Strategic sourcing is an institutional procurement process that continuously improves and re-evaluates the purchasing activities of a company. In the services industry, strategic sourcing refers to a service solution, sometimes called a strategic partnership, which is specifically customized to meet the client's individual needs.
In a production environment, it is often considered one component of supply chain management. Modern supply chain management professionals have placed emphasis on defining the distinct differences between strategic sourcing and procurement.
Procurement operations support tactical day-to-day transactions such as issuing Purchase Orders to suppliers, whereas strategic sourcing represents to strategic planning, supplier development, contract negotiation, supply chain infrastructure, and outsourcing models.
Sourcing and procurement departments strive to streamline processes across the organization to create better business controls while eliminating redundant data entry efforts.
Sourcing and Procurement is a critical business function that has significant and direct impact on bottom-line performance. Procurement spend can account for as much as 50 percent of an organization’s total annual expenditure.
Some of the tasks involved in the procurement process include developing standards of quality, financing purchases, creating purchase orders, negotiating price, buying goods, inventory control, inventory management, and disposal of waste products like the packaging. In the overall supply chain process, procurement stops once your company has possession of the goods.
Sourcing and procurement departments strive to streamline processes across the organization to create better business controls while eliminating redundant data entry efforts.
Sourcing and Procurement is a critical business function that has significant and direct impact on bottom-line performance. Procurement spend can account for as much as 50 percent of an organization’s total annual expenditure.
Some of the tasks involved in the procurement process include developing standards of quality, financing purchases, creating purchase orders, negotiating price, buying goods, inventory control, inventory management, and disposal of waste products like the packaging. In the overall supply chain process, procurement stops once your company has possession of the goods.
To make a profit, the cost of procuring your goods must be less than the amount you can sell the goods for, minus whatever costs are associated with processing and selling them. As a result, companies are challenging their procurement teams to play an increasingly important role in managing spend and optimizing end-to-end Sourcing and Procurement processes across the company.
Effective sourcing and procurement needs to consider an end-to end-perspective. Although many companies have initiated Sourcing and Procurement improvement programs in the past, many continue to face significant challenges in attaining and sustaining procurement savings. Challenges include:
Attaining accurate and complete visibility of spend across company;
Leveraging scale across diverse divisions and operating groups (purchasing power);
Segmenting spend and applying the appropriate category management and sourcing strategy to each category (Centralized, Central-Led, Decentralized);
Outlining clear ownership, accountability and fiscal responsibility around spend management;
Driving efficiency and effectiveness of procure-to-pay processes and clarity of roles and responsibilities;
Managing risks associated with poorly-written contracts;
Controlling spend and ensuring contract compliance across the organization;
Realizing benefits of past and future technology investments;
Building and retaining procurement skills and category expertise in strategic spend areas.
Effective sourcing and procurement needs to consider an end-to end-perspective. Although many companies have initiated Sourcing and Procurement improvement programs in the past, many continue to face significant challenges in attaining and sustaining procurement savings. Challenges include:
Attaining accurate and complete visibility of spend across company;
Leveraging scale across diverse divisions and operating groups (purchasing power);
Segmenting spend and applying the appropriate category management and sourcing strategy to each category (Centralized, Central-Led, Decentralized);
Outlining clear ownership, accountability and fiscal responsibility around spend management;
Driving efficiency and effectiveness of procure-to-pay processes and clarity of roles and responsibilities;
Managing risks associated with poorly-written contracts;
Controlling spend and ensuring contract compliance across the organization;
Realizing benefits of past and future technology investments;
Building and retaining procurement skills and category expertise in strategic spend areas.
To address these challenges, developed a holistic approach linking strategy, governance and execution to not only drive benefits, but also sustain and improve upon those over time. Including, building world-class and sustainable procurement capabilities within a company’s procurement processes, organizational structures and technology solutions.
It is more important to establish effective capabilities within the procurement organization to achieve continual savings. Organizations should also set up a strategic procurement team. Strategic procurement is an organization-wide process. It requires input from all departments and functional areas for an organization.
