strategic sourcing
Evolution of Supply Chain Management Responsibilities
--Functions: Procurement Manufacturing Logistics(1950's-1970's) --Process and Resources (1970's - 1980's) --Risk and Security (1980's - 1990's) --Ethics and Sustainability (2000's - beyond) A significant concern in the Strategic Sourcing process
strategic sourcing
A comprehensive approach for locating and sourcing-- key suppliers---, so that an organization can leverage its consolidated purchasing power to find the best possible values in the marketplace. Emphasis is placed on the entire life-cycle of a product, not just its initial purchase price.
Sourcing Strategies -single source
A sourcing strategy where there are multiple potential suppliers available for a product or service, however, the company decides to purchase from only one supplier. - This is in contrast to a situation where there is only one supplier for an item, i.e., sole-sourced. Sole source is not truly a strategy as there really isn't a choice, and there is very little opportunity for a company to negotiate price or service.
Strategic Alliance
A strategic alliance in sourcing, is an agreement between a buyer and a supplier to pursue some agreed upon objectives, while remaining independent organizations.
Most companies today have some type of Corporate Social Responsibility program.
Frequently these programs also require suppliers to agree to abide by a supplier code of conduct in order to be considered an approved supplier
Bottleneck Items
High supply risk/Low value to the company 1 Maintain safety/strategic stock 2, Develop contingency plans 3, Strengthen relationships 4, Search for alternatives
Non-critical items
Low supply risk / low value 1, Simplify and streamline the purchasing process 2, Reduce the number of suppliers and simplify ordering 3, Transfer buying responsibility to "users" within the company
Leverage Items
Low supply risk, high-value profit impact. 1, Consolidate volume as a negotiation tool 2, Use a competitive marketplace to reduce costs 3. Automate supplier interfaces to minimize process related cost
when identifying alternative suppliers, it is important to keep track of any considerations that may make one supplier
MORE Beneficial AT certain times of the year or under certain external conditions.
Functional Products Potential Strategy: Reliable, low cost suppliers. Multi-sourced
MRO items and other commonly low profit margins with relatively stable demands and high levels of competition i.e. office supplies, food staples, etc.
Continuously Improving Skills -- Procurement professionals and managers interested in
Maximizing strategic sourcing skills. Can expend their knowledge by taking online courses taught by industry leaders
The expansion of the global marketplace in recent years has made it necessary for companies to take a
More holistic approach to the integration of supply chain processes and overall business growth
Additional Sourcing Concepts - Reverse Auctions
Reverse Auctions - A sourcing technique where pre-qualified suppliers enter a website and at pre-designated time and date, and try to Underbid competitors to win the buyer's business
Sourcing
The process of identifying a company that provides a needed good or service
Supplier Selection is typically conducted by a cross functional team.
The process of selecting suppliers is complex and should be based on multiple criteria using evaluation forms or scorecards.
supply base rationalization
(also known as, Supply Base Reduction, Supply Base Optimization). Reduction in the supply base to the lowest number of suppliers possible without significantly increasing risk - Firms emphasize long-term strategic supplier alliances consolidating volume into one or fewer suppliers, resulting in a smaller supply base.
A "Supplier of Choice"
- Achieve a specific and exceptional level of performance measured by a set of criteria agreed upon by both buyer and supplier. § Typically trusted partners who know the buyers' organization, processes, procedures, and requirements. § Provide__a higher value ___ than their competitors and are characterized as reliable, responsive, flexible, and cost-effective.
Creating and cultivating relationships with consumer-friendly suppliers creates opportunities for your company to improve product and company image via PR and marketing communication with consumers.
- Classic examples are Starbucks' and Nespresso's sustainable coffee programs. - Patagonia's organic cotton program.
high-level sourcing strategies include:
- Insourcing: Producing goods or services using a company's own internal resources -- Outsourcing: The traditional definition involves purchasing an item or service externally, which had been produced using a company's own internal resources previously. - The term has more recently become synonymous with the concept of buying an item from an external source of supply regardless of whether the item had been previously produced using a company's internal resources.
Buyer-supplier partnerships are easier to manage with a rationalized supply base, and they can result in:
- Reduced purchase prices - Fewer supplier management problems - Greater levels of quality and delivery reliability - Closer and more frequent interaction between buyer and supplier
Negotiating Win-Win Strategic Alliance Agreements
- distributive Negotiations NOT GOOD refers to a process that leads to self- interested, one-sided outcome - GOOD collaborative negotiations
strategic sourcing is one method that procurement managers can use to help achieve these supply chain goals How it works:
- identify suppliers - cultivating relationships - continuously improving skills - understanding and Embracing the possibilities Effective strategic sourcing can make a positive difference in the supply chain of companies of all sizes.
