What is strategic sourcing?
Strategic sourcing is a process that has a real-world impact on all facets of a business. It involves internal collaboration with stakeholders and suppliers, as well as critical analysis of spend, and supplier risk management. It enables you to identify supply risks and develop a plan to mitigate them. With an improved strategic sourcing process, you can align purchasing power with the overall value proposition and build a diverse supply base. Also, you can determine ways to reduce supply chain costs and manage supply risks. Therefore, it becomes crucial for you to improve the strategic sourcing process. And to help you establish a good strategic sourcing methodology and reap benefits of the strategic sourcing process, the experts at SpendEdge have highlighted the key steps involved in improving the strategic sourcing process.
7 Steps of Strategic Sourcing Process
Step 1: Identify spend areas
Identifying spend areas is a key step in improving the strategic sourcing process. This is done at CEO, CFO, or CPO level and involves selecting areas of spend that could produce cost reductions or process improvements.
Critical to this step is prioritizing the various spend areas based on the objectives of the company. Collect data about your company, analyze the data, and build the framework you’ll need to divide the entire supply chain into various categories. This will help you in categorizing spend and understanding where the spend is taking place.
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Step 2: Perform Supply Market Analysis
Begin your supplier market research to find relevant suppliers and identify the ones that can be beneficial for your organization. The process involves supplier market analysis, demand analysis, supplier selections, and category risk analysis.
Collect data for the supplier base that can supply different categories. Go beyond your existing customers and consolidate supplier data. Analyze the spend in different categories and compare your spend to the supplier revenue. This will help you understand how valuable you can be to the supplier.
Next, conduct supplier interviews to select suppliers. Send RFI to potential suppliers and compare it with costs you are paying to your current suppliers. This will help you understand whether its wise enough to continue with current suppliers or not. Finish the step by performing a category risk assessment to determine if new suppliers are worth the risk or not.
Step 3: Analyze your current sourcing process
Engage with stakeholders to gain detailed insights regarding products used by suppliers. Know why they are using certain products compared to cheaper alternatives and find ways to cut costs without comprising the quality. Identify similar or alternative components to benchmark against your current ones and make the strategic sourcing process efficient. Evaluate potential suppliers against the current one and calculate the hidden costs associated with new suppliers. Even if you don’t intend to source from overseas, benchmark suppliers and products on the global level so you can have a global point of view.
Step 4: Develop a strategic sourcing strategy
Once, you have a clear idea of spend areas and supply market, develop a robust strategy to determine ways to minimize costs and risks. But before that, understand current suppliers’ capabilities and the future requirements for the commodity or service from the business units. This will help you to identify and establish timelines and milestones as a road map to accomplishing the objectives. Additionally, such strategies will negotiate the best possible deal with suppliers you choose for the organization.
Step 5: Supplier selection process
After self-evaluating the suppliers, send an RFI or an RFP to gain relevant insights. Define your requirements, and detailed questions to obtain a comprehensive overview of the product, processes continuous improvement policies, and costs. Once you get the questionnaire back from potential suppliers, develop the supplier portfolio and a score. This will help you benchmark scores against your requirements, determine the minimum score required by the supplier to qualify, and improve the strategic sourcing process.
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Step 6: Initiate RFQ Process
Since, you have shortlisted qualified companies who possess the potential to meet your needs, challenge your existing supplier by sending a request for quotation (RFQ). This will add an element of competition and help you get the best value in terms of cost savings. Prepare documents for each vendor, include a description of your company, the project, and background information and attach terms and conditions to be followed while making a bid. This will help you spend less time in negotiation, keep the process transparent and sign contracts at the best prices.
Step 7: Maintain supplier relationships
Probably this is one of the most ignored aspects of the strategic sourcing process. Companies fail to gain substantial value from their vendors after going through such a laborious process of vendor selection.
Establishing an effective supplier relationship management program will enable you to realize savings and improvements that were targeted during the early strategic sourcing process. Implement new ideas or processes, develop continuous improvement cost drivers with the selected supplier(s), and refine the score cards to keep the momentum going.