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• The sourcing function within any organization is part of the broader procurement efforts. The sourcing function ensures that the organization is getting its products from the most suitable suppliers.
• If possible, the sourcing function should influence the supply market through engagement with suppliers for mutually beneficial relationships.
• An effective sourcing strategy considers the company’s spend profile, prevailing market conditions, and the supplier base. The three elements for the business to meet its sourcing goals. When well implemented, an effective sourcing strategy benefits a company in numerous ways.
The Benefits of Effective Sourcing Processes
Cost-Savings
The team charged with the sourcing function constantly surveys the markets to identify suppliers the business can work with. They establish links with them with a view to negotiating for favorable prices. The business itself may be willing to cede some ground in the negotiations. Perhaps they could make bigger orders, give the vendor more business, or commit to paying within a shorter credit period to take advantage of discounts.
Cost savings could also come through locking prices for a certain period. This protects the business from volatilities that may arise from factors beyond the control of either party.
Risk Minimization
Effective sourcing allows a business to properly address risks in their procurement activities. Risks normally arise from working with certain suppliers. For instance, if a particular supplier has received complaints regarding quality from their past customers, it would be a risk to work with them. Before awarding big contracts to new suppliers, it’s prudent to verify their claims of having sufficient capacity to fulfil such contracts. Businesses also need to look at their overall spending to reveal possible areas of vulnerability, perhaps due to overreliance on one supplier or one shipping route.
All these are examples of risk mitigation at the sourcing level.
Aligning Organizational Objectives with the Sourcing Process
An effective sourcing process ensures congruence between corporate goals and sourcing efforts. If the organization wants to market its products as being superior in quality, they have to ensure that raw material suppliers are held to high standards. High standards are then passed to the production teams and finally to the packaging and distribution teams. Alignment of goals across various departments ensures that gains main in one area aren’t lost in another.
Recognition and Enhancement of Core Supplier Relationships
As a business continues to work with suppliers, the sourcing team identifies key strengths in suppliers and areas of improvement. The business can lend certain capabilities to help suppliers improve their operations, production methods, data analysis, or any other area. Stronger suppliers can serve the business better. Such arrangements are quite common where large corporations rely on small and medium enterprises for key materials in the supply chain.
The profiling of suppliers allows the business to assess and identify those who can be entrusted with more responsibility. Sometimes, the business may decide to take certain steps of the production process offshore if a supplier handles such work more effectively before shipping. For instance, labeling and branding of products may be cheaper to do at the point of production before shipping.
How to Implement Effective Sourcing Process
Effective sourcing can indeed help a business beat its competition through higher product quality, handling risks better, managing costs effectively, and passing the benefits to consumers. However, effective sourcing begins with the creation of a proper sourcing strategy.
As a business leader, what should you prioritize in crafting an effective sourcing strategy?
Start with the Business Spend
The first step in crafting a sourcing strategy ought to be to analyze the current spending patterns of the business.
Identify the items that the business is currently buying and how much they are spending on each. Can you categorize them for easier management? Next, identify the various business units that are making the purchases. You should also identify the suppliers you are buying from and the volume of business with each.
These questions will help you identify areas of risk, opportunity, and priority. The analysis should help you identify the most important things your strategy should address.
Create a Sourcing Strategy Document
Once you have identified the key priority areas to address in your sourcing function, you should then condense them into a sourcing strategy. The strategy should not have any contradictions with other organizational goals. The strategy must have a timeline for implementation and a methodology for keeping all stakeholders informed during the implementation.
Understanding the Supplier Market
The next step should be to research the supplier market to find out the profile of various suppliers. You may opt to look at the market in terms of geographical region and the individual suppliers therein. The research will help you come up with names of regions you’d want to source from and potential suppliers.
Requests for Supplier Information
The next step ought to be sending out requests for proposals and quotations from the various suppliers. These RFPs and RFQs must contain in detail what the organization needs from vendors. This way, the business will make a credible assessment of the most suitable suppliers to work with. After reviewing the proposals and quotations, the business then selects and contracts the most qualified. There must be well-out criteria for selection. It should be contained in the strategy document.
Finally, the business must set about managing the relationship with the suppliers. Supplier relationship management is part of the sourcing function once the contracts have been signed.
Does Your Business Need an Effective Sourcing Process?
Crafting and implementing a sourcing strategy requires intentionality from management. There must be a strong will to consistently implement a new way of choosing vendors to work with. The business should also invest in the right e-sourcing technology to help collect and keep track of supplier information to aid decision-making. E-sourcing technology also allows businesses to keep track of contracts with suppliers on the SRM journey.
ProcurePort is the world’s leading supplier of e-procurement technology. Reach out to us to help your organization acquire the right technology to augment your sourcing team’s functions.