This team sets the overall direction for procurement, aligned with the business strategy. The team will then use the data from the strategic procurement process to develop and implement a strategic procurement plan.
Key Steps To Successful Procurement Process:
Conduct an internal needs analysis - To begin, you’ll need to benchmark current performance and then identify needs and targets before developing a procurement strategy. This involves the collection of several different types of data.
Conduct an assessment of the supplier’s market - In this step, the strategic procurement team identifies potential countries that are feasible sources of the required raw materials, components, finished goods or services. If there are specific requirements, it may limit the number of countries that are suitable.
For instance, if one of the raw materials used by the organization can only be found in one country, then options are much narrower. For manufactured products, there will be a much wider range of potential countries from which to select. Services may be limited by the technological requirements of the organization.
Collect supplier information - It is important for a company to select suppliers carefully. A supplier’s inability to meet selection criteria can result in significant losses for the organization. The business reputation and performance of the supplier must be evaluated, and financial statements, credit reports, and references must be checked carefully.
Collect supplier information - It is important for a company to select suppliers carefully. A supplier’s inability to meet selection criteria can result in significant losses for the organization. The business reputation and performance of the supplier must be evaluated, and financial statements, credit reports, and references must be checked carefully.
If possible, the organization should arrange to inspect the supplier’s site and talk to other customers about their experiences with the supplier. The use of agents, who are familiar with the markets and stakeholders, can also be beneficial to this process. Organizations may select more than one supplier to avoid potential supply disruptions as well as create a competitive environment.
This strategy is also effective for large multinational organizations and allows for centralized control, but more regional delivery. Develop a sourcing/outsourcing strategy Based on the information gathered in the first three steps, an organization can develop a sourcing/outsourcing strategy. The following are examples of sourcing strategies:
Direct purchase: Sending a Request for Proposal (RFP) or a Request for Quote (RFQ) to select suppliers.
Acquisition: Purchasing from a desirable supplier.
Strategic partnership: Entering into an agreement with a selected supplier.
Determining the right strategy for you will depend on the competitiveness of the supplier marketplace and the sourcing/outsourcing organization’s risk tolerance.
This strategy is also effective for large multinational organizations and allows for centralized control, but more regional delivery. Develop a sourcing/outsourcing strategy Based on the information gathered in the first three steps, an organization can develop a sourcing/outsourcing strategy. The following are examples of sourcing strategies:
Direct purchase: Sending a Request for Proposal (RFP) or a Request for Quote (RFQ) to select suppliers.
Acquisition: Purchasing from a desirable supplier.
Strategic partnership: Entering into an agreement with a selected supplier.
Determining the right strategy for you will depend on the competitiveness of the supplier marketplace and the sourcing/outsourcing organization’s risk tolerance.
Savings attained through effective Sourcing and Procurement practices enable companies to reinvest in growth, personnel, facilities and equipment to drive improved performance. An effective sourcing is about finding the balance between the quality of raw materials and the affordability. The less you can spend on materials, the more profit your business can earn.
But, if you are too cheap and buy shoddy materials, your resulting product is of lesser quality. It is important to retain standards of quality because your customers want quality, too.
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With China emerging as a manufacturing superpower, the past several years has seen supply chains become increasingly more sophisticated and complex. Any enterprise with serious global ambitions has realized that to compete globally meant they needed to effectively source globally.
With the complexity brought on by rapidly expanding supply chain networks, expanding global markets for finished products, and facilities around the world supporting those growing markets, it has become absolutely essential to the optimal performance of supply chains that all involved parties are completely committed to frictionless supply chain collaboration.
In supply chain management, supply chain collaboration is defined as two or more autonomous firms working jointly to plan and execute supply chain operations. It can deliver substantial benefits and advantages to its partners. It has been known as a cooperative strategy when one or more companies or business units work together to create mutual benefits.
There are two main types of supply chain collaboration, vertical collaboration and horizontal collaboration.
