A Complete Guide on Sourcing Strategy will provide you with essential information about the importance of strategic sourcing for your business. In addition to understanding the benefits of strategic sourcing, this book also addresses the issues of maintaining supply stability, controlling costs, and risk management. It will also provide you with the tools and resources you need to implement your sourcing strategy. Once you’ve acquired this comprehensive guide, you’ll be better equipped to make informed business decisions and meet your goals.
Why Sourcing Strategy is Important?
The advantages of strategic sourcing include cost savings, which can significantly impact financial profitability. The realized cost savings can be credited directly to the bottom line of the company. Consider the following scenario. Sales revenue of $100 is reduced by overhead costs, commissions, and cost of goods sold. The remaining $70 is net profit. By using strategic sourcing, a company can increase its profit margin and maximize cash flow. Moreover, strategic sourcing also helps start-up technology firms focus on core activities.
A key benefit of strategic sourcing is that it is cost-effective and streamlines procurement operations. This approach enables companies to better control costs, reduce waste and maximize value for their money. But, this approach is not suitable for every procurement initiative. This is because strategic sourcing can be time-consuming. Thus, it is imperative to strike a balance between time and value. To understand why strategic sourcing is important, we must consider a few examples.
Traditional procurement focuses on lowering purchasing costs. Digital developments have increased complexity of supply chains, and consumers are more informed and more discerning. To stay ahead of the curve, companies should develop partnerships with suppliers that benefit all parties in the supply chain. Strategic sourcing allows procurement teams to identify areas for growth and eliminate supplier relationships that do not add value. Strategic sourcing helps companies improve the quality of their supply chains. If a new vendor is not cost-effective, strategic sourcing is the answer.
The term Cost Management in sourcing strategy is a synthesis of pure procurement and strategic cost management. The latter involves managing a company’s total cost, not just the cost of purchasing goods and services. As the importance of services grows within the global economy and individual organizations, the need to manage costs more strategically is more important than ever. Luckily, there are some simple tools and techniques to help you manage costs effectively, such as ABC analysis and classification. If you use these tools to make sourcing decisions, you will find that strategic cost management will be more beneficial for you and your bottom line.
For example, outsourcing is a good method to manage costs. Purchasing low value, high volume products from external suppliers can help companies save money on labor and rent expenses. You can also leverage advanced software solutions to minimize costs. Inventory management software can simplify inventory counts, track expenses over time, and even provide visibility into waste. In the modern world, it can be very difficult to keep track of inventory. With advanced inventory management software, you can manage inventory more efficiently and save money at the same time.
Maintaining Supply Stability
If you want to maintain stability in your sourcing strategy, you need to be able to predict future fluctuations. The best way to do this is to diversify your sources. To do this, increase your investments in market research and supplier relationships. You may also have to consider backward integration. During a supply disruption, be sure not to assume the worst. Such a posture could damage your supplier relationships and create a negative environment.
In a survey, we asked sourcing executives how they would deal with COVID-19. The overwhelming majority agreed that companies should focus on flexible processes to minimize potential disruptions. About 20% of respondents strongly agreed with this response. Because many manufacturers rely on a single supplier to supply their products, multi-sourcing is one way to avoid disruptions. This can help you avoid costly and inconvenient disruptions, and reduce costs while maintaining stability.
Another way to ensure stability in supply is to consider how profit-generating each supply item is to the business. You can measure this by its volume, its share of total cost, and its impact on your product or business. You can also gauge the supply risk associated with each item by looking at its availability, competitiveness, storage risks, and the potential for substitution. Those with moderate risk in their supply chain should be careful not to jeopardize their long-term supplier relationships with aggressive pricing.
Effective Risk Management
Effective risk management in sourcing strategy should include the identification of risks. There are many types of risks, and some are highly expensive and dangerous. Others may be low-cost, but may not have a large impact on the health, reputation, or profitability of a company. In any event, risk management should be a continuous process. It should also be monitored, reduced, and eliminated as necessary. It is important to establish and enforce an effective risk management process for sourcing.
