Strategic Sourcing And Supply Chain Management

As we all know, that identifying and locating suppliers is relatively simple, but it becomes more complex as the amount of unique raw materials, ingredients, parts, components, connectors, apparatus, products, equipment, supplies, and services increase and the numbers of buyers involved in the decisions expand. In a global enterprise, it is possible for one purchasing decision to impact numerous business processes or departments including manufacturing, receiving, distribution, marketing, sales or customer support.

Sourcing is seen somewhat narrowly as “finding sources of supply, guaranteeing continuity in supply, ensuring alternative sources of supply, gathering knowledge of procurable resources”. A rather broader definition of sourcing views it as “the entire set of business processes required to purchase goods and services including the selection of suppliers, design of supplier contracts, product design collaboration, procurement of material and evaluation of supplier performance”. Sourcing is the process of finding and subsequently managing a source for the input of production’.

Supply chain management (SCM) is the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers. Supply Chain Management spans all movement and storage of raw materials, work-in-process inventory, and finished goods from point of origin to point of consumption.

Strategic Sourcing

Strategic sourcing is the ongoing process of finding the best suppliers and using these supplier relationships to maximize value for an organization. Every organization has a sourcing program in place whether they know it or not.

Strategic sourcing can be summarized as ‘satisfying business needs from markets via the proactive and planned analysis of supply markets and the selection of suppliers with the objective of delivering solutions to meet pre-determined and agreed business needs’.

Situation in the research area

Research about Supply Chain Management

Supply chain management tools, trends and initiatives have evolved rapidly as organizations strive to exact greater value from relationships with customers and suppliers. Some recent trends that have impacted the inclusion of diversity suppliers in supply chains include

Strategic sourcing

Advances in technology, e-sourcing and e-procurement

strategic partnerships and alliances and

Outsourcing.

Strategic Sourcing helps to reduce the total cost of purchasing while maintaining quality and service. Strategic sourcing and supplier management and integration decisions must be aligned with corporate mission and vision, have direct operating company involvement and must be based on a well-defined business case.

Procurement’s role in delivering bottom line value through effective strategic sourcing has been demonstrated in several corporations. Corporations can achieve substantial amounts of savings by strategically sourcing goods and services. Some of the strategies in sources commonly employed are

Selecting sourcing strategies that are aligned with supplier diversity strategies

Insuring that diverse suppliers are included in early source lists

Negotiating aggressively with diversity suppliers following RFI /RFP stages

Developing supplier management and integration processes and metrics to insure successful and sustainable inclusion of diversity suppliers following the strategic sourcing process

The impact of technology on supply chain management cannot be ignored. Information technology professionals have found ways to apply systems knowledge to manage relationships with suppliers and track expenditures through sophisticated Enterprise Resource Planning (ERP) platforms. E-procurement processes allow suppliers and customers to exchange information, purchase goods and services, and execute payments with ease.

While not a new phenomenon, outsourcing is a trend that has received increased attention in procurement departments. The primary reasons for outsourcing are to reduce costs, increase efficiency of operations, improve customer service etc. Outsourcing allows companies to remove processes where they lack expertise from their supply chains and focus on areas of core competency. For example, some companies are considering outsourcing their entire logistics operations. Outsourcing has created opportunities for diverse suppliers in several key areas – business and real estate services and information technology staffing services. As additional lines of business are evaluated for outsourcing opportunities, sourcing strategies should involve a process to insure that diversity suppliers are considered for the outsourced service roles.

Research about Strategic Sourcing

Steps of strategic sourcing

According to the research already done, the Strategic Sourcing can be reduced to several steps as follows:

Assessment of Customer and Business needs.

Assessment of a company’s current spends (what is bought where?)

Assessment of the supply market (who offers what)?

Development of a sourcing strategy (where to buy what, while minimizing risk and costs)

Identification of suitable suppliers

Negotiation with suppliers (products, prices, value-added services, terms, etc.)

Implementation of new supply structure

Track results and restart assessment (continuous cycle)

Alternatives of Strategic Sourcing

Before Strategic Sourcing comes to our view, there were other sourcing methods used.

The first one is called reactive sourcing. Reactive sourcing as being a procurement approach where no proactive sourcing strategies have been put in place and so the purchasing and supply management function has an entirely reactive role e.g. responding to requisitions or other unexpected requirements from the business. It is better the Purchasing and supply management professionals to move away from this method of sourcing, wherever possible. However, some organizations still operate entirely on the basis of unexpected demand responding to individual needs as and when they arise. This response may be professional, but the buyer behavior is transactional, low level and will not necessarily enhance or promote the purchasing and supply management profession.

The other one is called Tactical Sourcing. Tactical sourcing is to some extent reactive as it covers those business requirements that cannot be planned in advance, but are provided within a framework of strategic sourcing. It is however, proactively managed and so resources and processes are set aside to manage it within the purchasing and supply management strategy An example of tactical sourcing is working with colleagues in Marketing and Sales, pro-viding a bid support activity within fast moving technology areas. Notwithstanding the above, there should be no unplanned or unexpected capital expenditure as all organizations have capital investment plans which purchasing and supply management professionals should obtain and incorporate in the strategic sourcing strategy.

The advantage of Strategic Sourcing

Strategic sourcing has particular importance with manufacturing firms. First, these firms use a greater portion of their revenue on purchasing than any others. Sometimes as much as 75% of company budgets are devoted to purchasing raw materials and other goods/services required to create their products. Another reason is that with most manufacturers there are some goods that manufacturers cannot go without for any period of time.

