To any strategic sourcing initiative there are eight basic “foundation” components (or steps) to building an organised strategic sourcing model. These guide the Procurement function when managing improvement, or effecting change to spend areas or processes, with the overall goal of reduced cost and greater process efficiency and effectiveness. These components can be used collectively as a complete model or on a singular component basis as the need dictates. Strategic sourcing initiatives can be finite or infinite in nature, but all use the same base components.
Depending on the Category involved, a typical sourcing initiative should take around 2-6 months and may consume up to 28% of the Procurement and other stakeholder’s working day time. World class organisations use strategic sourcing modelling 60% more than their average performing peers.
Overviewing The eight components:
1) Create sourcing team, strategy and Communication plan
A) Create your Sourcing Team intelligently ensuring you have executive, business unit management and staff buy-in from early on. Since Procurement doesn’t work in isolation, ensure that your team members are cross-functional (production, marketing tax etc) and include, where possible, pertinent unit business managers as the initiative decision maker committee. Considering the complexity of certain strategic sourcing initiatives, it maybe opportune to appoint very strong characters or even outside professionals to certain management or specialist roles.
B) Give careful thought to determining what your basic initiative strategy goal and supporting objectives are to be, how your team is going to approach and accomplish this- usually through a charter or mission statement. Consider and clearly state the immediate, medium and long term cross function impact of your initiative strategy. This basic planning needs to be precisely drafted to clearly state the Goal, objectives, establish timelines and milestones as a road map to objective attainment. Ensure understanding by all concerned as to the how and what is required by each team member and business unit, to accomplish team objectives. Remember those pertinent business unit managers are going to be heavily relied on, to convey this strategy in part or large, to any other team members of their Unit-Therefore they need to be fully conversant with the initiative strategy.
C) Equally importantly, ensure that a quality cross functional communication plan is developed and emplaced that keeps all stakeholders always informed of progress. A primary benefit of a good communications plan is to ensure that all related strategic sourcing outputs can be easily monitored, aligned, reassessed and deviations can be quickly corrected.
2) Analysis of Spend Areas
Conducting a tangible and intangible spend area analysis on effected Category Profiles is imperative to determine:
a) the comparative cost curve per supplier, per category profile over a decided period of time, versus what is the average current market mean cost per category.
b) Is the supply chain ( per buy –in category profile) tiered and to what degree (how essential is the buy-in category to your organisation’s overall operations to warrant multiple suppliers for a particular category?) , if so what are the geographics (location) of those suppliers involved, what strategic value is each supplier for a single category (with the purpose of maintaining continued supplier interest), and at what total cost (i.e.: not just financially cost based) per supplier involved?
c) To what degree of influence does legislation, local and world politics, events and financial/economics impact on your Spend and Category importance?
d) What feeling of “Total Cost of Ownership” do your buyers feel? This is an essential, but most often overlooked factor. as it can have enterprise-wide repercussions thru the entire Purchasing Cycle, to abstracts such as Corporate Branding Impact.
e) The analysis should also examine other abstract factors such as implications of Centralised/Decentralised Purchasing on spend and category (where buyers are located and who buys what), buyer efficiency (and often management too) in the categories for which they buy, logistical impacts, vendor histories and the processes that Purchasing uses to engage, onboard and evaluate/manage suppliers. Prior to finalizing this step, the team must understand their current suppliers’ capabilities and the future requirements for that purchase category within their various associated business units.
You can’t change or improve it unless you understand and therefore can measure it!
3) Demand Analysis & Forecasting Projections
Demand analysis is required of both the current and retrospective states of utilization of the subject Product Category (or service), so that the strategic sourcing team can best understand the internal demand patterns and overall Category histology. Both detailed internal (your organisation) and external (the open market and conditions therein) demand performance data (Inc. of supportive reasons why) for the category must be included in the research. This is vital to providing quality inputs for any subsequent forecasting projections.
Demand analysis helps identify key Categories where demand is highest and where demand is lowest, which would indicate a dynamic shift in Spending and Procurement Resources Allocation. Also study inhouse inventory movements to add input into the Demand Analysis.
Informed Forecasting Projections based on the qualitative outputs of the Demand Analysis can now be made regards the future demand performance for the subject Product category. This input is used by the strategic sourcing team as future performance-based intelligence within the supply chain and procurement planning process.
Remember: This is not an especially difficult or time-consuming Step. as all modern Procurement and Inventory Systems will be able to provide the required data spontaneously.
4) Market Intelligence & Supplier Portfolio Development
This analysis is performed to review and understand the capabilities of the existing supplier base. It is also the step at which the team explores the competitive landscape, what alternative and possibly better suppliers are in the marketplace, their capabilities and at what major business considerations over the current position. This is an important time to consider the total implications of using a tiered vendor strategy for critical buy in Categories.
Much of this initial establishing research data can simply be done thru discussions with key vendors (current and candidate), in-depth Research on suppliers and product, or any other suitable research methodology.
A natural methodology would be to engage an external consultant, like myself, to undertake this task on a dedicated basis, independent of normal daily Procurement operations.
From this basic research can be determined how many vendors are required, how many competing vendors there are in the marketplace, their organisational size, the geographics of where they need to be located and logistics implication and any other pertinent criteria. Once this has been established you can send out a Supplier Poll (SP) or call for a more formal Request for Information (RFI) from selected vendors to gain precise detailed procurement intelligence on factors such as price, quality, financial stability, production capabilities or any other important supply chain factors. This is an excellent opportunity for you to review, update and distribute your standard terms and conditions that will be future employed.
