SOURCING & PURCHASING
Sourcing describes all those activities within the procurement process concerned with identifying and evaluating potential suppliers, engaging with selected suppliers and selecting the best value supplier(s). The outcome of the sourcing process is usually a contract or arrangement that defines what is to be procured, on what terms and from which suppliers. The phrase ‘strategic sourcing’ may be used to describe the application of the sourcing process to significant acquisitions, or the team that manages the sourcing process on behalf of the organisation.
The scope of the sourcing process usually includes the following key activities: understanding the need; evaluating the supply market; developing an appropriate strategy; executing that strategy, usually involving market interactions such as the issue of an RFP and/or negotiation; selecting supplier(s); and developing a contractual agreement. See also Sourcing Strategy.
Different Types of Sourcing Methods
There is a wide range of sourcing methods and one should bear in mind three key points: 1) sourcing options are often not mutually exclusive 2) sourcing methods can be applied to both front and back office functions and 3) strategic sourcing as a procurement process can be seen as finding the appropriate solution for your short and long-term goals.
A few strategic sourcing methods can be applied:
Low-cost Country Sourcing
A method of sourcing which focuses on benefiting from the competitive advantage of other countries which are able to offer lower labor and production costs. The method focuses on cutting overall operating expenses for a firm, and is in itself a procurement strategy. Most companies which look towards China are following this sourcing method.
A similar sourcing method as to the previously mentioned low-cost country sourcing; however, this type of sourcing is not strictly about benefiting from cheap production. The aim may be to get a taste of the international market and the way to carry out business there.
Alternatively, the focus could be on tapping into a new range of skills or resources which would otherwise be unavailable domestically.
An outsourcing method in which a client works direct with an established outsourcing provider to arrange procurement; the outsourcing provider contracts out the work to a smaller company. All contracts are dealt under offshore law, as the agreements are between 2 offshore entities.
This can reduce the burden of dealing with import and export restrictions upon the company, and make the process itself smoother.
Captive Service Operations
This occurs when the outsourced services being provided are performed by a company the customer owns or are from within the same group. This creates a greater level of control, as well as addresses questions that may arise about confidentially, security and infringement rights. However, the same level of economies of scale may not be achieved as well as the opportunity to take advantage of supplier’s expertise.
The traditional way to outsource parts of a company’s operations. Two companies create a simplified agreement to allow for maximum cost reduction through utilizing economies of scale and expertise. However, there is a significant loss of control and there needs to be a high degree of trust as sensitive data may be at risk.
A slimmed down strategic sourcing process was defined, in 2012, as:
- Data collection and spend analysis
- Market Research
- The RFx process (also known as go to market)
- Implementation and continuous improvement
While the modernized process combines the market assessment and cost analyses steps of the older model into a single “market research” step, and the supplier identification and sourcing strategy development steps into a single “go-to-market” step, negotiation has split into “negotiation” and “contracting.” This change is due to the heightened importance of market intelligence in modern strategic sourcing plans, and its ability to deliver value by improving both pricing and contract terms when leveraged against the identified suppliers.
Although both descriptions of the sourcing process are accurate to some extent, there is no standard set of steps and procedures. As strategic sourcing is put in place and practiced over time, many large, sophisticated organizations will modify the process to better meet their individual corporate needs.
Outsourcing a business practice to another company may also be incorporated into a sourcing strategy for services. This strategy may involve the transfer of staff and assets to the outsource company. Due to the strategic and complex nature of outsourcing, many organizations such as Procter & Gamble, Microsoft and McDonald’s have created what is referred to as Vested Outsourcing agreements to help build highly collaborative win-win business relationships. Researchers at the University of Tennessee provide guidance on how to create Vested Outsourcing agreements in their book Vested Outsourcing: Five Rules that will Transform Outsourcing.
Supply chain planning (SCP) is the forward-looking process of coordinating assets to optimize the delivery of goods, services and information from supplier to customer, balancing supply and demand.
Importance of Strategic Planning in Supply Chains
Supply chains are basically networks. They are networks of facilities, people and distribution options whose primary purpose is procurement and transformation of goods so that can then be delivered and distributed to potential customers. Supply chains can be pictured as arteries that supply business or organizations its industrial life. Disrupt a supply chain and you will find business or organizations gasping for breath and clinging to dear life.
Strategic Planning improves Efficiency
Supply chain networks are basically three-network things: the supplier, the manufacturer and the distributor. While planners may call the supplier, the supply manufacturer or distributor, it still refers to the same thing. This three-network relationship forms part of the supply chain. All supply chains follow the same three-network design or a variation of the three-network design.
Strategic planning is important to supply chains, first of all, because it improves efficiency. The key word is Speedier. Planning how to get the raw materials or supply, planning where to get it, planning when to get it, planning an efficient procurement system all contributes to the goal of efficiency. If you cannot get your supply faster, the manufacturing aspect of the network might grind to a halt, waiting for the raw materials. This will be a costly episode in business or organizations.
The strategic planner then ought to design a speed equation. How to make the supply faster, where to get the supply faster, when to get the supply so that it will arrive faster are key questions for the planner. Strategic planning must improve efficiency; it must make the supply chain Speedier.
Strategic Planning improves Economy
The need for speed is just part of the supply chain equation. A speedier delivery will not produce a strategic advantage for business or organizations if it cannot get the supply cheaper. The key word is Cheaper. It would be totally absurd to have the supply delivered fast if in return it becomes more expensive. This would be a disaster to business or organizations.