In supply chain management, supply chain collaboration is defined as two or more autonomous firms working jointly to plan and execute supply chain operations. It can deliver substantial benefits and advantages to its partners. It has been known as a cooperative strategy when one or more companies or business units work together to create mutual benefits.
There are two main types of supply chain collaboration, vertical collaboration and horizontal collaboration.
Vertical collaboration is the collaboration when two or more organizations from different levels or stages in supply chain share their responsibilities, resources, and performance information to serve relatively similar end customers;
Horizontal collaboration on the other hand, is an inter-organizational relationship between two or more companies at the same level or stage in the supply chain in order to allow greater ease of work and cooperation towards achieving a common objective.
Although collaboration offers many benefits for consumer goods manufacturers and retailers, too often their joint initiatives don’t work out. Since 2008, a number of analysts have forecasted the demise of long-term supply chain relationships because of increased competition within the supply chains for thinner slices of the margin pie.
Their premise: As markets become tighter, energy and raw materials prices increase, and as working capital becomes harder to procure, supply chain collaboration will suffer in a Darwinian struggle for profitability scraps. Yet two reassuring developments are undermining that premise.
First, most supply chains are finding enormous amounts of waste, which they are trimming away to keep working margins. Second, supply chain partners are finding innovative ways to make collaboration work for mutual benefit in previously unexplored ways. As a result, while a number of supply chain partnerships have deteriorated over the past, most have survived.
Although collaboration offers many benefits for consumer goods manufacturers and retailers, too often their joint initiatives don’t work out. Since 2008, a number of analysts have forecasted the demise of long-term supply chain relationships because of increased competition within the supply chains for thinner slices of the margin pie.
Their premise: As markets become tighter, energy and raw materials prices increase, and as working capital becomes harder to procure, supply chain collaboration will suffer in a Darwinian struggle for profitability scraps. Yet two reassuring developments are undermining that premise.
First, most supply chains are finding enormous amounts of waste, which they are trimming away to keep working margins. Second, supply chain partners are finding innovative ways to make collaboration work for mutual benefit in previously unexplored ways. As a result, while a number of supply chain partnerships have deteriorated over the past, most have survived.
In fact, many companies credit their own survival largely to their working relationships with buyers and suppliers. Supply chain collaboration is a hot topic today—and no wonder: companies that collaborate effectively across the supply chain have enjoyed dramatic reductions in inventories and costs, together with improvements in speed, service levels, and customer satisfaction.
Collaboration between companies—joint initiatives that go beyond their normal course of day-to-day business, with the aim of delivering significant improvement over the long term—is particularly attractive for the Consumer Packaged Goods (CPG) sector. With pricing under pressure from recession-scarred consumers, the temptation for retailers is to transfer the pain upstream to their suppliers by passing on price reductions and forcing them to bear an increasing share of costs.
Collaboration between companies—joint initiatives that go beyond their normal course of day-to-day business, with the aim of delivering significant improvement over the long term—is particularly attractive for the Consumer Packaged Goods (CPG) sector. With pricing under pressure from recession-scarred consumers, the temptation for retailers is to transfer the pain upstream to their suppliers by passing on price reductions and forcing them to bear an increasing share of costs.
On the supply side, however, there is less and less room for manufacturers to absorb additional costs as volatile input prices put the squeeze on margins and the marketing investment required to differentiate branded products from private-label competitors continues to rise.
CPG players are looking at collaboration initiatives as a way out of the damaging spiral of antagonistic relationships. That’s one reason why collaboration efforts between manufacturers and their retailer customers have dramatically grown in popularity in recent years.
That was clearly evidenced in the 2008 annual Customer and Channel Management (CCM) Survey, conducted by McKinsey & Company, Nielsen, and the Grocery Manufacturers Association, when chief executive officers in the CPG industry identified collaboration with partners as their highest strategic priority.
In the 2010 edition of the same survey, more than 80 percent of the companies surveyed said they were involved in at least one collaboration initiative, and some were involved in as many as 10 such arrangements. If companies can’t make collaborations work, they will not only fail to achieve the potential benefits that supply chain collaboration can provide.
