Go beyond the seven step sourcing process
Procurement managers and strategic sourcing professionals often follow a consistent approach when planning and implementing a sourcing initiative. Having a process provides a framework that, when properly applied, can produce sustainable savings in a consistent way. Creativity in applying the strategic sourcing process will have a dramatic effect on the results achieved, whether a seven-step sourcing process or a custom internal sourcing process is used.
To optimize the results of a strategic sourcing initiative, there are several questions
to be answered at the start of the project:
o How can we improve our understanding of the sourcing process?
o What are the X factors that arise when executing a sourcing project?
o What other considerations should the sourcing profile explain during administration
Two frequently overlooked components of any strategic sourcing method involve the collection of innovative market information and the supplier strategy. Often in the course of a strategic sourcing initiative, new product developments, alternative technologies and shifts in consumption patterns present themselves. A Creative Sourcing (TM) process is dynamic, so the sourcing professional may need to implement a revised or new strategy to adapt to changing conditions and events.
Purchasing staff should consider how and when to approach both established and alternative suppliers in the current sourcing phase. Imaginative strategies and open communication will help motivate suppliers to present the best proposal and optimize overall project results.
Project team and the internal benchmark
The benchmark will set the foundation on which the sourcing initiative must be built and measured. Before the benchmark can be established, the project team must be assembled. The project manager or sponsor must identify the best resources both internally and externally to work on the initiative. The project sponsor must ask the following questions to begin developing the team:
o Who within the core sourcing group is best equipped to work on this initiative?
o Who can be recruited from other departments in the company to join
o Should additional resources be recruited outside the company? (either consultants or
o What are the costs of using these resources?
Determining the best and most cost-effective resources will help ensure that the subsequent process is a focused, collaborative effort that produces tangible results. Once the project team is selected, the key decision makers must be identified and introduced to the project team. Establishing the roles and responsibilities of each team member at the start of the initiative creates a defined structure that helps the process move quickly and efficiently.
Filter subjective thinking before the initiative begins. Procurement staff should recognize that internal biases may exist. These preconceptions may include anything from past negative experience with the process itself, past suppliers, or may simply be opinions of individuals who are subjective and unrelated to the current initiative. In some cases, the sourcing professional may even contain bias. In these situations, the professional needs to make other members of the team aware of their bias so that other team members can help make the process objective rather than subjective.
Prior established relationships with established suppliers must be approved in an objective manner. Review previous decisions from previous procurement initiatives and determine what new options may be available this time around. If possible, approach the sourcing project as if it were for a new product in the development stage. Start the initiative with a clean, objective slate.
Finally, the project team motivation must be evaluated at this stage of the project.
o Are there incentives or bonuses available in relation to the success of the initiative?
o Do high-level executives and management support the initiative?
o Have the team sponsorship and ability to drive change throughout
Positive reinforcement and the idea that the initiative is a highly visible, true team effort is an invaluable part of a successful outcome. The inability to have all these components in place at the benchmark stage will ensure a mediocre result.
The internal benchmark for recurring purchases should objectively define what has been done in the past (qualitatively and quantitatively) and identify the implications for the spending category for future strategic plans. Normally, the benchmark must identify what is extracted, from whom, pricing structure, service level requirements, and future considerations.
For new expenditure, the benchmark must identify the purpose of the expenditure and have some preliminary proposals or cost estimates as the basis for the category of expenditure.
At the end of each procurement event, the recommended course should be compared to the benchmark and all quantitative, qualitative and cost avoidance results should be measured and reported.
Traditionally, the next step in the strategic sourcing initiative is to conduct a market assessment. Here, the sourcing team must look at a number of factors to determine the status of the marketplace.
First you have to ask the question “Is this the right time to source?” The team needs to look at the market
conditions for determining the feasibility of a sourcing initiative.
o Recent market events such as natural disasters causing supply disruptions may be hindering
efforts from both domestic and global sourcing. Product regions can be greatly affected by these events. Vendors may implement Force Majeure clauses contained in contracts.
o Currency fluctuations can affect whether offshore sourcing is an attractive option
o What are competitors doing? Have competitors recently hit the market in search of
price reduction or try to lock the supply?
o Have new technologies, regulations and policies recently changed the market?
If now is not the optimal time to source, when will the initiative be more successful? When timing is bad, your best strategy might be to go for a contract extension at existing prices. A full sourcing event can be completed at a later stage where market forces are more favorable.