Collectively, speed and price should go hand in hand in the supply chain to create a strategic advantage. The question of how, where and when to procure supply in the fastest way, now has to be tempered with how, where and when can we get it the cheapest. The strategic planner must be able to incorporate such into the plan. A supplier might be able to get if fast but will the cost still justify it? A supplier might be able to get supplies cheap but will the speed justify it? These are basic questions that can affect the strategic plan.
The supply chain should be designed then in a manner where the price would be a consideration, aside of course from the speed. Business or organizations then have to source out suppliers who can provide it cheapest in relation to fast delivery. It is always wise do business with suppliers in various localities and even in various countries.
Utter dependence on a few suppliers located in the same location is never an intelligent option. An armed conflict can just erupt in the locality, as what usually happens to suppliers in the African continent and it can just wipe out your entire year’s supply of raw materials, as proven time and time again.
Strategic Planning Improves Expectation
Another factor that improves the supply chain network and creates a strategic advantage is the identification of and the transacting with manufacturers or outsource manufacturer who are able to transform the goods that have been delivered fast and cheap into finished products or partially finished goods.
If business or organization can transform the supply, that has been delivered fast and cheap, into finished products, then the strategic plan should involve in-house manufacturing.
However, if an outfit out there can do the job better and probably cheaper, then it is always the rational way to do business. Strategic planning improves the expectation of business or organizations. They can now decide who will do the process better, and not regret in some future date.
Most of the toys, consumer electronics and even household goods are made in China. The strategic consideration of course is expectation. These guys can do it better. Not only can they do it faster and cheaper, they also can do it better. This is the primary reason why many manufacturers have partially done the manufacturing process or fully given the manufacturing process to outsource manufacturers commonly known as sub-contractors.
In the event a new entrant happens to do the manufacturing process better, the strategic planner has to seize the opportunity but then as he still needs the previous manufacturer, he then needs to incorporate the new relationships, anticipating complexities that may eventually arise in the future. The search for the better should form part of the strategic plan. In a world that is constantly changing, the business or organizations that can do its process better might be the only ones left standing.
Strategic Planning Improves Evolution
People do evolve, so does the product. Evolution and change is another key factor that must be incorporated in strategic planning. Lifestyle changes and patterns affect product evolution and product delivery. The key is Better and better.
The strategic planner has to visualize how lifestyle changes and patterns affect product delivery. Years ago, a large segment of the working class worked regular 40 hour weeks Monday to Friday. That is not so true today. Many still work 40 hour weeks or more but on different shifts and in different locations. The 24/7 establishments evolved to cater to these lifestyle change and pattern. From the initial grocery stores that started to open 24 hours a day, 7 days a week, now comes the high-end stores, gyms, entertainment arcades and a host of other industries.
Supply chain strategy calls for an evolution in the delivery and distribution to ensure everyone gets everything they need in the exact time. If there has to be delivery and distribution at 1:00 in the morning, business or organizations must evolve to answer this end-user need. Neglect it and others will do the evolution for you and you might be on the verge of extinction.
Doing things better and better must be a passion that the strategic planner must not forget to consider. This passion must be present not only in product design, in product manufacturing but in product delivery as well. The supply chain has to constantly evolve to cater to the needs of the constantly evolving end-user and their world. The business world has actually become a world without any clear boundaries. Where it used to be that office hours was 9 to 5, now the definition of office hours is so loose it can be any time in the twenty-four hour clock.
Strategic planning is extremely important in supply chains. It may spell the difference between healthy business or organizations, or business or organizations that have contracted a life threatening disease. Supply chains are lifelines; strategy must be able to keep them alive and well.
How to achieve connected supply chain planning
To succeed in a growing global market, you must adapt effectively to the digital revolution and seek out practical ways to connect your supply chain planning from start to finish. Here are five steps we recommend to achieve connected supply chain planning.
- Make the move to real-time supply chain planning
When using ERP systems and spreadsheets for planning, companies typically rely only on historical data, resulting in little wiggle room for changes should any disruptions occur in demand or supply. For example, based on the previous year’s numbers, a company can estimate the number of products it will sell in the next quarter. But what if a massive hurricane destroyed a key distribution center, leading to too little supply on the shelves? With Anaplan’s real-time connected supply chain management solution, you can create “what-if” scenarios and plan more effectively so you’re ready when disruptions occur.
- Unify supply chain planning with enterprise planning
A vital second step is connecting traditionally siloed supply chain planning to sales and operations planning and financial planning. Companies can benefit from synchronizing their short-term operational planning with their wider business planning processes to make real-time updates to inventory forecasts and supply. Deploying real-time S&OP solutions that enable enterprise-wide collaboration means key stakeholders across the business can create new scenarios and quickly assess how to use their resources wisely to optimize profitability when an unforeseen event happens.
- Anticipate the demand of the end customer
For consumer-packaged goods companies, anticipating what customers want and when they want it is an ongoing challenge. A solution like Anaplan allows end-to-end visibility across the supply chain, and beyond their existing network of wholesalers and retailers to sense demand signals from customers. When you can rapidly identify changing consumer sentiments and assess how that changes demand for your product, it benefits your company, partners, and customers by improving profitability, margins, and lead time.
- Leverage real-time data across all points of the supply chain
Because supply chain planning typically involves a myriad of suppliers, channels, customers, and pricing schemes, models soon become large and potentially unwieldy—especially when spreadsheets are your primary planning tools. Incorporating a solution that uses real-time data allows you to plan with more accuracy and reduces the risk of stock-outs or having too much inventory.
- Ensure you have the flexibility to cope with change
When you have technology that lets you plan efficiently and react quickly, disruptions aren’t disruptive because re-planning and re-forecasting is easy—resulting in time and money saved and increased profitability.