AN INTRODUCTION TO STRATEGIC SOURCING

STRATEGIC SOURCING
Supplier segmentation
1. Supplier (short term)
2. Partner (medium term)
3. Strategic Partner (long term)

Strategic / Critical suppliers

4. Partnership / Collaboration
5. Performance scorecards
6. Performance review meetings

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 STRATEGIC SOURCING
1. Strategic sourcing is a structured, systematic process for reducing the
total costs of externally purchased materials, goods, and services
while maintaining/improving levels of quality, service, and technology.
2. Strategic sourcing is a comprehensive approach for locating and
sourcing key material suppliers.
3. This often includes the business process of analyzing the total cost
associated with procuring an item or service.
4. There is a focus on developing and maintaining long-term
relationships with trading partners who can help the purchaser meet
profitability and customer satisfaction goals.
5. From an information technology applications perspective, strategic
sourcing includes the automation of processes such as request for
quote, request for proposal, electronic auctioning, business-to-
business commerce, and contract management.
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 STRATEGIC SOURCING
1. Hult (2002) and Kotabe and Murray (2004) state that
sourcing can influence the competitive advantage and
business performance of a company.
2. Narasimhan and Das (1999) empirically support the
positive influence of strategic sourcing on
manufacturing flexibilities, as buyers can increase
manufacturing performance and reduce costs through
strategic sourcing.
3. Khan and Pillania (2008) present the key dimensions of
strategic sourcing with empirical validation, where
partnerships, flexibility, supplier selection, and trust
are essential. 4
 STRATEGIC SOURCING
1. Vendor: Any seller of an item in the market place
2. Supplier: Seller with whom buyer does business
3. Partner: Alliance with key suppliers based on trust, shared risk and
rewards for achieving competitive advantage
4. Strategic Partner: Alliances with top supplier and buyer
5. Sourcing: The process of identifying a company that provides a needed
good or service
6. Procurement: The business functions of procurement planning,
purchasing, inventory control, traffic, receiving, incoming inspection and
salvage operations
7. Vendor Management / Supplier Relationship Management
8. Outsourcing: The process of having suppliers provide goods and services
that were previously provided internally
9. Offshoring: Outsourcing a business function to another company in a
different country than the original company’s country 5
 STRATEGIC SOURCING
Once the decision has been made to outsource a product or service,
firms will typically use a process known as strategic sourcing to decide to
whom to outsource the product or service, as well as the structure and
type of relationship that should be established.
A sourcing strategy is typically focused on a category of products or
services, and for that reason, the strategy is sometimes called a category
strategy.
• A category strategy is a decision process used to identify which
suppliers should provide a group of products or services, the form of
the contract, the performance measures used to measure supplier
performance, and the appropriate level of price, quality, and delivery
arrangements that should be negotiated.
• Effective category strategies also create the foundation for cost
management, contract frameworks, and ongoing supplier
performance management metrics and relationships. 6
 STRATEGIC SOURCING PROCESS
Strategic sourcing process that involves six steps
1. Data collection and spend analysis
2. Research
3. The RFx process (requesting information, quotes,
and proposals from suppliers)
4. Negotiations
5. Contracting
6. Implementation and continuous improvement

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 STRATEGIC SOURCING PROCESS
1. Data collection and spend analysis:
Once you identify the need for strategic sourcing, the next step is
collecting and analyzing spend data.
SPEND ANALYSIS:
A spend analysis is an annual review of a firm’s entire set of purchases.

MAVERICK SPENDING:
It is defined as buying from suppliers without following the
company’s pre-established procurement policy. Purchasing
goods or services out of contract or from non-preferred
suppliers means that your company doesn’t benefit from the
preferred supplier discounts that you worked hard to negotiate.
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 STRATEGIC SOURCING PROCESS
The purpose is twofold
First, the data is needed to determine where you should
focus your efforts.
Second, data is needed to determine both quantitative and
qualitative requirements associated with a spend category.
When we discuss the
Quantitative aspects, we are referring to current price
points, discounts, payment and freight terms, and other
costs associated with a particular area of spend or supplier.

Qualitative requirements refer to the quality and services

tied to these costs. 10
 STRATEGIC SOURCING PROCESS
2. Research:
The research phase provides context to the categories
you are sourcing. The purpose of research is to develop
or refine your sourcing strategy by determining what
competition exists in the marketplace; what alternative
products, services, or processes are available; and
whether or not current market conditions make it a
good or bad time to go to market.
A go-to-market strategy (GTM strategy) is an action
plan that specifies how a company will reach customers
and achieve competitive advantage
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 STRATEGIC SOURCING PROCESS
4. Negotiation:
Once initial proposals are received, refined, and
analyzed, you will move into the negotiation phase of
strategic sourcing. At this stage you will develop target
price points for the products or services you buy,
identify preferred suppliers and request that suppliers
meet the established targets in order to win your
business.

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 STRATEGIC SOURCING PROCESS
5. Contracting:
Once the final supplier or suppliers are selected, your
next step is to award the business. The contracting
phase converts the business terms agreed to during the
sourcing phase into a legally binding document
detailing the rules of engagement between the
customer and supplier

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 STRATEGIC SOURCING ACTIVITES
• Manage relationships with critical suppliers.
• Develop electronic purchasing systems.
• Implement companywide best practices.
• Negotiate companywide supply contracts.
• Manage critical commodities.

