How To Create An Effective Sourcing Strategy


An effective sourcing strategy is essential for every successful procurement department. It helps you to optimise your company’s external spend and other value contributions in a way that aligns with your organisation’s overall agenda. Without a comprehensive procurement strategy in place, it becomes almost impossible to measure your performance and monitor whether your actions support your corporate agenda.

So, how can your procurement department create an effective sourcing strategy? The book Managing Indirect Spend: Enhancing Profitability Through Strategic Sourcing by Joe Payne and William R Dorm outlines 6 main steps to help you do just that:

 

1 Data collection and spend analysis

To begin with, your first step should be to collect information about your current suppliers and complete a spend analysis. It’s only by understanding where your procurement operations are today, that you can focus your efforts on reaching your targets in the future. With the data you collect, it’s important to identify any areas that present an opportunity – whether it be for cost reduction or value contribution.

When completing your spend analysis, always try to take into account both quantitative and qualitative elements of each spend category:

Quantitative:

  • Current price points
  • Any discounts
  • Payment/delivery terms
  • Any other costs associated with a spend category/supplier

Qualitative:

  • The quality of the product/service
  • Reliability and availability
  • Managerial staff
  • Localisation

When completing analysis of potential suppliers/spend categories, you need to take into account both categories of factors. Before moving on, be sure to identify and establish timelines and milestones as a road map for accomplishing team objectives.

 

2 Market Research

Jumping head first into a new supplier or spend category without first completing the appropriate research can cost you time and money. For that reason, you cannot forget to complete your market research. Questions to consider in this phase include:

  • What competition is out there?
  • Are there alternative products, services or processes available?
  • What are the current market conditions like?
  • Is it a good time to go to market?

 

3 The RFx process (also known as go-to-market)

Based on the data you’ve collected in the last two steps, the next step is to shortlist your potential suppliers and get in touch with them.

RFX, which is one of the most common acronyms in the strategic sourcing and procurement landscape, is a catch-all term that captures all references to Request for Information (RFI), Request for Proposal (RFP), Request for Quote (RFQ), and Request for Bid (RFB).

Source

Your RFx should define your requirements of the supplier, e.g.:

  • Product/service specifications
  • Delivery requirements
  • Evaluation criteria
  • Pricing structure
  • Financial terms and conditions

Once all RFx’s have been sent out, it’s imperative that you give suppliers adequate time to respond. As the responses start to come in, you have the opportunity to evaluate any proposals and information submitted by suppliers to determine both the quantitative (cost savings) and qualitative (value) benefits.

strategic sourcing

4 Negotiation

Once you’ve gathered your proposals/quotes/bids from your pool of suppliers, you can move onto the next step in your strategic sourcing plan – negotiation (and selection).

Areas that are worth thinking about during this stage include:

  • Try to focus more on long-term agreements
    • The best cost savings can come from SRM or innovative supplier relationships, which take time to develop.
  • Aim to establish trust from the start
    • A successful long-term relationship with your suppliers can only be built on trust, so focus on being firm but fair.
  • Convey a desire for mutual success

 

5 Contracting

The contracting phase begins when a decision has been made on the supplier(s) your company wishes to move forward with. In this phase, we usually see the terms agreed upon in the previous stage being put down into a binding document. However, this isn’t the only option available to you. You could move forward with a simple purchase order, too.

If there are certain suppliers that you’ve chosen not to move forward with, it’s often worth notifying them of your decision. The reason for this is that it conveys professionalism, as well as maintains positive relationships open to future business.

 

6 Implementation and continuous improvement

Many procurement teams will go through the long process of strategic sourcing, simply to drop it at the last step. The fact of the matter is that genuinely successful sourcing teams will always focus on the final step – implementation and continuous improvement.

By taking the time to establish an effective supplier relationship management (SRM) system, you’ll be able to achieve the savings and improvements that were included in your goals at the start. In this phase, procurement departments should be focusing on:

  • Contract execution
  • Developing continuous improvement cost drivers
  • Refining any metrics developed to measure performance

 

Do you agree with the steps set out above? Let us know in the comments section below.

 

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