The basic steps for conducting a spend analysis include:
1, Defining the scope (e.g., expenditures over a specific time period). 2, Identify all of the data sources. 3, Gathering and consolidating all of the data into one database. 4, Cleansing the data (finding and correcting errors) and standardizing it for easy review. 5, Categorizing the data (e.g., commodity and sub-commodities). 6, Analyzing the data for: - the best deals per supplier - to ensure that all purchases are from preferred suppliers - to reduce the number of suppliers per category. 7, Repeating the process on a regular schedule.
Framework for Sourcing Strategy Development The essential steps are:
1, Identify the targeted spend area 2, Create the sourcing team 3,Develop a team strategy and communication plan 4, Gather market information 5, Develop a supplier portfolio 6, Develop a future state 7, Select suppliers and negotiate 8, Implement Supplier Relationship Management (SRM)
Drivers of Strategic Sourcing Companies spend significant time and resources developing and implementing Strategic Sourcing initiatives to:
1, improve long-term financial performance 2, increase customer focus 3, improve product quality 4, reduce the cost of materials 5, reduce delivery lead times 6, optimize the number of global suppliers ===for most companies, this means a reduction in the number of suppliers. 7.Deliver more innovative products, in less time, and less expensively than competitors
Key areas of a typical spend analysis are
1, total historic expenditures and volumes 2, future demand projections or budgets 3, expenditures categorized by commodity and sub-commodity 4, expenditures by division department or user 5, expenditures by supplier
General Sourcing Categories Non-critical bottleneck leverage strategic
== Non-critical - routine items that involve a low percentage of the firms' total spend and involve very little supply risk. == bottleneck - unique procurement problems. Supply risk is high and availability is low. Small number of alternative suppliers. == leverage - commodity items where many alternatives of supply exist and supply risk is low. Spend is high and there are potential procurement savings. == strategic -strategic items and services that involve a high level of expenditure and are vital to the firm's success
Use of Artificial Intelligence in Supplier Selection
Artificial Intelligence (AI) can improve supplier selection and increase the effectiveness of supplier relationship management
Evolving Responsibilities of Supply Chain Professionals
As the discipline of Supply Chain Management has been increasingly recognized for the value that it brings to an organization, supply chain professionals have been tasked with a larger role, and an evolving set of responsibilities over the years.
Strategic sourcing is a field in constant development.
Becoming proficient in this field and keeping your knowledge up- to-date, will help you understand, plan and implement a sound strategic sourcing strategy.
- GOOD collaborative negotiations
Both sides work together to maximize the outcome or create a win-win result. Requires open discussions and a free-flow of information between parties § Successful collaborative negotiations start with a clearly expressed understanding of how each company wants to benefit from the collaboration § Alignment between parties regarding motivation, contribution, financial benefit, and the management of the alliance are essential. § Negotiations are not about each company obtaining the most value, negotiations are more about establishing a relationship that works well for both parties.
Cultivating Relationships
Cultivating a positive, long-term relationship by working closely with your suppliers can provide many win-win scenarios.
Identifying Suppliers
Effective procurement managers consistently locate the Best Quality Materials at the lowest possible cost from the most reliable suppliers.
Strategic sourcing is a specialty area whose
Potential and profitability is just beginning to be realized
Preferred Suppliers
Preferred Suppliers are those that best meet your company's overall purchasing requirements.
Companies agree to share information and resources to achieve a mutual benefit.
Preferred suppliers are potentially ideal candidates for a strategic alliance.
Sourcing Strategies -multi source
Purchasing a good or service from more than one supplier. Companies may use multi-sourcing to create competition between suppliers in order to achieve higher quality and lower price.
Strategic sourcing in today's competitive business climate, supply chain management professionals are constantly seeking out creative ways to
Reduce cost, Improve the quality of the final product and achieve a faster time to market ( both new and existing)
objective 3 Examine supplier relationships across the entire organization.
