The Strategic Sourcing Lifecyle
For businesses that have not focused on their purchasing practices in the past, there are many companies out there today that offer a Strategic Sourcing service. The sourcing process generally results in significant savings for a company because of a change in approaching the Purchasing Process.
I feel that there is a larger savings opportunity than just strategically sourcing commodities and developing a purchasing strategy. Sourcing is just the first of three steps that should be exercised:
1) Strategically source commodity
2) Implement agreements
3) Continuous Improvement
Strategic Sourcing – First, a business hires a consulting company to source their commodity(ies). The consulting firm will analyze the business’ purchasing spend, identify key savings opportunities, review current practices, develop the purchasing strategy, conduct RFP and Scopes of Work, and assist in fact-based negotiations with suppliers?. It is typical that the strategic sourcing process is conducted with the client, not simply for the client. The consultants help with the analysis, provide industry knowledge, and guide the client through the process. The goal is to give the client the necessary experience and tools to continue the strategic sourcing process after the Consultants leave.
At this point, the engagement ends. The contracts with the agreed upon suppliers are finalized, and potential savings can be realized if the business fulfills the new agreements, but, unfortunately, there is no guarantee on implementation.
Implement Agreements – Implementation is the key second phase for complete sourcing success. The buyers and expeditors must be aware of the new agreements and (potentially new) suppliers, and adhere to the contracts for the company to actually see a difference in the total cost of ownership. The buyer will have to address questions and concerns immediately so that the people using the commodities do not have too many problems with the changes and so that there is a general acceptance of the new sourcing process. There are many times when due diligence is not done for changes in commodities. Operators/users of the commodities dislike the changes, primarily due to a feeling of frustration and misunderstanding. This could potentially lead to failure of implementing the change to a new commodity, therefore negatively affecting overall operations.
Continuous Improvement – Companies need to track and measure key performance indicators (KPI) on their suppliers to ensure that they are meeting contract
expectations. Important questions are "Do the parts have the expected half-life?", "Are they delivering the commodity on time?", "Are we having production failures due to a faulty commodity?". The Contract date of completion is a critical factor to track. The sourcing process can begin again before the contract is actually complete, and the client can achieve continuous savings.
In my opinion, a complete transformation in the approach to purchasing
goods will drive realized savings for the company. The benefits include a lower Cost of Goods Sold (COGS), greater market competitiveness, and increased cash flow.