Review the market price in the product area you plan to get. Have prices increased or decreased over the last 12 months? Is the supply tight or is there plenty of products? In many product areas, there are several moving parts that need to be tracked. Indexed based commodities and products are moving targets that require ongoing attention to monitor market movements. Not only investigate the history of the market, but investigate what the experts of analysts in that market predict. A minimal financial investment in this data now can potentially reward the project with significantly higher savings in the future.
Evaluate any new developments in the market. Are there new technologies that will give your business a competitive edge? Is the market moving towards an innovative solution that can provide a cost advantage in the near future? Buying at the end of a product life cycle can cause the organization to overpay for outdated technology. Research and awareness of these factors will help avoid a potentially costly mistake.
Collect supplier information
After the initial market review, look to qualify as many suppliers as possible. Limiting the potential supplier base can only limit the possibility of a successful initiative. The greater the potential supplier base, the greater the chance of identifying innovative opportunities and increased value.
Begin by gathering information about the potential supplier base. The main focus should be to throw a wide net into the market. Identify the supplier base for competitors. Consider foreign suppliers, even if there is no intention to import. Foreign suppliers may be willing to establish domestic importers or distributors if your quantities are high enough or they intend to establish themselves in the market. Their motivation will be to establish a foothold in a new market. This can potentially be used as an advantage in the negotiations.
After developing the first supplier list, you need to establish contact with each one to gauge their interest and viability in this initiative. Does this supplier have the potential to become part of my current supply base? Are they able to deliver the required service and volume commitments? If suppliers do not meet these qualifications, ask who they would recommend as a potential participant or how they would suggest meeting the requirement. Be creative in finding alternative suppliers. Networking with fringe providers in this initiative can foster healthy conditions that could benefit a future project.
At this point, most traditional sourcing processes use an RFI process to develop a short list of suppliers. However, it is too early in the sourcing cycle to disqualify suppliers who want to participate. Disqualifying suppliers at this time may cause you to miss out on a creative or innovative idea that may lead to changes to the original requirement or specification. Potential suppliers must be considered as part of the sourcing team, and engaging as many people as possible will help develop the most innovative and cost-effective strategy for the sourcing initiative.
Suppliers generally do not invest resources in competing for business that they have no chance of winning. If they appear to be an outlier, ask about their interest and actively try to engage them in the process. Suppliers may have some of the same distortions that the internal team incurred at the start of the sourcing project. Attempts to identify and overcome the supplier’s claims. Any vendor can have the key to a creative solution that can help achieve superior results.
Develop sourcing strategy
The procurement strategy must be developed and approved as a fluid, evolving process. Fine-tuning of the sourcing strategy will be required as the team interacts with the potential supplier base through implementation and measurement of results. However, be aware that as market conditions fluctuate or the organization’s goals change, the purchasing strategy may need to be revised. A common flaw in strategic sourcing initiatives is getting stuck in the initial process and strategy regardless of a complex or moving market. Always be prepared to revise the strategy and re-incorporate ideas that may have been overlooked in a previous strategy.
One of the first goals of developing the sourcing strategy is to divide the requirements into minimum needs and maximum wishes. Minimum requirements are those aspects of a potential supplier agreement that must be met (ie, fast forwarding, company logo, specific payment options). If a vendor is unable to meet these basic requirements but can provide some unique value, consider partnering with a vendor who can meet the minimum requirements. Maximum wants are bonus features in a deal that will prove valuable to the business but are not “deal breakers”. Establishing these criteria will and communicating them to the supplier will assist in the qualification process.
Listen to vendor issues and inputs in the market. Communicating with the potential supply base is a key element of any sourcing initiative. Strategic sourcing must be a process that is mutually beneficial to both the customer and the supplier. Listening to and addressing supplier issues will be motivating for both parties in the long run. Market information is invaluable for a sourcing effort. The wealth of knowledge that can be obtained from suppliers will have a positive impact on the project’s outcome and the cost-saving potential.
When purchasing a finished product, consider purchasing at the component level. In a case study, a large propane distributor purchased propane cylinders equipped with overflow valves from a supplier. A sourcing strategy for source of cylinder and valve was developed as separate items with separate groups of suppliers. As a result of component-level sourcing, the customer was able to realize significantly higher cost savings than if they obtained the finished product. This case study also shows an example of how creative solutions can increase your bottom line savings.
Determine if a single source or multiple sources is most convenient for the product that emerges. While a single source may provide the best cost-saving option due to economies of scale, it also limits the customer’s ability to rely on other sources of supply such as a contingency plan. Is it best for your business to have a single, competitive product source? Or would you be better off with forging more suppliers?
