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With strategic sourcing, major manufacturers, retailers, governments and service providers are achieving double-digit cost savings while strengthening ties with suppliers offering the best quality products and customer service. Strategic sourcing is also good for innovative and competitive suppliers, including small and medium-sized businesses that might not have imagined they could compete against larger companies for major contracts. Strategic sourcing can even be used by suppliers themselves to achieve similar savings and benefits. The main objective is minimizing costs, but strategic sourcing takes an enlightened view of the supplier-customer relationship. Strategic sourcing recognizes that people, including innovative suppliers, are a valuable part of an organization and focuses on reducing waste or non-value-added costs. It is defined as: "A disciplined, systematic process for reducing the total costs of externally purchased materials, products and services while maintaining or improving levels of quality, service and technology."
TSA's Three Steps To Strategic Sourcing
1. Purchasing Profiles & Prioritizing: The first task for a strategic sourcing team is to gather as much information as possible about what, when and how the business buys. This means developing purchasing profiles for each business group, specific products and services, and even the vendors used by the business. This involves internal interviews, accounting reviews and in-house surveys, as well as marketplace surveys. After benchmarking internal and marketplace practices, priorities are set in areas such as costs, service or quality.
2. Identify Strategic Sourcing Products: Next is developing specifications for products to be purchased. This can be very detailed, identifying exactly how a product is used and which features are most and least important. For example, a common problem in large organizations is over-ordering of office supplies, such as pens and paper. Questions like these will be asked of users:
- Are specifications for this product too high or low?
- Are we buying features we don't use?
- What do users value?
- What are the costs and benefits associated with features/services?
- What would happen if a service/feature was removed?
- Will significant savings result from unbundling goods and buying components from different suppliers rather than one?
3. Solicit Bids & Negotiate With Suppliers: Once the sourcing team understands what users need, it identifies the "universe" of potential vendors, big and small. A detailed Request for Proposal (RFP) is sent out based on the vendor database. The RFP spells out exactly what information is needed from vendors, even incumbent suppliers. Simple tenders may be used for low-priced commodities, but the formal RFP is preferred for core goods and services.
A hallmark of the strategic sourcing approach is the effort made to be fair and above-board with all potential suppliers. The incumbent supplier is treated no differently than other potential vendors. For example, if information is supplied to one vendor, it is also distributed to others. The aim is to create a level playing field. In fact, if any supplier attempts to circumvent the process, such as contacting an "old pal" in the head office or business unit, that vendor could be disqualified.
Each bid is rated using weighted criteria agreed to by the sourcing team. The lowest price, for instance, may be overshadowed by speedy delivery or quality, depending on the specific product or service. A long-term relationship with a supplier may be important, but not an overriding factor.
Applying sound business principles, the sourcing team will review payment terms, any value-added programs (such as inventory management by the supplier) and delivery issues. The sourcing team then meets with the successful bidder or bidders to get agreement on future purchase terms, prices and conditions. They also agree to a quality control system involving on-going reporting.
If all goes well in negotiations, the purchasing relationship is awarded. Everyone involved is notified of the results, with feedback available to unsuccessful bidders so they can make improvements and bid again next time.
Is strategic sourcing working for small and medium-sized businesses? You bet.
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