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DRIVERS OF STRATEGIC SOURCING
• Reduce costs and delivery cycle times
• Improve quality and long-term financial performance
• Increase number of global competitors
• Increase customer focus
• Reduce high costs of globalization and materials,
• Deliver more innovative products more frequently &
cheaply than competitors

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 OUTSOURCING PROGRAMS
Outsourcing allows a firm to:
– Concentrate on core capabilities
– Reduce staffing levels
– Accelerate reengineering efforts
– Reduce management problems
– Improve manufacturing flexibility.

Risks associated with outsourcing, include

– Loss of control
– Increased need for supplier management
– Higher exit barriers
– Unexpected/unanticipated costs

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 SUBCONTRACTING
• Subcontracts can exist only when there are prime contractors
who bid out part of the work to other contractors.
• The use of a subcontract is appropriate when placing orders
for work that is
 Difficult to define,
 will take a long period of time,
 and will be extremely costly.
• Subcontract is a complex activity that requires knowledge
about performance to date as well as the ability to anticipate
actions needed to ensure the desired end results

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 REASONS TO MAKE INSTEAD OF BUY
• Quantities are too small and/or no supplier is interested
•Quality requirements are too exacting or unusual and
require special processing methods
•Greater assurance of supply
•Closer coordination of supply and demand
• Preserve technological secrets
• To take advantage of unused capacity
•Keep our capacity utilization high and outsource the rest
•Avoid supply dependency
•Competitive, political, social or environmental factors
• Personal preference ( Company`s own choice)
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 REASONS TO BUY INSTEAD OF MAKE
• Lack of administrative or technical experience
• Excess production capacity
• Customer preference for a particular brand
(Customer demanded)
• Problems maintaining technological leadership for a
noncore product
• Flexibility (supplier`s ability to fullfil demand)
• Trend to outsourcing: Focus on core activities and
outsource the balance of the company’s
requirements.
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 SOURCING INFORMATION
• Information can be obtained from:
 Analysis of market conditions
 Locating supplier sources
 Supplier assessment
 Supplier historical performance

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 LOCATING SUPPLIERS
Useful ways to locate suppliers include:-
 Salesperson – the usefulness salespeople is dependent on
their knowledge of the product they are seeking to promote.
 Exhibitions – provide an opportunity to compare competing
products, meet representatives of suppliers and attend
presentations by exhibitors and exhibition catalogues.
 Trade journals – provide buyers not only with information
regarding new products, substitute materials, trade gossip
and keeps buyers informed about changes in the policies of
suppliers.
 Informal exchange of information between purchasing and
other professionals.

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 EARLY SUPPLIER INVOLVEMENT
Early supplier design involvement and selection requires key suppliers to
participate at the concept or predesign stage of new-product
development. Supplier involvement may be informal, although the
supplier may already have a purchase contract for the production of an
existing item.
Early supplier involvement (ESI) is perhaps one of the most effective
supply chain integrative techniques.
Under ESI, key suppliers become more involved in the internal operations
of the firm, particularly with respect to new product and process design
concurrent engineering and design for manufacturability techniques.
Value engineering activities help the firm to reduce cost, improve quality,
and reduce new product development time.

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EVALUATING & SELECTING KEY SUPPLIERS

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 SUPPLIER APPRAISAL
• Supplier appraisal is situational. What to appraise is
related to the requirements of the particular
purchaser.
Five methods used in assessing supplier capability in this
connection are based on:-
 Past performance – for existing supplier
 Reputation – word of mouth
 Visit and appraisal – visit the supplier in order to
make assessment of quality capability
 Third party certification – hire third party to assess
the supplier
 Evaluate of sample product 24
STRATEGIC ALLIANCE AND SUPPLIER CERTIFICATION PROGRAMS

• Supplier certification programs are one way

to identify strategic alliance candidates. Firms
often develop their own formal certification
programs, & most require ISO 9000 or similar
certifications as one part of the certification
process.
• A site audit using a cross-functional team to
identify a supplier’s process capabilities,
materials and methods monitors base-line
management practices.
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 REWARDING SUPPLIER PERFORMANCE

• Rewarding suppliers provides an incentive to surpass

performance goals.
• Punishment, a negative reward, may reduce future
business; or a billback amount equal to the
incremental costs resulting from a late delivery or
poor quality.
• Strategic supplier agreements allow suppliers to – A
share of the cost reductions – More business and/or
longer contracts – Access to in-house training
seminars and other resources – Company and public
recognition
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 SUPPLY BASE REDUCTION
Supply base reduction is most often the initial supply chain
management effort.

• Buyer-supplier partnerships are easier with a reduced

supply base.

Supply base reduction results in:

• Reduced purchase prices
• Fewer supplier management problems
• Closer and more frequent interaction between buyer and
supplier
• Greater levels of quality and delivery reliability. 27
 E-Purchasing Commerce through the
Internet
Using the Internet to conduct purchasing business is not
extensive today, although commercial Internet usage by
purchasers should increase dramatically over the next
several years. The highest expected growth areas in e-
commerce purchasing include the following:
• Transmitting purchase orders to suppliers
• Following up on the status of orders
• Submitting requests for quotes to suppliers
• Placing orders with suppliers
• Making electronic funds transfer payments
• Establishing electronic data interchange capability 28
 USE OF E PROCUREMENT SYSTEMS

Primary benefits of e-procurement include:

– Cost savings
– Free-up time to concentrate on core business
E-procurement systems enable the
concentration of a large volume of small
purchases with a few suppliers in electronic
catalogues, which are made available to the
organization’s users.

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