Key success factors in strategic sourcing | by Elaine Porteous

Experience has shown that the seven-step strategic sourcing process has stood the test of time and, with variations, has become best practice. The main objective of strategic sourcing is to save money but other key reasons include improving the whole acquisition process, better supplier performance and minimizing risk.

Through tight management of the sourcing process, organisations are able to place more spend under the prudent eye of Procurement and, at the same time, ensure that savings opportunities are properly realised, implemented and reported on.It is worth us revisiting the generally accepted process and reviewing the elements that contribute to a successful solution that suits all the parties.

Profiling the category and understanding the spend data

This first step requires defining the sourcing category and the commodities in it. What are the current quantities or services being sourced, what types, shapes and sizes? Who are the users, where are they located, what are the processes used and who else is involved in the supply chain? Validating and documenting the existing data is vital.

Know the supply market

Identify potential new global and local suppliers beyond those currently in use.   Study the cost components that make up the product or service, also called cost drivers, and analyse the suppliers’ marketplace for risks and opportunities. Follow the key raw material prices and other cost elements such as labour and transportation and use these to validate suppliers’ proposed prices.

Decide on and develop a sourcing strategy

Deciding where to buy while minimizing risk and costs is the challenge.  At this stage, setting up a cross functional project team is a must. Involving all stakeholders, not only the end users, but also other affected areas of the business in the strategy will pay off.  Find out what real alternatives there are to the current suppliers, how competitive the supplier marketplace is and importantly, how open the users are to new suppliers.

Select a suitable sourcing process

The most common method of sourcing is to use a Request for Proposal (RFP) for soliciting bids. This allows for a clean and efficient process that is also transparent and defendable. The product or service specifications must be clearly defined; this is often a weakness in poorly constructed RFPs. Add in delivery and service requirements, your legal and financial terms and conditions, and any other specific requirements. Work out your evaluation criteria at this stage in the process and if possible, include a guide on this for the bidders.

Selecting a supplier and negotiating terms

A good strategic sourcing strategy includes conducting multiple rounds of negotiations with suitable short-listed suppliers. Mitigation of risk and future contract compliance are elements to consider. The final selection of the chosen supplier must be based on the pre-designed criteria. The contract must be drafted, agreed, and it needs to be signed by both sides. Surprisingly, this vital step is often overlooked and may cause anguish later.

Implement and integrate

Ensure that the supplier, internal stakeholders and everyone affected is involved in the design and implementation of the solution chosen. Extensive communication and change management are vital steps to ensure a smooth implementation especially where there are radical systems or process changes.

Reporting and tracking results

This is a key element of the sourcing management process. It not only includes tracking of savings but it identifies when and where the supplier is, or is not, adding value. Supplier Relationship Management (SRM) plays a big part in realising the benefits of a contract.  Constant monitoring of purchases made is needed to ensure that full value is being achieved from the contract. Failure to do this will not only mean lost savings but will promote the practice of “maverick” spending.

Strategic sourcing is a circular process.  Before the end of a contract, go back to Step 1 to review the supply market again and restart the process.  Market conditions change, benchmark the commodity or category again and proceed from there.

Elaine Porteous is a Senior Associate of Bespoke – www.bespokesourcing.co.za
Posted on August 14, 2013

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