Applying Strategic Sourcing

Strategic sourcing applies high-level strategy to key stages in the procurement process. For the sake of illustration, suppose that a given company makes lightweight, ultra-strong, magnesium-alloy chassis for rugged laptops. The company has been using only one magnesium-alloy supplier for five years, and there has been growing executive concern over the price and quality of the magnesium-alloy. The current contract with the supplier will soon expire, and the company has taken the opportunity to hire a team of strategic sourcing experts to evaluate their procurement strategy with respect to magnesium-alloy.

Internal knowledge gathering

As an initial step in the procurement process, the hired sourcing team needs to learn everything there is to know about magnesium alloy with respect to the business at hand. Key questions include: At precisely what rate does the business consume magnesium-alloy? What are they paying per unit? Does the business expect to use more or less magnesium-alloy in the foreseeable future? Are the quality concerns due to overall quality, or inconsistency in quality? As the sourcing team gathers information and answers, they will eventually reach a threshold of knowledge and insight that will allow them to proceed to the next stage in the procurement process.

Analysis of the supplier market

The sourcing team will now perform a supplier market analysis that addresses the specific quality-grade of magnesium-alloy the business needs. Throughout their research, the team will focus their efforts on determining a fair market price per unit, given the company’s current order volume and contract terms. The sourcing team’s research will involve drawing upon their network of industry experts that are familiar with the metals and alloys market in general and, ideally, the magnesium-alloy market in particular.

Once the sourcing team has performed their supplier market analysis, they can determine whether the company is likely over-paying its supplier. Furthermore, the sourcing team may conclude that the business is too dependent on a single supplier and needs to diversify. However, they will have to balance this consideration with the volume discount the business will likely receive through larger orders with a single vendor.

Strategic recommendation

Having performed a thorough internal and external (supplier market) analysis, the sourcing team is now in a position to make an informed, strategic recommendation to the company to either renew their contract with their current supplier, under the current terms, or make a change. If the sourcing team recommends a change, the company can either renegotiate the current contract; seek bids from other vendors of magnesium-alloy; or both, if the sourcing team recommends seeking multiple suppliers.

Qualifying candidate suppliers

At this point in the procurement process, the hired sourcing team and the company may agree that it’s time to begin a dialogue with other suppliers. Accordingly, the sourcing team will tentatively reach out to the magnesium-alloy supplier marketplace, either through a formal supplier survey, or through informal means. Either way, this step will signal to vendors that the business may soon be in the market for their product, but is only in the exploratory phase. However, this step will also signal to the current supplier that their relationship with the company is no longer on firm ground. Therefore, the sourcing team will treat this stage in the procurement process with particular sensitivity to the personal relationship that the business and the current supplier may have built up over five years of working together.

Bidding and selection

The initial, tentative dialogue with the supplier marketplace should result in a list of qualified vendors. The sourcing team may now recommend seeking formal bids. If the business agrees, the next step in the procurement process will involve sending RFPs or RFQs to selected vendors. If the business has ERP and procurement software in place that can handle drafting, tracking and distributing the bids electronically, then the company can use eRFPs or eRFQs. Regardless of the final form the request takes, it will need to include highly-detailed, well-crafted requirements. For this reason, the sourcing team will bring to bear all of the information on the supplier market; the company’s needs; and the previous vendor’s shortcomings, when helping draft the request.

Once the bids or quotes have come in, the sourcing team can then use their accumulated knowledge at previous stages of the procurement process to make a final, highly-informed recommendation. In the present example, if the business decides to accept another vendor’s bid, and thus switch suppliers, then the company may undergo a significant and often difficult transition. The sourcing team should remain in close contact during this final phase to ensure that all the requirements are met, and that the transition is as smooth as possible.


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