Sourcing:
Also known as procurement, is the practice of locating and selecting business partners based on set criteria. It is the process and way of developing supply channels at the lowest total cost of ownership, not just the lowest purchase price.
Selecting the best supplier in the sourcing process is the most important purchasing decision. Having a weak supplier in the supply chain will cause issues of poor quality, price, and delivery. Even well written contract will not solve the approached problems in the long run.
Sourcing Plan:
Is the result of all planning efforts on strategic sourcing. Into this planning, all sourcing events are organized and detailed with tactical and operational information such as the sourcing team responsible for each event, when the sourcing event is supposed to begin and end, based on each step (RFI, RFP, RFQ), the requirements, specifications of all services or materials, and negotiations/cost goals. The objective of the sourcing plan is to manage the timing and quality of all sourcing events in the strategic sourcing program.
Before the development of supplier base its important to determine if the required material or service should be outsourced. In case that the required product or service represents core competency than the source of the supply should be handled by the requiring company itself. The strategic sourcing plan might fail without support of various company departments and financial backing to allow the procurement management to allocate time on essential activities of planning.
Strategic Sourcing:
Formalizes gathering of information and way of its usage for the benefit of companies and organizations. It aims to consolidate purchasing power to find the best value within the markets, adjusting strategies to meet the business goals.
Strategic sourcing goes beyond purchasing and focus on total cost of ownership (TCO) from optimisation of the sourcing processes through spend & market analysis up to building supplier relationship management. The initial costs of procurement & strategic sourcing aim to generate best possible Return on Investment (ROI), financially through cost reductions and lowest possible cost of ownership. The largest companies choose to invest in the resources, time, and talents required to develop strategic sourcing to improve their organizational abilities to provide stronger competitive performance in the long run.
Sourcing Planning Stages:
1. Spend Assessment
2. Discovery
3. Evaluation
4. Selection
5. Development
6. Management
1. Spend Assessment:
It is the process of collecting, cleansing, classifying and analyzing expenditure data with the aim of decreasing procurement costs, improve itsefficiency and increase profitability. It is also useful for inventory management, contract management, sourcing, supplier management, budgeting, planning, and product development. Through spend assessment, available, collected data are being identified, extracted, and examined. Analysis of procurement spend is a baseline to measure possible improvements, and set for sourcing strategies, aiming to bring and maximize values, cost savings and profitability. The crucial questions are answered and assessed through analysis of purchase history data (thewho, whom, what is bought, when, where why, how and at what price).
The following questions can be nurtured through the assessments:
What is being bought?
With whom are we buying?
Who is buying?
On what terms we buy?
How much we paid?
How much we bought?
How often we buy?
Did we get what was promised for that spend?
Where and how it was delivered?
How does it compare to previous years?
To process of spend assessment most commonly investigate internal data bases to collect and analyse information through Enterprise Resource Planning Tools (ERP), financial & transactional data, purchase orders, suppliers shared data, risk assessment reviews, automated procurement software tools. Evolving procurement digitalization start to impact the collection, management, and analysis of data. Having the right software tools ease the process, making it easier and faster, where performance, compliance, cost data and analysis can be breakdown to small pieces of important insights.
2. Discovering Suppliers:
Finding suppliers throughout the globe has never been so easy. However, finding an adequate supplier might be constraining. Many leading organizations and companies maintain and gather data on past and potentially new suppliers in soft, hard copy and internally used systems. Among others the following are also useful to find potential partners:
Internet & Supplier Websites
Social Media, Virtual Networks & Communities
Supplier Information Files & Catalogues
Registers, Directories & Trade Journals
Phone Directories
Filling of Mailing
Sales Personnel
Market Trade Fairs & Events
Company Personnel & Supply Management Departments
Professional Organizations
Existing suppliers (as a source of information & as potential for development to a new supplier)
3. Evaluating Potential Suppliers:
Once the potential list of suppliers has been developed, it’s important to evaluate each prospective supplier potential individually. The evaluation type might vary depending on the specificity of the project and considering criticality, complexity, and value of the purchase to be made. The evaluation should become a necessity in high value subjects, strategic and critical purchases to be made.
To consider if the evaluation assessment would be necessary the following points should be raised:
Is the supplier strategically important?
Is the product or service considered as strategic?
Are there any other alternatives (products or services) available?