Share best practices across the organization
Vendor Managed Inventory (VMI) -
Suppliers directly manage buyer inventories to reduce the buyer's inventory carrying costs and avoid stockouts for the buyer
Establishing a sustainable procurement process takes work
The company involved must understand the value of incorporating sustainable standards into their sourcing goals
Using a specific supplier that has a Positive Brand Image
With your consumers can create an excellent product differentiation opportunity, potentially leading the consumer to prefer your product over others. - An example of this is the "intel inside" logo on personal computers.
supplier co-location
a representative of the supplier is actually embedded in buyer's purchasing department to forecast demand, monitor inventory and place orders.
A regular review of an organization's sourcing strategy is a must in order to
achieve significant agreed upon results.
Co-Managed Inventory (CMI) is
an arrangement where a specific quantity of an item is stored at Buyer's Location § Once it is used, the item is replaced by the supplier, with the full knowledge and approval of the buyer. § The buyer provides systems access to the supplier, and the supplier takes responsibility for managing the replenishment process in the buyer's system. § The supplier reviews all of the available information and generates orders in the buyer's system. § The primary difference from VMI is that in CMI the supplier is just recommending an order which is not confirmed until and unless the buyer approves it.
---strategic sourcing requires analysis of what an
organization buys, from whom, at what price, and at what volume.
Strategic Alliance Development
an extension of supplier development which refers to increasing a key or strategic supplier's capabilities.
Consumers can drive the success of a company through their
awareness and demand for ethical business practices
Innovative Products Potential Strategy: Innovative, high-tech, cutting edge, market leading supplier. Long term partnership. Single-sourced
characterized by short product life cycles, volatile demand, high-profit margins, and relatively less competition i.e. technology products such as the IPHONE
objective 5 Leverage the entire organization's spend
consolidate leverage one company with many devisions to each supplier leverage total value
Spend Analysis Categorizing and analyzing expenditure data for the purpose of
decreasing costs, improving efficiency, and monitoring compliance.
Successful sourcing strategies are almost always different for
functional product versus innovative products
strategic items
high supply risk / high value 1,Ensure availability of supply 2,Focus on relationship building 3,Encourage process integration and innovation 4, Frequent communications 5, Establish mutually agreeable supplier performance criteria
objective 1 improve the Value-to price relationship
i.e. achieve cost reductions while maintaining or improving quality/service
A sound strategic sourcing strategy can create opportunities for your company to
improve corporate image, increase sales and market share, and reduce costs.
Ethical Sourcing
is that which attempts to take into account the public consequences of organizational buying or bring about positive social change through organizational buying behavior
Sustainable Sourcing § Do not mortgage the future for the present.§ Companies must considering worker safety, wages, working conditions, human rights, etc.
is the ability to meet current needs of the supply chain without hindering the ability to meet future needs in terms of economic, social, and environmental challenges.
using strategic sourcing tactics to identify the best suppliers can help companies
maintain Efficient and effective supply chains across all company divisions and partners
Developing solid relationships can help
sourcing professionals become better at meeting cost, speed-to-market, and quality goals, while allowing suppliers to more efficiently tailor and deliver materials to precise purchaser specifications.
The benefits of these types of arrangements include:
ss potential to increase revenue and profit for both parties § Potential to create a competitive advantage or block a competitor from gaining market share. § Mitigate risks and ensure continuity of supply. Strategic § Position the partners for future strategic opportunities.
Sourcing Strategies Analysis and ability to make adjustments based on price, evaluation of
supplier performance, and the overall needs of the organization.
Supplier Base
supply base - The group of suppliers from which a company acquires goods and services.
The Strategic Sourcing process requires an organized approach that allows the organization to
systematically work on spend area or processes that can result in cost saving benefits
Objectives of strategic sourcing involve
the reduction of cost while maintaining or improving quality
objective 2 Understand the category buying and management process
to identify improvement opportunities
objective 4 Develop and implement multi-your contracts
with standardized terms and conditions across the organization
§ Supplier-related risks are a major consideration for supply chain professionals § Just one mistake on the part of a supplier, and a company's reputation can be damaged significantly.
§ AI can quickly and thoroughly analyze supplier-related data such as on-time in-full delivery performance, audits, evaluations, and credit scoring and provide information to use for future decisions regarding certain suppliers. As the result, a company can make better supplier decisions and improve its customer service. -
Examples of Sourcing Categories
§ Banking Services§ Books & Publications §Catering&Hospitality § Chemicals§ Component Parts § Computer Hardware § Consultants § Energy/Utilities§ Entertainment § Food Services § Furniture§ Gases and Fuels §Insurance § Janitorial§ Legal Services § Laundry & Uniforms § Medical Supplies § Memberships§ Office Supplies§ Printing § Raw Materials§ Shipping Services §Site/Landscaping§ Software § Telecommunications § Training § Transportation§ Travel § Vehicles/Equipment § Waste Disposal
§ The sellers bid against one another to secure the buyer's business, driving the price to be paid for the item downward.
