Few people would describe car buying as a carefree task. Consumers typically dread the experience of deciding among endless options of cars and dealerships, researching pricing, dealing with the bank, and finalizing all the paperwork before riding off in our new vehicle. Although the process generally follows similar steps for every buyer, it is slightly unique each time because each person has different requirements. Additionally, the buyer has to weigh how much he wants to spend versus the quality of the car, strategically sourcing the best car to satisfy his long-term need.
Simply put, strategic sourcing is a method companies use to get the right materials and services at the right time needed to do business. The strategic aspect refers to procurement that considers total cost, risk mitigation, and overall value, as opposed to only taking cost into consideration.
Most people wouldn’t want to buy a car just because it was the cheapest option. It takes looking at several factors such as the total mileage, gas mileage, and the Carfax report, to assess the total value that car provides. The perfect car is a balance of price and quality as required by the buyer. And it is different from buyer to buyer. This is the same concept many companies use when purchasing materials and services.
Prior to the 1980s, procurement was highly tactical and administrative in nature. Companies purchased materials as needed, usually motivated by cost and convenience. In 1983, Peter Kraljic wrote an article published in the Harvard Business Review on purchasing strategy, which introduced the idea of purchasing being a strategic (rather than tactical) practice. Kraljic’s article is often cited as the beginning of an era dominated by Strategic Sourcing. Today, Strategic Sourcing is the prominent procurement method for large businesses with the systems and personnel infrastructure to support it.
Once the company has decided upon their highest-value suppliers, the next step is to have the negotiated contract written and signed. For service providers, this means service level agreements that provide the vendor with incentives to perform at or above standards. For product purchases, this means minimum quality standards for available to promise and defect rates. This is a continuous process. With consistent business, lower rates may become available when the contract expires.
Companies should be proactive about keeping up with and checking in on their suppliers. A company run with integrity should avoid turning a blind eye to supplier quality for the sake of convenience or cost. Maintaining lasting relationships with suppliers to ensure exceptional production is critical, plus it gives an opportunity to renegotiate better contracts.
When a company plans to implement a strategic sourcing initiative, a procurement system will allow users/buyers to track their spending, save products in a catalog format, and document contract and pricing. In most instances, a group (or individual) is responsible for ordering products and services as needed. Ideally, this system is quick and easy to use.
The balance between standardizing processes and allowing room for impromptu decisions is difficult to find. Although emergency purchases are necessary on occasion, it is important to determine limits and guidelines. For example, a purchase order may not be required for field personnel if a gasket blows in the middle of the night. But, when the need for additional pipe is known two weeks in advance, the proper sourcing activity will allow the company to receive the lowest possible price for the same item. Clarifying what defines an emergency situation is a critical task.
Procurement software alone is not a procurement system. To be sure that high-level rules of system use are followed, the process must be simple. Employees will work around the process if purchasing common items becomes a burden. A logical process will allow them to see the benefits of the system and comply with protocol.
Provide the proper training to end users stressing the importance of participation. By giving personnel the proper training, users gain confidence in the system, their work, and their role with the company. Confident users make for successful systems.
The Strategic Sourcing process looks different for every company, but the benefits typically remain the same.
This article has been adapted from a chapter from Trenegy’s book: Jar(gone).
Trenegy is a non-traditional consulting firm, dedicated to help companies clarify the latest business jargon into useful terms and solutions that actually benefit your company. Find out more: info@trenegy.com.