High value strategic & critical purchases evaluations should include:
Surveys, Know Your Supplier (KYS),
Financial conditions analyses, Due Diligence,
Third-Party Evaluators, Supplier Evaluation Meeting, Audit & Supplier Facilities Visit,
Quality, Capacity, Management, Service, Flexibility Capability Analysis,
Production & Delivery Lead time,
Information Technology Capability Analysis,
Supplier Green Manufacturing Program (Carbon Footprint, Waste Recycling)
Corporate Social Responsibility Analysis
4. Selecting Supplier:
Once the evaluation process had been processed for the critical, strategic product or service the selection process must start. Optimally, two to three (or more) potential suppliers should be chosen for further consideration and asked submission of bids/proposals. At this stage we have the following ways for the supplier selection process:
a) Competitive Bidding:
Traditionally, requests for bids are being send between three or eight potential suppliers, depending on the complexity and value of the requested product or service. Requests for proposal ask suppliers to quote the price in accordance with stipulated terms, conditions & specifications. It’s usually a one pass process. Under competitive bidding procurement / supply chain managers are required to award the contract / order to the lowest bidder, provided that the lowest bidder is qualified to perform the contract in accordance wit set conditions. Qualified bidders prevent awarding the contract / order to a low bidder who cannot met the conditions & requirements.
The use of competitive bidding should take place when:
The value of specific product or service is significant to justify the expense of buying and selling companies.
The specifications of product or service required must be set, clear and understood by buying and selling companies.
Their market must consist of sufficient and adequate number of sellers.
The sellers must be technically qualified & willing to price competitively.
The time available must be sufficient to use competitive bidding. The suppliers must have sufficient time to be able to obtain and evaluate bids from their subcontractors, to calculate their best proposal.
Once these conditions are met, competitive bidding should result with lowest price bidder award and the most efficient method of supplier selection. To obtain the lowest price bids the participating suppliers must be ensured that the lowest bidder will be awarded with the contract. If the buying firm enter negotiation with the lowest bidders after bids are collected, in the future bidders might not be willing to participate or tend not to offer best price at initial stage, believing that they might do better at later stage of negotiation. The companies will adopt the strategy of submitting low enough bids to be included in the shortlist to enter further negotiation stage. Competitive bidding tends to put extreme pressure on suppliers to reduce their costs, reflecting with the product quality, development, lead time and other services.
b) Reverse Auctions:
Use online real time interactions for number of bids limited by the time set by the buyers. Auctions often are used to bring prices down on products or services that are believed to be above the market value. However, reverse auctions are not appropriate for all solutions. The caution must be considered to minimize the number of unqualified suppliers entering the bids. Prior reverse auction, all the participants must be duly prequalified. During the bid process suppliers might be bidding below their costs. While this might sound attractive in the short term, in the long run it will not be sustainable and will create risks for the buyer. Also, reverse auctions assume that all the suppliers and their products are identical or equal (which are very risky assumptions).
c) Bidding & Negotiation:
Large and most advance organisations use two step bidding process consisting of Bidding stage & Negotiations. This selection method is used in situations where there are inadequate specifications. In the first step technical proposals are being requested. Bidders are requested to provide their proposal detailing technical matter and the way the product or service will be produced. After the determination which proposal will be technically satisfactory the next step follow. The request for quotations is sent only to the companies who submitted acceptable technical proposals in the first step. The final price is being determined in two ways:
Award is solely based on lowest price received from competing companies.
The price proposals received for technically compliant products or services are used as the beginning stage for negotiations.
It’s important to determine to the supplier which of the steps of final selection are going to be used.
Solicitation:
Once decision has been made whether to use competitive bidding or negotiation as the means of selecting final source of supply an invitation for bids should be sent to chosen suppliers. Usually Request for Proposal (RFP) / Request for Quotation (RFQ) / Invitation for Bid (IFB) is being distributed. RFP normally consist of purchase description of item or service required, information on quantities (Bill of Quantity – BOQ), required delivery schedule, special & standard terms, and conditions. Cost data breakdown should be always requested by the procurement or supply chain professionals to support price proposal and evaluate production or delivery cost steps, to verify potential and any points for possible optimization.
Weighted Factor Analysis:
In most of the cases one prospective supplier is often superior to its competition, and selection should be obvious. However, the right choice is not always obvious. In such cases numerical weighted factor system can be put in place to facilitate the decision process.
