While traditionally the goal of sourcing has been to identify and award a supplier that best meets the business requirements and is the most cost effective, in 2020, the game changed dramatically. As companies have had to navigate unprecedented supply and demand chain challenges, they’ve had to quickly revamp their supply chains to meet the needs of today and for the next six months.
The need to make sourcing more strategic and responsive to the organization’s needs has never been more vital. As organizations retool their supply chains for 2021, they have an opportunity to revisit their sourcing to put in place the structure and organization to drive the best outcomes, by following these five key steps for strategic sourcing success.
Evaluate, collect data and build a strategy. The first step starts with embarking on a disciplined and organized evaluation of your sourcing needs. This consists of the following processes:
- Solidifying supplier relationships. Makesure you have the right relationships with the suppliers you work with so you are aware and can properly prepare for any upcoming large projects — such as new developments or growth plans.
- Spend analysis. Complete a detailed run-down of exactly how much your organization spends on what, where it is spent, and identify areas where spend needs to be improved.
- Project validation. Determine if you need to obtain a new supplier for the category you’re intending to source for, or if it is something you can renegotiate.
- Data gathering. Gather the requirements and initial data you need, such as:
- Existing contracts with suppliers — including terms and conditions
- Statement of work
- Supply market analysis
- Spend data from your spend analysis
- Project strategy. Next, produce your project strategy detailing the scope and scale of your intended project as well as the types of suppliers to select. You will also want to include information about risk avoidance.
Determine the right engagement model. A key element of developing your strategy lies in selecting appropriate sourcing events, such as an eAuction or a detailed RFQ. Both offer advantages but the various considerations should be weighed carefully to determine the right approach for your business.
- Low-complexity and high-value spend initiatives. For categories that contain items of high value, and are relatively simple to negotiate, either an eAuction or an RFX is appropriate. You will need to assess: Is it worth risking taking this sourcing event to an eAuction setting? You may get a better price, but you could run the risk of alienating a supplier that could be more reliable, for a higher cost. One example could be bulk computer hardware for an organization, such as notebook PCs, for the next 3-6 months.
- High-complexity and high-value initiatives. For complex buying processes, such as buying niche or specialist items, items that are crucial to your business, or a long-term project like fitting out a new building, you want to develop a good relationship with a prospective supplier. So, this means you’ll likely spend more time building that rapport with a smaller number of reputable suppliers, in combination with an online RFI or RFP that can be accommodated by any best of breed sourcing system.
- Low-complexity and low-value initiatives. You’ll be able to execute quick wins for your business with these types of suppliers. You can do so by putting some of the products or services you order in bulk up for eAuction. Anything low value, and simple to acquire, such as stationery supplies or staple items used in your business, can be sent to eAuction, where suppliers will bid against one another in a controlled environment to win the contract.
- High-complexity and low-value initiatives. It’s best to use an RFX for these types of items; with a complicated purchasing process, it’s time-consuming and inefficient to run an eAuction. For example, you might have small value items such as a tiny fitting for a product you produce, but it’s vital that the fitting is made to the right specification and you can ensure delivery.
Next, you’ll need to send out requests for proposals (RFPs) to inform selected suppliers of the initiation of a sourcing process. You’ll likely have to deal with multiple inquiries from prospective suppliers, so be sure to explain exactly what you want from them. You’ll then receive responses from suppliers detailing proposals for evaluation.
Make a shortlist of suppliers to take them through to the next phase of negotiations, where you’ll run your Sourcing activity. Make sure you have the following:
- Summaries of all RFP responses
- Detailed shortlist of all suppliers
- Copies of supplier viability evaluation
- Detailed negotiation plans
Research and award your supplier. In researching suppliers for potential awards, be sure to evaluate the following:
- Communication skills. How has the communication been with your supplier so far? Are they willing and able to answer your questions? Is it done over the phone, email or through a web portal? If you’re having difficulty getting hold of the supplier during the tendering process, it might be a bad sign.