Procurement is a risky endeavor. Suppliers may fall short of the quality and quantity of the product or service a company needs. Fraud and rogue spending may drain profits without detection. Internal processes may not be optimised, causing costly exceptions and errors. Ultimately, it is the responsibility of procurement to manage risk effectively. Developing a risk management process for sourcing involves taking a holistic approach to assessing risks.
The first step in implementing a risk management strategy for sourcing is assessing your suppliers. You need to evaluate their capabilities in managing risks. In other words, what do they know about your industry? Can they meet your standards? If you need a new supplier, why not look into outsourcing it? Using a reliable alternative supplier will reduce your risk exposure. Just remember that you should evaluate all of your suppliers.
Alignment of Resources
While sourcing goals can seem long-term, ensuring that the right tools are in place to reach them is critical to the success of the company. Disconnecting the right tools from the strategy is common among businesses, which is why they must be aligned and driving toward a shared vision. In the context of increasing market volatility, the impact of unpredictable external factors is even more severe. Alignment of resources in sourcing strategy is a critical component of the supply chain.
Successful strategic sourcing involves a collaborative process between internal and external stakeholders. It starts with defining organizational goals and objectives, and then moves on to identify a supplier base and spend profile. The process then focuses on creating collaborative relationships and long-term cost savings. To begin a strategic sourcing project, identify all stakeholders and create a plan. Once the strategy is defined, create a work flow for communication.
Once this alignment is achieved, a company will be better able to collaborate with all stakeholders, from suppliers to internal customers. Once the supply chain is aligned with the business, procurement will be able to work with stakeholders to help them meet their goals. Aligning resources will also create a more transparent supply chain that will make it easier for everyone to make decisions. Further, alignment will eliminate internal friction that can negatively affect the business.
Optimization of Ideal Suppliers
Sourcing optimization originated with the purchase of transportation services for national and international shipping routes. It involved many suppliers, many shipping lanes, and varied types of transportation. There were several hundred suppliers competing to provide transportation services for the tens of thousands of shipping lanes in the United States. The number of potential bid combinations was in the hundreds of millions, but actual bids were only in the hundreds of thousands. This strategy was not successful for several reasons.
To make the most of the benefits of this sourcing strategy, the manufacturer should have their own suppliers. These suppliers provide the raw materials necessary for the manufacturing process. In this way, it is possible to negotiate at both levels. Savings in raw material costs will then be passed on to the customer. It is also possible to create two-tier supply chains that help the manufacturer to save money while still maintaining a good relationship with its supply base.
In order to determine which of the three types of suppliers is the best, a company should analyze and compare multiple bids. This process requires the use of mathematical models and a combination of computers. Once the data are compiled, the optimization process can begin. The sourcing team should categorize suppliers into subcategories and assign managers to each category. Once this is complete, the team should conduct research on the market to identify the best-fit suppliers. A shortlist of potential suppliers should be produced.
Step Strategic Sourcing Processes
A.T. Kearney has identified seven steps to build strategic sourcing processes. These steps start with an analysis of the total cost of goods and services, supplier-marketplace analysis, planning, and key changes to the supply structure. Once these steps are completed, strategic sourcing can be implemented. Strategic sourcing can help companies reduce costs and improve quality and customer service while achieving the business objectives. To make strategic sourcing more effective and efficient, a company must follow these 7 steps.
The next step in the strategic sourcing process is to continually monitor supplier performance. Continual monitoring of supplier performance will help organizations identify potential risks and disruptions in the supply chain. Using the data to improve supplier performance is crucial for strategic sourcing, and this information should be updated periodically. In addition, the process should be reviewed before contracts expire to keep pace with market trends. Keeping a track of spending data and research will help ensure that the process continues to yield results.
In addition to the benchmarking process, the final step in strategic sourcing involves selecting the best suppliers. The benchmarking process involves meetings and discussions with suppliers to assess their performance. It is critical that the strategic sourcing process is successful in achieving the business objectives. All stakeholders in the business must be involved in this process. Sourcing is an integral part of a company’s success. The end result is always a successful one.