The weighted factor systems call for:
Numerical development of the factors & subfactors that serve as the selection criteria
Development of scoring factors to evaluate potential suppliers
The scoring & evaluation of the suppliers
The Factors to be considered are specific to the nature of the products or services provided by the suppliers. Usually, they do include technical, financial managerial, quality, capability sustainability (CSR) factors. Weights are assigned accordingly to the importance of each factor and particular set strategy of the buying company. Sub factors determine, understanding the scope of supply & problem, technical approach to the product, level of technology in production facilities, operators and supplier personnel capabilities, maintenance requirements. The scale generally should be based on 0-5-10-point bases, clearly defined to reduce subjectivity in the process of selection. The better-defined factors and rating the more optimal decision to come. The assessments are based on collective judgement of evaluator after collection and studying of all available data provided by supplier, obtained in field investigations, and gathered from any other 3-rd parties. The effect of weighted-factor system breaks down a complex problem into its key important components. The approach is widely use in practice leading to fair and objective selection result.
Supply Management has the ultimate responsibility for source selection. However, the process teams are set and handled in following ways:
The simplest and most common approach (usually processed at small companies) is that a single Procurement/ Supply Chain Manager or person in charge of company supply chain, conducts the analysis and makes final selection or recommend decision for company management board.
The other common approach requires a cross-functional team (usually processed at small/medium size companies), consisting of representatives of supply chain, management, design, engineering, operations, quality, finance etc.
The third approach is to use a commodity team. Commodity teams are created and specialised to source and manage group of similar products or services. These teams usually consist of Procurement / Supply Chain Managers, Materials or Manufacturing Engineers, Project Managers, Production Planners, Quality & Finance Managers. Commodity teams are type of cross- functional teams widely used in large and top tier organizations. The principal difference is that Commodity Cells / Teams are permanent, while cross functional teams are usually set for one-time assignments.
5. Suppliers Development:
Most of the suppliers have awareness that ability to become competitive on cost, quality, timeliness service depends on their own Suppliers contribution in supply chain. Some suppliers require development assistance to realize full benefit & reach of collaborative relationship. In major top tier corporations Procurement & Supply Chain Managers aim to assist and guide their own suppliers to improve the quality, delivery performance and reduce the costs for bilateral long-term benefit.
6. Suppliers Management:
Procurement / Supply Chain Managers have responsibilities associated with proactive management of his suppliers. On periodic basis it’s important to analyse its suppliers’ abilities to meet the firm long-term needs. Once present suppliers appear to not be able to meet the future requirements, the companies have the following options:
Assist chosen supplier with financing and technological development assistance.
Develop & prequalify new alternative sources of supply.
Develop the required supply capabilities internally.
Strategic Matters in Procurement:
The companies /organizations must also consider following factors when selecting supply sources as they do have strong impacts for the supply chains.
1. Early Supplier Involvement
Early supplier involvement (ESI) is an approach in supply management to bring collaboration and expertise of suppliers into design process. Early supplier involvement builds on win-win opportunities in developing alternatives and improvements to materials, services, technology, specifications, tolerances, standards, order quantities, lead time, packaging, transportation. Proactive companies require, accept, and prefer to involve suppliers at early stages. Early collaboration is developing trust, communication that commonly results in the selection of single supply source. At most progressive companies, this selection process is the result of initial intensive competition between two or three carefully prequalified potential suppliers. The ESI company usually becomes the single or primary source of supply.
2. Supply Base Reduction
It’s a shift from enlarging the firm supplier base to downsizing the base. It is based on initial reduction of items produced with various suppliers and consolidation of produced items with one or two suppliers. This process adoption requires prequalification and development of suppliers and early supplier involvement with supply chain management eagerness to listen suppliers’ suggestions for design improvements and cost reductions.
3. Single & Multiple Sourcing
It’s a way and strategy of an enterprise to conduct the procurement with one or multiple suppliers. They way of conducting the business might be critical for the survival of the company.
The single source & multiple source supplier selection should be always looked from concrete case of each company business needs.
