7 Steps to Successful Strategic Sourcing

Thursday, May 22, 2014 , business management, by Rich Rafdahl

The term “Strategic Sourcing” has been referred to quite often over the last few years. It definitely sounds impressive and implies a cutting edge and potentially transformational process but what is it – really? What is “Strategic Sourcing” and how does it compare to the prior way of sourcing. Personally, I think strategic sourcing is absolutely critical for any business’s competitiveness, sustainability and future growth potential. In short, one may say “SS” is aligning your procurement processes and supplier choices with your business and clients’ current and future objectives. But it is so much more!! Ideally, it is selecting a supplier who is a trusted business advisor and highly resourceful partner who can work collaboratively on reducing the Total Cost of Ownership for the product or service required. It is a supplier who is continually looking for innovative ways to help you and your business succeed and is invested in your business for the long haul.

DSCN0055As with any strategy, the quality of the result is in direct relation to the intelligence gathered (due diligence), process integrity and committed effort applied.  Before a true supplier strategy is considered, a thorough cost, product and service analysis should be initiated which will allow you to review all requirements and spend for a particular category company-wide. One of the reasons I suggest a comprehensive review is that many organizations are de-centralized and allow various staff to purchase products and services independently, particularly for internal use, which can set the stage for too many suppliers, overlooked expenses, inconsistent quality and standards, unnecessary costs and a spend that is not optimally leveraged.   Also, with many organizations, there is the good likelihood that management is not fully aware of the total spend with every category nor if they are receiving the best value. For example, within the indirect spend area, some expenses and suppliers can be on autopilot for years with no one seriously reviewing these programs or challenging the status quo.  A good first step is a comprehensive vendor payment history review which can provide a list of all suppliers and expenses that could be considered. The following is a logical step by step process to maximize the potential result of a strategic sourcing effort.

  1. Initial Spend Analysis: As a first step, I often do a 10,000 ft. spend analysis by reviewing and classifying all expenses by spend category (i.e. raw materials, equipment, packaging, printing, lease programs, legal services etc.). Simultaneously, I rank these categories by their business impact (strategic vs. routine), level of difficulty (complex/high risk vs. low risk/less complicated), value improvement potential (low vs. high savings potential), time and speed to complete (quick hits vs. it is best to delay).

 

  1. In-depth Due Diligence: Once I have identified the spend categories that provide the most promise, a more thorough due diligence is required. This involves significant data mining and information gathering.   For example, you want to have a complete understanding of the program’s annual and monthly volumes, specifications, requirements and any nuances associated with the current program and current supplier(s). It is also valuable to interview all current stakeholders that have a vested interest in the program so that you have all critical data needed along with their input, expectations and perspective. Also, these interviews can assist in compiling both current and future requirements for the program. Keep in mind that invoices can provide basic information such pricing, terms, freight and volume information but they do not offer any insight into special services, unique deliverables, future demand and next generation requirements.

Finally, it is always wise to invest in a value analysis to ensure your company is receiving the optimum value and what is being specified is not hindering your competitiveness and productivity. Whenever there is a specification required for a product or service – ask why! An over-engineered product can result in unnecessary costs associated with a specification or tolerance that is not really required. On the other hand, a supplier may be able to provide an additional service or specification improvement – which could significantly reduce the downstream labor or processing costs – resulting in a better overall value.

 

  1. Market Analysis: Compile a list of incumbent suppliers and potential alternative suppliers. Ideally, these are “best in class” suppliers within the market who you know have a good quality and service reputation. If you have geographic considerations you may want to weigh national vs. regional suppliers since response time, proximity to plant and the associated freight expenses could be important factors. If you are unsure which suppliers are potential best fits, I would suggest a survey and/or meeting with each to review all critical requirements. Typical areas of interest are

 

    1. Capability: Expertise to meet or exceed your program’s requirements
    2. Capacity: Ability to fulfill current and future needs
    3. Quality and Performance: Can they consistently deliver a quality product or service
    4. Financial Health: Financially sound and are continually investing in their business often with state of the art equipment and future plans of growth.
    5. Motivated and Creative: Interested in your business – promotes ideas and products that will advance your company’s competitiveness and success.
    6. Ease of doing business: Responsive, Professional, Precise and Effective

 

  1. Strategy: Once you have completed your data review, value analysis, internal interviews, market analysis you are ready to develop the strategy.   For example, your investigation may have uncovered that there are 5 suppliers currently in place providing similar products within your company across multiple plants, which can be easily reduced to 1 or 2, or you may have discovered that several suppliers have the ability to provide multiple products and services which are currently supplied by numerous suppliers. Both these scenarios offer an opportunity to reduce the number of suppliers which will provide increased leverage, lower costs and better service when your customer status is elevated with the awarded supplier(s).

Another example may be that you have uncovered a new product or process that could significantly increase productivity and value within your company but it will require getting all the internal stakeholders on board.   The strategy may involve the assistance of your manager or a formal presentation with several key staff and management in order to explain, educate and influence. There are many different strategy options but several you may want to consider would be:

    1. Serious collaborative efforts with suppliers to increase efficiencies and reduce costs
    2. Product improvements or process improvements
    3. Inventory Reduction: i.e. consignment arrangements, shorter lead-times, vendor managed inventories, reduced minimums, extended payment terms etc.
    4. Supply channel improvements
    5. Reengineering of product/processes to improve efficiencies and productivity
    6. Mutual cooperation to challenge the status quo.

