A Sourcing Strategy: The 5 Key Elements of a Sourcing Proposal
A sourcing strategy sets out your proposition for how you will procure goods or services that meet a defined need in your organization. It’s a roadmap for how you plan to go to market in a way that’s different than what’s currently used. The result should be a change that adds value to your organization. This means that your sourcing proposal is also a tool for selling your ideas to the rest of your organization and therefore needs to be built with care. There are five key elements to an effective sourcing proposition.
1. Assess how your organization currently purchases the items you are looking for. Ask “who buys what, from whom, and for how much.” Knowing who is currently shopping allows you to assess whether or not you have the right procurement skills to perform the task well. Knowing who they buy from will tell you if there is an opportunity to reduce the number of suppliers and get lower prices with volume discounts. Knowing what prices are currently being paid allows you to find differences for short-term price savings. It also helps you compare your prices with the price paid elsewhere.
2. Evaluate the supply market. You can use analytical tools like Porter’s Five Forces to do this. Understanding the relative power of companies in your supply market, those that sell to your supply market, and those that are buyers of your supply market will help you establish who gets the most supply chain profits , which in turn will point the way to the best strategy to deal with it. For example, if your suppliers have bargaining power over your customers (including you), can you form a consortium of other buyers to rebalance this power?
Other things to consider when evaluating the supply market are whether or not new entrants can be attracted to increase competition; whether technological changes will change the nature of the supply market; the key capabilities needed to be successful in this market and which vendors have these capabilities; how capacity is defined in the industry and how well it is used. All of this is useful information to have when negotiating or guiding you towards suitable alternative providers.
3. Analysis of prices and costs. Price analysis tells you whether or not the price you are paying is fair. Essentially, you test the price against a benchmark to judge if it’s reasonable. You can use the price you last paid as a benchmark if you adjust for inflation or deflation since you last bought it, or you can use external benchmarks if they exist (for example, list prices for stationery).
Price analysis will only tell you that the price is fair if there are comparable benchmarks. If they don’t, you’ll need to look at the cost of the item. One way to do this is to send a request for information to several potential vendors (say five) and ask for a cost breakdown plus price. This will allow you to calculate the profit element (something the vendor can’t give you if you ask directly). You will then be in a position to compare the individual cost elements of the five providers, as well as the profit element. This, in turn, will allow you to judge what is fair cost and profit, and by adding the two, what is fair price.
4. Armed with your information about what you currently buy, the price you must pay based on cost analysis, and an understanding of the supply market, you are in a position to decide your strategy for going to market; in other words, your sourcing strategy and how it will create value for your organization.
5. The final element is to go to market with a tender and possible negotiations around the range of products, prices and service levels.