Single Sourcing:
In times of shortage the supplier gives priority to the needs of a special customer
Lower total cost result form economy of scale (much higher consolidated volume)
Buying company obtains more influence over the supplier
Lower costs of sourcing, processes, expeditions, freight, and inspections are being incurred
Improved interdependency and risk sharing
More reliability & improvement of delivery lead times
Time to market improvement
Multiple Sourcing:
70%-30% approach. The 70 % volume is being awarded to the main supplier while 30% volume is awarded to the second (a backup supplier). With main supplier we can obtain economy of scale, while with the second supplier we can obtain competition. In case of approached and occurring issues with the main supplier we might award the 2nd supplier with the 70 % volume. This dual or multiple sourcing may be appropriate:
To protect buying companies during shortages, strikes by diversification
To maintain competition and provide a back-up source
To meet customers volume and product diversification requirements
To meet the technological requirements while one supplier is more advanced
To share the supplier’s capacity
4. International, National, Local Sourcing
Prior building the supplier base, the company must consider the issues of local, national & international sourcing. The consideration should always reflect the specificity of the busines and its strategic requirements to meet the needs. Local sources are usually relatively small in comparison to national & international sources. The national supply sources are headquartered within the country, having operative facilities in various regions throughout the country. National sources are also usually larger companies. The common definition is that an international source is headquartered outside of buying firms country. However, this doesn’t define where the company has its own operations. The differences between local, national, and international sources have fade due to globalization and growth of multinational companies’ developments.
Local Buying has its benefits usually of immediate availability of materials & services, add up values into local communities, bring closer cooperation, usually shorter delivery dates, lower total cost of consolidated transportation, eliminate inventory, ad-hoc orders are filled faster, disputes are more easily resolved. However, local buying usually implies at larger initial expense.
National Buying bring the advantages of economies of scale, higher quality, better service at lower price. National companies also bring superior technical assistance, larger capacities, flexibility, minimized risks of shortages.
International Buying usually but not always provides superior quality, better delivery timelines at lowered total cost, more advanced technologies to meet the needs, broader supply base and expanded customer base.
The spectrum of sourcing and buying type to be involved must be evaluated based on needs & requirements of each specificity.
5. Manufacturer or Distributor
In deciding whether to buy from manufacturer or distributor, procurement or supply chain manager should focus largely on capabilities and services of the distributor. Particularly in the steel industry distributors pay the price for steel based on total quantity purchased or contracted as other buying firms. However, the distributors sell in smaller lots to their customers do not justify the needs of buying full carloads. In most of the cases each company can buy from the steel manufacturers directly (subject to exclusivity agreements put in place with some of the distributors or manufactures wide networks of its own field sales representatives). Distributors tend to have their own processing facilities that might meet the need of buyers. Either distributor or the manufacturer must perform the essential distribution functions of carrying the inventory, providing technical advice rendering service, extending credit line, organizing logistics, customs clearance etc. If the buying firm has a volume and potential to build up and take over in charge specific services required to deliver the product or service directly from manufacturer, he might become more cost effective and gain on experience. To answer such question, it’s important to clarify if it’s the company, distributor or the manufacturer that can perform the required distribution services satisfactorily at the lowest cost.
6. Environmental & Sustainable Supply Management
Is the one of the most strategic factors to be considered when preparing or conducting sourcing. The important of environmentally friendly products, services and its sustainability adds to communities and benefit to future generations. In here consideration must be done as to:
The possibilities of purchase of products that are recyclable and has possibly the lowest carbon footprint
The environmental and liability issues associated with the use and discharge of hazardous materials
The largest and most advanced companies take environmental matters and sustainability seriously, leveraging and adapting the operations by setting up organizational goals to reduce the organizations / companies carbon footprint. This becomes a necessity by prioritizing selection of sustainable and more environmentally friendly products or services. Suppliers are willing more often than ever before to participate and support the buying companies in early design involvement that brings possibilities of readapting their supply chains, technical parks to bring the output of environment friendly and sustainable products or services.
Conclusion:
Sourcing & the right source selection is more important than ever before as more companies are entering into long term collaborative relationships. Careful supplier selection is critical, and proper relationship management is essential for supplier performance which has impact on customer / end user satisfaction. It is important to address strategic issues of supply chain management while developing sourcing plans, considering supply base sizes, multiple vs single source selection, early supplier involvement, way of bidding, suppliers capacity possibilities and its share, international sourcing benefits, carbon footprint, diversity & ethics. Sourcing plans should be always developed collaboratively with functional management of each company / organization to bring positive effects of meeting the needs, with possible change effect.
From analysis, market studies, global sourcing, due diligence, purchasing, logistics to developing capabilities, recommendations & strategic decisions, we are here to assist. Using our expertise and deep understanding of the procurement field & markets we provide solutions with valuable results.
Comments