 

  1. Create Comprehensive RFx: Once you have identified the best potential suppliers then you are ready to develop the Request for Quote/Proposal. When creating a comprehensive RFx I compile all the information needed by the supplier to accurately quote the program. This obviously includes the service or products to be quoted with specifications, volumes, performance expectations, delivery criteria, price change methodology, financial terms etc. I also include all the unique requirements, special services and conditions of the program. As a precursor, I list all non-negotiable requirements up front (within the RFx or reverse auction) so that the suppliers fully understands the price of admission and what are the “absolute” base requirements prior to participating in the quote process. As a final note with the RFx, I routinely ask each supplier to provide any unique ideas, services or offers that could distinguish their program from the others. I find this encourages the participants to be creative and has the potential to generate new ideas and a competitive advantage for those suppliers who are willing to “think beyond the margins”. My goal is to select a supplier/partner who will provide the best value proposition but is also always looking for ways to improve my business and our competitiveness in the marketplace.

 

  1. Final Discussion: When reviewing the various proposals, I often include key stakeholders into the evaluation process to ensure their ideas and perspectives are considered and nothing is overlooked. Once the value propositions and any implementation costs have been considered, the 2 or 3 best suppliers are selected. At this time, I usually inform all key management of our logic and preliminary decision so that they can offer any last minute ideas/questions as well as to gain their approval to proceed. When given the “go ahead” the final suppliers are invited in to discuss their proposal and negotiate any open points that still need to be finalized or agreed upon. During this meeting, I often ask how they would, if selected, assist in making the transition as seamless as possible. I may inform them of our business’s future plans and inquire how they can help us achieve our objectives or simply ask how they can assist us in becoming more effective, productive and profitable in the future. Again, they may have some unique ideas that have not been considered – which could tip the scales in their favor.

 

  1. Final Selection and Award: Prior to making the final announcement of a supplier change on a product vendor, it is suggested that adequate inventory be in place to address any transition issues or potential delays. I encourage a prompt, courteous and honest communication with all suppliers that participated in the bid process. It is important to treat all suppliers, especially incumbents who are losing their position, with respect and courtesy so that they feel the process was fair and they were handled with integrity. You never know when you may need one of these suppliers, and how they are treated could have a major impact on their future response. Unfortunately, I have witnessed a number of these “break ups” fall short of common courtesy – where an incumbent is left hanging for weeks or is sent a very brief email concluding the arrangement. I suggest a direct phone call or possible meeting thanking the incumbent for the service and work they have done during their term and suggesting that maybe next time things will work out differently.

 Finally, lay out a timeline of change, the process and address any existing commitments and remaining inventory so these issues do not create any  future problems.   With new suppliers, a final transition plan should be created that includes input from all key stakeholders such as Finance,  Customer Service, Operations and Receiving etc. It is critical that the new supplier’s performance be monitored during this initial change so that they  do not get off on the wrong foot internally.

 Lastly, retain a record of the whole process, information gathered, logic and final decisions for future reference. The intellectual capital gained and  compiled during this effort required many hours to accomplish and is incredibly valuable. This will be immensely helpful for the next review and  particularly for your successor who could benefit from having access to this prior process which can be built upon – as needed

In summary, nothing I have shared with you is rocket science. In fact, everything I have mentioned above was learned from my mentors, several exceptional procurement professionals along with a number of healthy mistakes – which taught me what not to do. If you follow these steps, maintain process integrity and apply a good measure of common sense you will make an excellent strategic supplier choice.  If you have any questions, please contact Richard Rafdahl – Cost Reduction Specialists Inc. at costreduction@crspecialists.net.

Did You Know!

The Boston Consultant Group concludes that a 5% reduction in procurement costs is the bottom line equivalent to increasing sales by 30%.

CRS offers its services on a contingency basis, with our fee tied to the savings secured and approved by the client.

CRS focuses on reducing the Total Cost of Procurement (TCOP) while maximizing value with key suppliers. This includes negotiating improvements in quality, services, performance requirements, terms, incentives & price change methodology.

CRS will manage all information with utmost respect and confidentiality.

CRS can develop and facilitate Reverse Auctions and complex RFQs, RFPs, RFXs and RFIs.

CEO of a film manufacturer said “What appealed to me initially was that CRS’s offered expertise in procurement and supply chain on a performance basis - contingent on results, with no risk. Within 6 months CRS provided savings in excess of $1 million".

CRS has assisted various manufacturers and distributor organizations in the food, packaging, spirits, electronics, computer, cosmetic, furniture, metals, services & construction industries to reduce their costs & increase savings.

“Cost Reduction Specialists were very easy to work with and helped us achieve savings in many areas including telecom costs, credit card processing fees, office supplies, distribution supplies and other indirect costs”- Controller Furniture Business

“CRS negotiated significantly lower prices for our temporary labor, labels and corrugated cartons programs resulting in savings that exceeded $400,000”. VP of Finance – Food Processing Organization

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