- Supplier operations. Discern whether your chosen supplier can fulfill your requirements for the short term and beyond. We recommend starting with these points:
- Finances. Is your chosen supplier financially stable/profitable? How much debt are they carrying? If their financial situation doesn’t look great, perhaps consider offering a shorter-term contract as a trial.
- Infrastructure. Interrogate your supplier to identify the way their organization is set up and whether they have the systems in place to support the volumes of goods/services you might need. Tour their facilities, if appropriate, to witness their operations firsthand.
- Supply chain. Is their supply chain robust to sustain them if circ*mstances change for the worse? If you needed to increase the volume of one item, would your suppliers’ supply chain be able to accommodate this? Investigate if they’re able to accommodate short-term requirements, such as unseasonable weather conditions or extenuating circ*mstances.
- Ethics. Ask suppliers for a copy of their applicable Corporate Social Responsibility statement or Ethics Guidelines to ensure these are in line with your business requirements.
- Customers. Does your supplier have a huge relationship with another customer? If so, this could help you understand if they over-rely on one client, that potentially could interrupt the level of service you receive.
- Disaster plans. You’ll be integrating suppliers into your supply chain and you need to ensure that they can continue to deliver if the worst happens. If they don’t share these plans, question why and reconsider their viability.
- Competency. Assess the supplier’s capabilities against your requirements. Talk to account managers or other people from the supplier in consideration. Ask probing questions about their capabilities to deliver under extraordinary circ*mstances, such as in extreme weather conditions or raw material shortages. Finally, speak to customers —you might find out something your supplier isn’t sharing.
- Cost. This is to ensure transparency in costing. Ask your supplier:
- What is the total cost of the product/service?
- Does this cost include things such as maintenance, service upgrades, exceptional orders (if applicable)?
- Are delivery costs included?
- What sort of margins are they making?
After reviewing all of the above, if a clear winner is not apparent, you may consider reopening the RFP process to a small selection of suppliers to encourage them to improve their offers. If you’ve run an RFX sourcing event and it’s appropriate, you could consider running an eAuction against the final few suppliers, to get a better deal.
Once selected, you should notify the supplier and internal stakeholders via a "Commitment Go Document," stating the following:
- Award proposals
- Financial benefit estimates
- Implementation plans
- Transition plans
- KPI criteria and targets
- Risk assessment and mitigation (i.e. compliance measures)
- Contract considerations (i.e. SLA development / payment terms / year-on-year improvement)
- Communication to senior management
- Communication plan to key stakeholders
Contract implementation. You’ll need to work with your new supplier to devise a communication plan to implement the new goods you’ve selected for your business. The potential risks of the relationship should be identified and then mitigated with sufficient compliance measures. These arrangements are then formalized through a signed contract. In the past, this was an enormously time-consuming process that involved preparing reams of paperwork, but today technology can auto-generate contracts based on pre-prepared information plugged into the system beforehand and from the RFP previously submitted to ensure supplier information accuracy .
Key Performance Indicators and objectives should be set and tracked to hold suppliers to account. Finally, you’re ready to transfer the ownership of the supplier to the right people in your organization, with agreed upon checkpoints in place for service level delivery and performance against the agreed upon service levels and KPIs.
Invoice set up and monitoring. Once the supplier is onboarded an invoicing process must be set up. Any new supplier agreement creates the opportunity to make the case for invoice automation, especially if the new contract generates high invoice volumes.
Ongoing monitoring and tracking of supplier performance should include:
- Receiving timely deliveries of goods
- High quality products
- Excellent customer service
- The correct invoice for the right amount and the right goods
- How quickly the supplier communicates with you
- Stock availability
Finally, you should track the value of the savings you’ve made with the new supplier to report to the wider business how this cost-saving measures enabled by procurement have benefitted the bottom line.
Buying for a business is a complex process, even at the best of times. Ensuring a sound process is firmly in place will enable your organization to deftly navigate market shifts, supply shortages and evolving needs on an ongoing basis.
Shannon Kreps is vice president of product marketing at Medius, a global supplier of cloud-based source-to-pay software.