Be careful that internal biases do not reappear, as fear of an internal team member that the new purchasing pattern may develop additional workload for them or that logistics and material handling may become too cumbersome. At this stage in the process, the critical goal of the sourcing strategy should be to consider all options and try to identify the value in each one, not to disqualify ideas and opportunities.
Apply and evaluate bids
After identifying the sourcing strategy, it is time to execute the RFX (RFI, RFP, RFQ, etc.) process. The RFX document must be vendor friendly. One of the most common complaints from vendors is that complex, static request requests do not allow them to talk about the benefits, ideas, opportunities and competitive advantages they offer and only allow them to file a financial response. A straightforward and straightforward document will encourage suppliers to participate and allow them to present their most competitive offerings. Keep RFX open. This gives suppliers the freedom to present more creative solutions and introduces more fresh ideas into the process.
Sell to supplier. Educate the vendors and market them the reasons why this business is attractive and valuable. Give vendor sellers a business case that they can take to their management to create steeper discounts and more value-added services. The more there is to offer, the more aggressive the suppliers will be in trying to win the business.
During the RFX process, open communication is once again a key element. Vendors will often have questions about the RFX document and its content. These questions need to be addressed so that suppliers can effectively respond to RFX. Schedule individual time with each vendor to review the document and ensure that they fully understand the requirements and expectations.
Once the RFX responses are returned, each proposal must be evaluated. Creating an RFX rating matrix can be helpful in determining the value of a proposal. A rating system allows the organization to objectively recognize both the quantitative and qualitative values of a proposal. The soft dollar value that a vendor presents can be as important as bottom line cost reduction. The assessment matrices determine who meets the minimum requirements and will prioritize and weight the maximum wishes described in the proposal.
After the proposal evaluations and further supplier qualification, the core team can develop a negotiation strategy with the preferred participants.
Negotiate with and select suppliers
Negotiations with suppliers begin after the initial bidding process. Many sourcing professionals see the negotiation as an emotional battle with the supplier. In most negotiations, the best way is to reduce or completely eliminate emotions from the negotiations and instead rely on a fact-based, objective market picture for leverage from suppliers. With the right market research, a solid business case can be prepared for the supplier and lead them to a competitive offer. Look for creative ways to motivate the supplier by making them aware of some of the indirect financial aspects of winning the business, such as capturing a new market or taking business from a primary competitor.
Emotional tools are best used to create healing in a relationship as opposed to negativity. This is also the last opportunity to tackle any distortions that may be left over from the start of the sourcing process. Use emotional tools to create a need for the vendor to fix some past issues in the process or service. Give the bidder the opportunity to repair the relationship by providing additional incentives in their offer.
Measure each supplier proposal based on your internal benchmark based on both qualitative and quantitative aspects. Are there one or more suppliers that stand out from your current circumstances? Are savings or process improvements dramatic enough to warrant a pilot with an alternative provider? If not, consider using the market information collected to enter into fact-based negotiations with your current suppliers.
Choosing a new supplier has three main considerations: monetary cost changes, policy cost changes, and the time frame for change. What are the transition costs associated with a new supplier? How will this affect established relationships between your organization and the current provider? How long does it take to implement new order processes and software programs? Are there any regulatory or governmental issues that need to be addressed? And most importantly, do we have the ability to drive change throughout the organization?
The last milestone for the sourcing initiative is to implement the recommended action plan with the suppliers. The key to successful implementation of the results of the initiative is to exercise control over change management. Effective change management will ensure a smooth transition to the recommended actions, eliminate liabilities for new processes and optimize the results of the project.
The strategic sourcing process should not end with implementation. Performance metrics must be put in place to ensure the positive results of the initiative. Suppliers as well as internal processes should be audited to ensure correct results well after completion of implementation. Continue to keep suppliers (and even potential suppliers) engaged as the organization grows, so there is always interest from the suppliers in providing the best and most innovative solutions to the organization. Creative Sourcing (TM) begins and ends with market knowledge.
About Source One Management Services, LLC
Source One is a service delivery service provider that has been helping companies with their strategic sourcing needs for 15 years. Source one commitments may include consumption consolidation, help with declarations of work, identification of alternative suppliers, market and supply studies, RFP management, price and condition negotiations and contract recommendations. A small sampling of the categories that Source One has been successful in includes: Advertising, Benefits, Chemicals, Direct Materials, Shipping, Hardware, Insurance, Material Handling, MRO, Packaging, Small Package, Software, Telecommunications, Travel, Tax Services, Uniforms, & Utilities. Customers average 18% savings in all product and service categories. In order to best serve their customers, Source One offers flexible fee options for their consulting services.