Tutorial

Master strategic sourcing to keep costs low, customers happy

Generally speaking, strategic sourcing deals with procuring the raw materials needed in manufacturing. When it's done correctly, strategic sourcing helps a company pick the right suppliers, manage its relationships with them, optimize cost and provide reliable delivery to customers. The process ties in closely with both inventory management and manufacturing.

Let's assume that you are in the business of manufacturing office furniture. Your customers are all over North America, and you have four factories around the country. You service large corporate accounts; the margins are small and the competition is fierce. Your major goal is to meet the requirements of your best customers and provide reliable, on-time delivery to them.

Computer chairs are one of your specialties, so you need to source fabric and leather. You also need to buy commodity ball bearings from different suppliers. At any point in time, you are likely to be dealing with over 100 suppliers, so how you select and manage them can greatly impact your profitability and reputation.

Let's look at the value proposition for our furniture company and then consider the importance of implementing a strategic sourcing approach.

Supporting your value proposition with strategic sourcing

Any strategic sourcing strategy should support a company's value proposition. The furniture company's value proposition includes these four goals:

Meet customer delivery dates: If you promise a delivery date to the customer, you must deliver furniture within five business days of what was promised. If you fail to do so, customer satisfaction will go down and you will lose business.

Meet quality standards: The customer expects a very low defect rate, and this depends, in large part, on the materials that come from suppliers.

Keep inventory low: Minimize spare parts and work in progress while maintaining high standards for meeting your promises to the customer.

Keep costs low: Minimize the cost of raw materials.

Aligning strategic sourcing approach with software selection

While developing the specifics of the strategic sourcing approach, it can be helpful to choose the required software features at the same time.

Company buying history: What vendors have supplied ball bearings and fabrics in the past? What were the prices? Were the products delivered on time? What was their quality? What products had to be returned? Do customers love the fabrics? (We can assume they are relatively indifferent to the ball bearings.)

Finding answers to such questions is a natural application for business intelligence software, especially for differentiating among suppliers that provide similar raw materials. What is required is the ability to aggregate disparate data sources into a single data mart, then analyze the data with easy-to-use reporting and query tools. It will also be a plus to perform some simulations or what-if analyses, which can help, for example, with balancing supplier price points with overall quality received.

Discovering suppliers: At times you might want to identify new fabric suppliers. Periodically, companies should investigate content aggregators such as Alibaba.com and ThomasNet to see what new suppliers may be available.

Cataloging suppliers: Catalog purchasing is common online and through the mail. As a buyer of strategic goods, it would be valuable to have a supplier catalog as well. It would show your suppliers and their products and buying history, and make it easy to make the next purchase. Many software vendors have functionality to support the creation of supplier catalogs.

Managing suppliers: For managing relationships with new suppliers and reviewing relationships with existing ones, you need a somewhat formalized process. Many companies use requests for proposals and requests for quotes to start the process, followed by a contract spelling out the terms of the relationships. Strategic relationships with suppliers are not rigid, but they should be well defined.

More on strategic sourcing

Choose a supplier relationship management vendor

Manage procurement with accounts payable software

Read a definition of strategic sourcing

Suppliers and value-added services: Companies and their suppliers can develop relationships that represent a value-add for both companies. Here is a simple example. You might want to give away a pen and pencil set with every desk blotter that you sell. As the manufacturer of the blotters, you might ship them to the company that supplies you with pen and pencil sets. That supplier, in turn, might package the items together and ship them to your customers as a value-added service. Why do business this way? Comparative advantage: Your supplier is more adept at the packaging and shipping. You pay it an extra fee for those services, and both of you increase your profits.

Strategic sourcing requires discipline. Find your best suppliers and create formal agreements with them. Review supplier performance on a regular basis and make adjustments as necessary. Monitor how suppliers impact profitability.

Hopefully, by following these good practices, your cost of goods sold will go down and you won't lose too many customers because of poor supplier performance.

About the author:
Barry Wilderman has more than 30 years of experience as an industry analyst, researcher and consultant at such companies as META Group, Lawson Software, SalesOps Analytics, and McKinsey and Company. He is currently president of Wilderman Associates. Contact him at Barry@WildermanAssociates.com and on Twitter at @BarryWilderman.

This was first published in July 2013