§ Bid prices are monitored until the session is officially over. The winning bidder is the seller who offers the lowest price. § Reverse auctions are used by private companies, public sector agencies, and non-profit organizations.
Some key terms and concepts related to ethics include:
§ Corporate Social Responsibility ethics (CSR) is the practice of business § Business Ethics is the application of ethical principles to business. The two (2) main ethical approaches are: - Utilitarianism: an ethical act is that which creates the greatest good for the greatest number of people, and should be the guiding principle of conduct. - rights and duties: some actions are just right in and of themselves, regardless of the consequences. Do the right thing!
The following are some commonly used criteria for supplier selection
§ Cost§ Quality § Capacity § Service § Location § Reliability - communication capability - order system and cycle time - willingness to share information -product and process technology
Results in better market penetration, access to new technologies and knowledge, and a higher return on investment
§ Eventually extends to a firm's second-tier suppliers as the firm's key suppliers begin to form their own alliances
Sustainable Sourcing Programs Should Try To:
§ Grow Revenues─ Growing the company through the launch of new sustainable products § Reduce Costs─ Increasing resource efficiencies which will also help to reduce costs § Go "Green"─ Ensuring that the products or materials used meet environmental objectives for things like waste reduction, reuse, and recycling § Manage Risks─ Link company brands to the social consciousness of consumers Resourcing § Build _intangible___ Assets Intangible ─ Such as social and environmental responsibility, increasing consumer awareness of sustainable sourcing and sustainability
Understanding and Embracing the Possibilities Some of the top competencies needed to excel in making the most of strategic sourcing decision-making process Include:
§ Recognizing and accessing key issues, opportunities, strategies, and techniques, to achieve a competitive advantage. § Identifying internal and external challenges that affect sourcing strategy. - defining issues involved in global sourcing, electronic procurement § Applying problem-solving skills to determine the best course of action pertaining to the above strategy areas.
Additional Sourcing Concepts-Supplier Co-location
§ The employee is on the payroll of the supplier but works for the buyer and is empowered to forecast demand, monitor inventory and place orders. § The arrangement involves the buyer granting the supplier access to potentially proprietary or sensitive data. § Benefits both buyers and suppliers, from day-to-day operational improvement, to strategic advances in the structure of the supply chain organization.
Business Ethics and Ethical Sourcing This involves the Procurement organization ensuring that the products being sourced are acquired in a responsible and sustainable way.
§ The people involved in producing these products should be treated fairly and work in a safe environment. § The environmental and societal impacts must also be considered as part of the sourcing process.
Ethical Policies Should Include:
§Create a Supplier Code of Conduct and require all suppliers to formally agree to abide by the code as a condition of being an approved supplier. - Inform suppliers of ethical sourcing expectations and create specific provisions within supplier agreements accordingly. - Determine where all purchased goods originate and the manner in which they are made - Have knowledge of their suppliers' workplace principles - Seek independent verification of supplier compliance with ethical standards - Include ethics as part of their supplier performance rating system - Routinely report supplier compliance to key stakeholders
§ From the supplier's perspective:
─ Avoids ill-advised customer orders ─ Supplier decides inventory set up and shipments ─ Opportunity for supplier to educate customers about other products
reason for multiple suppliers
─ Need more capacity ─ Spread risk of supply disruption ─ Create competition ─ More sources of information ─ Dealing with special kinds of business
Preferred suppliers provide:
─ Product and process technology, and expertise. ─ Product development and value analysis. ─ Information on the latest trends in materials, processes, or designs. ─ Capacity for meeting unexpected demand. ─ Cost efficiency due to economies of scale.
from the buyer- firm's perspective:
─ Supplier tracks inventories ─ Supplier determines delivery schedules and order quantities ─ Buyer can take ownership at the stocking location ─ Buyer may also be able to avoid taking ownership until the material is actually being used.
reason for a single supplier
─ To establish a good relationship ─ Less quality variability ─ Lower cost [100% of volume] ─ Transportation economies ─ Proprietary product or process ─ Volume too small to split
