15. Strategic Sourcing

[MUSIC] Welcome back to our lesson on strategic sourcing. Upon completion of this lesson, learners should be able to discuss the role of strategic sourcing and procurement and the overall supply chain. And discuss the concept of total cost of ownership. And discuss the components of strategic sourcing.
Strategic sourcing is positioned at the top of the procurement model. And is focused on finding and contracting with suppliers to meet an organization’s needs for materials and services. Once an organization identifies a need for new materials or services, it must launch a process to identify an appropriate supplier to meet the need. The process begins with an opportunity assessment to determine specifically what needs to be purchased. How much needs to be acquired, when it needs to be acquired. And the specifications and other critical elements associated with the new material or service that are needed to help identify appropriate suppliers.
Analyzing demand for an established finished product or service may be relatively straightforward. However, if the item is a new component being used for a new finished product, it may be difficult to accurately determine how many finished products will be sold, the life cycle of the product, and the needs for replacement parts. Hence, the procurement function may need to engage in demand analysis activities with other functions within the organization. And also build in contingencies to handle unexpected variances in demand. Perhaps you can appreciate the challenges faced by an Apple employee engaged in sourcing the parts for the first generation Apple watch, a new product with no history. Yet, you must ensure that a quality, affordable set of suppliers are in place to meet production requirements.
With an understanding of specifications and demand requirements, the strategic sourcing process now turns to researching potential suppliers. The research takes place through reaching out to existing suppliers, conducting Internet research. Reviewing literature from trade magazines and professional societies. And working with peer organizations in other corporate divisions. Oftentimes, corporations establish commodity councils to share knowledge regarding specific suppliers and commodities across geographies and divisions. Commodity councils help leverage spend and mitigate effort and risk when researching new suppliers.
In many cases, a formal proposal process is used to identify and evaluate potential suppliers in a fair and transparent manner. Many organizations, including government agencies, often require formal proposal processes. Sometimes a request for information, or RFI, is used to identify a set of suppliers who appear to be willing and able to engage in further discussion leading to a potential contract. RFIs may contain a minimal amount of information about the needed product or service. Request for proposal, or RFPs, contain detailed documentation to convey the needs related to the product or service to be purchased.
A formal process is followed in creating RFPs, soliciting vendors, and evaluating RFP responses. Criteria scores and weighted scorecards are often used to identify a short list of vendors for final discussion and selection. Typically, a cross-functional team is involved in generating RFPs and evaluating vendors. With the emergence of internet-based tools, auctions have become popular for quickly communicating requirements to a broad range of potential suppliers who may bid on the need with minimal effort. Auctions tend to be somewhat commodity-specific open markets for sharing of requirements and evaluating potential vendors for contracting. Auctions are good for driving efficiency. However, they may not be a good fit for highly specialized needs that require a deep understanding of specific unique product and service requirements. The final step in the strategic sourcing process is supplier selection and contracting. Regardless of how the supplier is identified, final negotiations need to take place. Culminating in creation of a contract with pricing, service requirements, legal terms, and other aspects of the relationship spelled out. Hence, the completion of strategic sourcing for a given item is a signed contract with a supplier, or suppliers, to meet the needs of the organization.
Some people have the view that procurement should focus on beating up on suppliers to get the lowest purchase price per unit.
One way that this may be facilitated is by having a buying organization concentrate its purchasing spend on as a relatively few number of suppliers as possible and becoming a big part of their business. This also has the benefit of having the buying company deal with less complexities than dealing with a large number of suppliers and all of their nuances, multiple contracts, etc. However, there a lot of risks in putting all of your spend in one company. Which may go out of business, race, prices have quality issues, etc.
Rather than making procurement decisions based solely on concentrating spend and getting the lowest possible per unit purchase price, it is better to consider that total cost of the ownership approach. Total cost of ownership is a estimization of the expenses associated with purchasing, deploying, using, and retiring a product or piece of equipment. It is designed to help procurement personnel make more informed financial decisions when purchasing products or services. TCO adds to the initial purchase price other costs expected to be incurred during the life of the product. Such as service repair, insurance, freight costs from specific vendors. Proposed inventory ownership policies, and return policies. As well as ease of interaction with the supplier and other non-tangible issues. All of these are real costs that need to be considered to get a true view of the total acquisition cost. I think we are all faced with TCO decisions in our personal lives. Whether to go with the low-cost goods that we hope will last a long time. Or go with more expensive goods with a generous returns policy, as an example of decisions we have to make in our day-to-day lives.
In this lesson, we learned that strategic sourcing is a fact-based process for optimizing the organization’s supply base. And total cost of ownership considers the total expenditures associated with purchasing, deploying, using, and retiring a product or piece of equipment. And finally, that strategic sourcing is a continuous process, beginning with opportunities assessments. And leading to selection of, and contracting with, suppliers. Thank you for watching, and we’ll see you on the next lesson. [MUSIC]

Jim Rohn Sứ mệnh khởi nghiệp