Because of these two reasons, manufacturers can benefit from strategic sourcing. One benefit is that by having a stable relationship with key suppliers, the business can ensure that they have a steady supply of both bottleneck items and other necessary goods. Additionally, by negotiating with the supplier and finalizing a purchasing arrangement, the company can secure a lower price on those items because the vendor is assured of a buyer for their products.

The benefits of using a strategic sourcing approach are myriad. They address both of the main procurement goals – improving purchasing conditions and increasing procurement efficiency. Strategic sourcing also yields substantial bottom-line benefits by reducing the cost of purchased goods and services. Strategic sourcing is also capable of:

1)Broadening the list of participating vendors

2)Increasing competition

3)Decreasing cycle time

4)Increasing efficiency of the procurement function

5)Improving ROI

6)Gathering market price data

Purpose of our research

Strategic Sourcing is relatively new. We introduce this method because it can solve some certain problems effectively. The problems are mainly about the relationship between companies and their vendors:

Firstly, there are not established to be lasting vendor relationships. Most businesses pick suppliers based almost exclusively on price and only a few take the time to thoroughly go into the backgrounds of the vendors that they do choose. In the long run, going through the request for proposal (RFP) process for almost every purchase is more time-consuming and expensive than it needs to be.

Secondly, suppliers have no real loyalty to their buyers because they realize that their buyers have no loyalty to them nor are they willing to invest the time in understanding the details of the buyer’s industry.

Thirdly, the unstable relationship is vulnerable. If anything happened in the market, the partnership is very likely to break. Thus, the company would lose its supply and the vendor would have no buyer. It turns out to be a “lose-lose” situation.

The risks of buying the wrong items, services or from the wrong supplier can have major impacts and ripple throughout a business. Consequences can range from late delivery to total service failure liability and can even affect market competitiveness. In addition, if the selected suppliers cannot provide opportunities to reduce costs, improve and upgrade product/service offerings or provide other market-facing advantages, then an organization can quickly find itself losing market share.

The efficient solving measures.

It is advisable for organizations to shift from the Reactive and Tactical sourcing process and evolve the Strategic Sourcing process. The Implementation of Strategic Sourcing needs Top Management buy in and High level of competence in doing various analyses to arrive at an optimum source. The Strategic Sourcing Organization should be highly placed for an easier decision-making. An extensive market driven analysis should be carried out for implementation of the Strategic sourcing of an Organization wherein the Organization’s position in the market place is the prima force. The current supply chain should also be mapped for an effective implementation of the Strategic sourcing. The Analysis provides with extensive data analysis leading to weighing in the various options and arriving at a sourcing Plan. The source Identification and strategizing follows the set procedural path making Strategic sourcing an excellent tool generating bottom line growth and rationalizing the supply chain costs.

¼ˆ1¼‰ The first stage in implementing strategic sourcing is the positioning of the purchasing and supply management function within the organization. In order to undertake strategic sourcing, purchasing and supply management must be positioned at the appropriate level. In order to sustain the high level position, resources and influence, the purchasing and supply management professionals responsible for strategic sourcing should create a suitable governance structure.

The purchasing and supply management function should create a Sourcing Board (sometimes referred to as a ‘Procurement Board/Panel’) comprising, decision makers, opinion leaders and influencers.

The Sourcing Board should be used to discuss strategies, policies, approaches, assist with decision making and to help influence others in the organization on behalf of the purchasing and supply management professionals.

¼ˆ2¼‰As – Is Analysis. This is a very important stage in strategic sourcing which includes establishing: Customer and Business requirements, Spend analysis, how the Supplier positioning is, a Supplier historical analysis, analysis on Transaction cost, an Analysis on critical nature of products, future spend analysis, market analysis, supplier referencing and supply chain cost analysis.

¼ˆ3¼‰ Decide what type of Sourcing Strategy – global, regional or local will be applicable for the Organization?

Several analytical tools can be used as appropriate for this stage including Porter’s Five Forces, PEST (Political, Economic, Social, Technological) and SWOT (Strengths, Weaknesses, Opportunities and Threats).

¼ˆ4¼‰Mapping Supply Chains. The process of mapping supply chains can be complex and the extent to which it is undertaken is dependent on the value and risk of the procurement in question and limited by the resources allocated to strategic sourcing by the organization. The ‘As-is’ analysis and ‘Mapping’ stages can take typically between three and six months. The timeframe is too long for some organizations and more over impracticable for some procurement situations. However, the longer-term benefits of such proactive strategic sourcing are invaluable.

¼ˆ5¼‰Consolidate Data and Generate Options for Strategic Sourcing

Once the analysis has been undertaken and supply chains have been mapped, the next stage is to consolidate the data and to generate options. In summary, this stage involves brainstorming options to fulfill the requirements, such as identifying the offering of suppliers and identifying whether there are other ways to fulfill the requirement e.g. instead of pur-chasing PCs i.e. goods, rather purchase a desktop service i.e. outsource the PC desktop provision.

¼ˆ6¼‰Selection of the Strategic Sourcing Options

Once a range of suitable strategic sourcing options has been identified, these should be presented by Senior purchasing and supply management professional(s) to the organisation’s directors or Sourcing Board to be considered in the light of where the business currently stands and what the customers require. Occasionally, the strategic sourcing teams will be required to investigate further, or support their suggestions with business cases, ROI (return on investment models) and so on. Equally, the organization may require further options, or clarification or changes to those options preferred.