With the advent of COVID-19 pandemic, supply chains and demand have been massively disrupted and are causing inventory issues, unclear delivery reliability, and a significant risk in single-source supplier circumstances.
Businesses frequently select suppliers primarily based on cost-effectiveness and tend to oversee red flags, like supplier reputation and market trends, to secure the best-priced goods.
However, this is rarely efficient as sourcing, and negotiating contracts with new suppliers incur additional costs associated with risks and reputational damage. Furthermore, the long-term cost of reputational damage resulting from poor quality control and order fulfillment can render any initial price-based savings insignificant.
It is high time that organizations now adopt strategic sourcing processes and implement strategies to source valuable suppliers and maintain a long-lasting relationship.
What is Strategic Sourcing?
Strategic Sourcing is the process of determining an organization’s spend profile and supplier base to ensure that the organization’s procurement needs are met effectively and profitably. It involves connecting data, spend analysis, market research, negotiation, and contracting to achieve maximum business performance.
Strategic sourcing entails creating a proactive, holistic, and ongoing evaluation and re-evaluation of an organization’s sourcing activities. Suppliers are seen as critical value partners in strategic sourcing, and the goal is to develop long-term, collaborative relationships. Every stage of the customer-supplier lifecycle is evaluated to ensure that the organizations’ needs are met consistently and efficiently.
When you rely on a single supplier, you risk not being able to procure critical goods and services if the supplier’s operations are disrupted. Some of the common drawbacks of depending on a single supplier includes increased supply vulnerability, increased risk of supply interruption, and greater dependency between your business and the supplier. This means if they have hiccups in their business, as a result, your business will suffer too.
Let’s take a look at the 7 Strategic Sourcing Process Steps that can help you successfully implement an effective sourcing strategy in your organization:
1. Spend Analysis
Spend analysis is the process of gathering, cleaning, categorizing, and evaluating spending data to reduce procurement costs, improve efficiency, and monitor controls and compliance. is one of the essential tools that procurement departments employ to proactively find savings possibilities, manage risks, and improve their organization’s purchasing power.
Identify the expenditure areas that exist across all business areas in the corporation and categorize them based on their criticality/non-criticality. Categorization will aid in the prioritization of sourcing operations for each spend category. Analyzing your spend will also help you identify which suppliers are most costly and which are providing you value at a good price.
Once you have identified the critical suppliers, you can also discover opportunities to streamline your suppliers and help save your organization money. For example, after doing a spend analysis, you might come to know that you are spending on two different suppliers who offer related products or services. You can consolidate such suppliers and negotiate better deals by procuring multiple products or services from them.
2. Market Research
Once you have done a detailed spend analysis of your current supplier base and identified which ones are critical for your business, you can now conduct market research to either find leverage in existing contracts or identify new suppliers, if needed.
A comprehensive analysis of your present and prospective suppliers can help you comprehend and assess essential supplier profiles. That involves examining suppliers’ revenue or market share to evaluate their market position and industrial performance, as well as the risks and opportunities associated with the supplier market.
Knowing your suppliers’ position in the market allows you to look for opportunities such as negotiation or mitigating risks by onboarding credible suppliers.
3. The RFx process
After completing the supplier market research, the next step is to solicit RFIs/RFPs/RFQs from suppliers. This step helps in supplier identification and negotiating strategy. It is critical to convey the business’s explicit requirements and the end-goals and performance objectives so that suppliers have a clear grasp of what the organization requires. That is necessary to submit an adequate proposal and design strategies to meet your business’s objectives.
The given data will provide valuable information, such as price structure, delivery and warranty conditions, product/service specs, and so on. After compiling the provided data, you may now establish criteria for selecting the suppliers depending on which you can source suppliers.
With the information generated from your spend analysis, market research, and different proposals, you are now ready to negotiate the price of the goods with your suppliers. For example, you need to procure goods for your new Product B, and you can negotiate the price of goods for your Product A by sourcing the goods for Product B from the same supplier. Your negotiation strategy may also depend on your spend data, the credibility of the supplier in the market, and the roadmap laid out by them in past or future proposals.
Once you have created a win-win negotiation strategy with your supplier that provides you with the highest cost savings and quality level while also satisfying the supplier’s requirements, it is time to draft a detailed contract.
A good contract that addresses all the terms and conditions of the deal can help you maintain a healthier and mitigate potential price and delivery risks. Moreover, based on the contract, you can also evaluate your supplier’s performance and derive the most value from the relationship.
For example, while contracting, you can mention that. “In case the supplier fails to deliver the products within two weeks once the order has been placed, the client will be eligible for a 2% rebate on the delivery”. This clause will ensure that the supplier delivers within the deadline, and the period mentioned can be criteria to measure the supplier’s performance.
You gather the information and data needed to establish an organization as an approved supplier or vendor during the supplier onboarding process. This procedure aims to make it easier for your company in the future to do business, procure goods and services, and pay suppliers. Supplier onboarding also necessitates vetting and validation to ensure that the prospective supplier complies with all applicable laws, regulations, and company policies.
7. Monitor Performance
Your strategic sourcing process does not end at selecting and onboarding the supplier. The last and most crucial step is to effectively assess how suppliers perform in relation to the organization’s requirements and objectives. You can evaluate their performance based on the terms and contract.
It’s crucial to keep track of supplier performance regularly and identify areas for improvement. That can significantly assist organizations in identifying supplier risks and developing strategies to avoid any supply chain disruptions.
Strategic sourcing is not a one-time process but a circular process. Given the dynamic business environment, market conditions change rapidly. So, before the contract expires, re-evaluate all the processes such as spending data, market research, look for further negotiation if applicable, and follow the whole strategic sourcing process flow once again.
About the Author:
Mohammed Kafil is a certified procurement consultant who has been coaching companies to establish resilient digital procurement operating models for over a decade now. With Kissflow Procurement Cloud, a flexible purchasing software that streamlines end-to-end procure-to-pay, purchase management system and also eventually the vendor management system, Kafil helps medium and large enterprises with their digital transformation projects. In the recent past, he has also worked with Fortune 500 companies to implement platforms like Coupa, Ariba, Ivalua, and BuyerQuest.