How do you achieve success with strategic sourcing? What do you need to do to be successful with strategic cost reduction? This article outlines some of the best practices on how to effectively perform strategic sourcing, so you can achieve your goal of lowering your costs without sacrificing the quality or reliability of your supply chain.
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What is Strategic Sourcing?
Strategic sourcing is a process used by organizations to identify and secure the best possible channels of supply for their goods and services. It involves analyzing, negotiating, and managing all aspects of the procurement process, from product selection to delivery. The goal of strategic sourcing is to maximize business value and savings by reducing costs, increasing efficiency, and improving supplier relationships.
The success of strategic sourcing requires a joint strategy between the buyer and supplier. This entails a comprehensive analysis of the buyer’s strategic spend – what they spend money on and how much they spend – to identify areas where cost savings can be achieved. It takes into consideration business objectives, quality standards, and compliance requirements.
Once areas for savings have been identified, an effective supplier management strategy needs to be implemented in order to brainstorm ideas, setting expectations, and ensuring that performance criteria are met. In addition, there should be ongoing communication between the buyer and supplier to ensure that the relationship remains beneficial for both parties.
By using strategic sourcing techniques, organizations can realize significant savings on their total spend and form lasting partnerships with trusted suppliers.
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Understanding Your Spend Dynamics
When it comes to strategic sourcing, understanding your spend categories is key to success. One of the best ways to get started is to use the Kraljic Matrix, which classifies spend into four categories: Bottleneck, Leverage, Non-Critical, and Strategic.
Bottleneck items are high-value, high-risk products that require close supplier management. Leverage items have high unit costs, allowing for cost reduction opportunities. Non-Critical items are low-cost products that are easy to replace and don’t require specialized attention. Lastly, Strategic items can create a competitive advantage, so they require careful selection and maintenance of suppliers.
Once you understand how each item fits into the classification, you can define expectations for each category and develop effective strategies for cost savings and supplier management.
For Bottleneck items, you may need to reduce lead times. For Leverage items, focus on cost reduction with long-term contracts or purchasing volume discounts. For Non-Critical items, streamline your procurement process to increase efficiency and save time. Finally, for Strategic items, ensure that you’re selecting the right suppliers to meet your organization’s needs.
Each of these levers, if successfully implemented, can impact a holistic, positive change in the supply situation.
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Understanding Your Internal Needs
Internal cross-functional needs refer to the requirements or goals of different departments or functions – Quality, Manufacturing, IT, Finance, After-Sales, Marketing, etc) within an organization that need to be considered. Engage with representatives from these departments to understand their specific needs and requirements. This could include factors such as budget constraints, technical specifications, regulatory compliance, and delivery timelines.
Inputs from past sourcing events are important to look at – both successes and failures alike – so you can make informed decisions this time around; what succeeded last time versus what might not work next time.
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Conducting Market Research
As part of this market research process, you need to gain an understanding of your organization’s existing supplier base and the industry dynamics at play. This data can be used to evaluate current sourcing strategies and develop new ones. By collecting this information, you’ll gain the insights necessary to make the best decisions for your company and reduce costs in the long run.
The Structure-Conduct-Performance (SCP) model is a wonderful tool to conduct this step. The model highlights the tight link between market structure, market conduct and market performance. Once you have conducted your research, you will be able to outline the high-level approach for each strategic category.
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Creating a Request for Information (RFI)
One of the first steps is to gather gather information about a potential supplier’s capabilities and capacity to meet your requirements. A request for information (RFI) is a tool that is used for this purpose. The RFI questionnaire typically includes a series of questions related to the supplier’s capabilities, such as the types of products or services they offer, their production capacity, their quality management systems, and their delivery and logistics capabilities.
By collecting this information, you can make an informed decision about whether to engage with the supplier and potentially enter into a business relationship. An RFI questionnaire can also help to identify any potential gaps or weaknesses in the supplier’s capabilities, which can be addressed through further discussions or negotiations.
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Creating a Request for Proposal (RFP)
An RFP plays a primary role in streamlining the process of soliciting bids and creating a level playing field for all suppliers. An RFP clearly outlines the details of the project, such as the quantum of goods or services needed and any specific features or requirements.
For strategic items, the pricing information solicited from suppliers shouldn’t be just on Unit Price. The endeavour here is to identify as many cost factors that impact the pricing of an item or service. Say you are buying millions worth of Castings. Ask every supplier to provide an cost breakdown right from the purchase of raw material to manufacturing overheads to packaging and shipping. Having such rich information from several suppliers arms you with excellent negotiation power.
Read more about the importance of an RFP.
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Evaluating Proposals and Shortlisting Suppliers
When it comes to strategic sourcing, evaluating proposals to RFIs and RFPs and selecting the right suppliers for negotiation is an essential part of the process.
The RFI questionnaire can be weighted and the responses scored by a cross-functional team. This not only ensures the evaluation is objective but also feedback from other stakeholders are factored in the supplier evaluation.
The RFP response evaluation includes a comparison of the pricing of the participating suppliers.
To sum up, when evaluating proposals, there are several key factors that should be taken into account, including cost reduction, quality assurance, delivery speed, and customer service. It is important to consider both short-term and long-term cost savings when comparing bids. Quality assurance measures should also be taken into account to ensure that the products or services meet your standards. And customer service should also be taken into consideration to make sure that any issues or support needs that arise can be addressed quickly and effectively.
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Final Negotiation and Contracting
The suppliers that meet the capability needs and are reasonable on pricing need to be negotiated with. In this negotiation phase, it’s important to clearly define expectations and make sure all parties are in agreement with the terms of the agreement.
Once a supplier is selected for award, it’s important to carefully manage the contract or agreement to outline all of the terms and conditions of the partnership. Additionally, it’s important to create metrics and performance benchmarks that will be used to measure the effectiveness of the supplier over the life of the contract.
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Monitoring and Improving the Supplier Performance
Finally, effective supplier management is essential for regularly evaluating suppliers based on performance metrics and price. It’s also important to provide adequate communication between the business and suppliers, as well as provide incentives for meeting expectations and goals.
Regularly evaluating suppliers and looking for ways to improve costs through strategic sourcing can have a big impact on a business’s bottom line. With the right approach, businesses can gain better control over their supply chain and improve their profitability.
About Krinati
Krinati guides purchasing teams in adopting the right strategic sourcing process. The process is then conducted using Krinati’s eSourcing solution – a automated solution that supports RFI scoring & cross-functional evaluation, complex multi-stage RFPs and innovative online auctions.
Read more about the benefits of eSourcing.