Once the SP or RFI’s have been received and dissimilated, a Supplier Portfolio can be developed. The purpose of such is to create a list of suppliers for future consideration with the specific intent of sending a Request for Proposal (RFP) to some or all. The team now, creates criteria for basic evaluation based on the information received from the SP’s or RFI’s.
5) Developing Sourcing Strategies & KPI’s, evaluate suitable vendor candidates
Based on the information garnered from the preceding steps in the Strategic Sourcing Model, the team can now set about developing a competent and informed Sourcing Strategy, comprised of targeted and qualitative Procurement and Supplier Key Performance Indicators (KPI), Service Level Agreements and other pertinent factors which can accurately track and optimise all “critical responsibilities” to ultimately ensure Procurement continuously meets corporate objectives thru:
Based on the outputs created in Step 4, the team now decides on who in the original Supplier Portfolio receives a Request For Proposal (RFP).
When preparing the RFP, ensure that there is no ambiguity about your company requirements to all potential suppliers. Get as granular as possible: include everything from product stipulations, delivery and service mandates, pricing outlines, etc
During all steps, the key internal strategic sourcing initiative stakeholders have been kept informed. Ensure that they now concur in the majority, with regards the selection of suppliers that are going to receive the RFP. This agreement amongst internal stakeholders is not always easy for a variety of reasons as to why a particular supplier is preferred over others
Once this concurrence has been achieved, send out the RFP’s.
Once the team has received back all RFP’s, should you require supplementary information, don’t be afraid to ask for it – you want to ensure that you have a complete picture of all the applicants.
An important aspect is to now develop the “Future State.” Once all the RFPs are back in the hands of the team, the evaluation process entails developing a business case, performing GAP analysis, and establishing three very important and critical criteria for the team to consider when selecting the supplier(s), understanding Total Cost of Ownership, recognizing Total System Cost, and developing future Performance Metrics.
6) Negotiate, Agree, Contract, Appoint
The outputs of all the previous component steps intermesh into focal Step 6. You have a “critical short list” of potential suppliers agreed to by all team stakeholders thru “the process of consensus”, backed by a carefully crafted effective and “future orientated” Sourcing Strategy. Time to initiate the face-to-face negotiation process.
By this stage you have long established your basic market intelligence (Step 4), ultimately translated into the Sourcing Strategy which provides the basis of a flexible contract template. All these prior actions now support the use of broader scope “Objectively Informed Negotiation” tactics which is something many vendors are not used to and can be deployed to great effect.
Also consider all recommendations, suggestions and ideas raised by the supplier, during both tactical and strategic levels of the negotiation phase. Often innovation comes from suppliers! Considering valid points put forward by suppliers lead to trust and respect being established early in the relationship, which leads to a win- win state for future relations.
If strategically required and proven, offer supplier development assistance, but be exceptionally careful of resorting to this strategy, that common sense (and experience) alone dictates should often have more pitfalls than gains.
Being firm but fair will yield more rewards in the long run. If the trust factor is not established during negotiations, you will probably never see any meaningful commitment nor innovation from the supplier. ·
Finalize your Performance Metrics during the negotiation stage- doesn’t make sense to do this after award of the contract. ·
Once agreement has being reached on the basics, it is then time to finalise, legally process and award the governing supply contract, and to “onboard” the supplier.
7) Qualitative Supplier Relations & Performance Management
This is often the most ignored steps of the entire strategic sourcing model. In most cases, the Strategic Sourcing initiative is only comprehensively and diligently completed to Point 6, afterwards the team is either disbanded or does not nurture and cultivate the supplier relationship on any kind of effective management level.
One of the “golden rule” long term fundamental objectives of any strategic sourcing initiative is to strive for Continuous Improvement of cost, quality and process throughout the Relationship Life Cycle with the supplier.
Only by developing an effective targeted and competently managed Supplier Resource Management (SRM) programme are you ever going to efficiently steer your supplier base to its greatest potential.
This is the step whereby the SRM programme is developed and initiated with the focus on monitoring critical aspects such as contract execution, establishing operational effectiveness, implementing and testing new ideas, processes or simply fine tuning the existent. Areas for constant SRM focus would be continuous improvement of supplier orientated cost drivers, refining of scorecards, Service Level Agreements and all other metrics developed to measure supplier performance.
8) Continuous Process Optimisation and Improvement
This should be the ongoing repetitive step of diligently managing and maintaining the SRM on an infinite basis to ensure continuous optimisation and improvement upon the solid foundations established in steps 1 through 7 of the Strategic Sourcing Model.
Here, relying on best practices involve having benchmarked performance (Step 5) so that there is a yardstick against which to regularly measure, score and rank suppliers. Revisiting your demand analysis and forecasting predictions (Step 3) and Sourcing Strategy (Step 5) regularly, adjusting supply mix and expanding partnerships with top adherents to the Service Level Agreements all continue to drive and steer overall performance favourably in the Future State.
(Karl) Furrutter & Associates are Strategic Sourcing and Tactical Procurement professionals that are used in the capacity of Solutionist, Research Consultant, or Fixed Term Contractor, as applied to a number of dedicated and strategically important change and or recovery roles, for which it is advantageous to use non- permanent skilled personnel on an only “as needed” basis, within the context of Procurement pain points or neutral and transparent Capital Recovery from tangible asset bases requirements.
We are South African based but work globally.