for
further consideration
• Evaluation of suppliers should be focused on Total Cost of Ownership (TCO), taking
into account ALL the data gathered, not just cost
• We’re not looking to get the cheapest product, we’re looking to get the best product at the
best value
• Decisions should be made on which suppliers can demonstrably provide the most
value, setting aside issues of inertia (“we’ve always worked with them!”) or opinion.
Once finalists have been identified as those which appear to offer the
greatest potential value, the team should solicit RFPs for pricing and
commercial proposals.

Step 5: Defining the “To Be” State
In general, a company’s operational strategy has the following 5
objectives:
• Quality
• Speed
• Dependability
• Flexibility
• Cost
In this step, we’re looking to define a future state which maximizes
these objectives, while taking into account the TCO. Maximizing the 5
objectives while ensuring TCO is accurately measured allows us to
deliver maximum value

Step 5: Defining the “To Be” State (cont.)
Total Cost of Ownership (TCO):
Acquisition cost + Operating cost + Maintenance cost + Training cost +
Warehousing cost – Salvage value
Total System Cost (TSC):
Supplier costs + Supplier profit + Interaction costs + Buyer costs
• There is a cost for our company to do business with an outside company
• Make vs Buy decisions need to incorporate the TSC in the evaluation
Performance Metrics/Key Performance Indicators (KPIs)
• Metrics can and will vary for each spend area. Critical metrics must be
identified and benchmarked using the supplier’s response to the RFI/RFP (or
prior interaction, in the case of an incumbent supplier) before a final decision
is made.

Step 5: Defining the “To Be” State (cont.)
Once these costs have been accurately accounted for, and
determination has been made on what KPIs will be used to measure
the suppliers, a selection can be based upon which supplier provides
the lowest TCO while allowing for our maximization of Quality, Speed,
Dependability, Flexibility, and Cost.

Step 6: Selection and Communication with
Supplier
• Selection of the new or incumbent vendor is based on the best value, as
determined in Step 5. Additional value creation (if possibilities for improvement
were identified during review of RFI/RFP responses) can be a point of discussion
during final negotiations
• Continuous Improvement Objectives (in the form of KPIs) must be communicated
during negotiations prior to final selection, to allow the supplier to know how
they will be evaluated from the very beginning
• For incumbents, it’s critical that they are made aware of any changes to how they will be
evaluated, as well
• During the entire process of evaluating suppliers, beginning with their RFI, a great
effort should be made to develop trust
• An attitude of “win-win” will generate a desire for supplier innovation, which can provide
additional value creation during a long-term customer/supplier relationship. An adversarial
relationship, on the other hand, will not encourage anything more than a bare minimum
effort from the supplier to keep to the letter of the agreement.

Summary: What Is Strategic Sourcing?
What Strategic Sourcing Is What Strategic Sourcing IS NOT
Focused on the Total Cost of Ownership (TCO),
incorporating customer needs, organizational goals,
and market conditions Focused ONLY on cost
Getting the best product/service at the best value Getting the cheapest product/service
Driven by a rigorous and collaborative approach Ad-hoc activities involving only purchasing
Addresses all levers for savings Focused on “beating up” on suppliers
Decisions based on fact-based analysis and market
intelligence
Decisions based on opinion, unjustified preference, or
complacency
A continuous process A one-time project or decision
Chart source: <http://ast.umich.edu/pdfs/What-is-strategic-sourcing-102811.pdf>

Sourcing Strategy Development

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