A Sourcing Strategy – The 5 Key Elements of a Sourcing Proposal
A sourcing strategy sets out your proposal for how you will go about procuring goods or services that meet a defined need of your organisation. It is a road map for how you intend to go to market in a way that is different to that used currently. The result should be a change that delivers value to your organisation. This means that your sourcing proposal is also a tool to sell your ideas to the rest of your organisation and so needs to be constructed carefully. There are five key elements to an effective sourcing proposal.
1. Assess how your organisation currently buys the items you are looking at. Ask “who buys what, from whom and for how much”. Knowing who currently does the buying enables you to assess whether or not they have the right procurement skills to carry out the task well. Knowing who they buy from will tell you whether there is an opportunity to reduce the number of suppliers and get lower prices from volume discounts. Knowing what prices are currently paid lets you find any differences that will let you get short term price savings. It also helps you to benchmark your prices against the price paid elsewhere.
2. Assess the supply market. You can use analytical tools such as 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 from your supply market will help you to establish who appropriates the most profit from the supply chain which in turn will point the way to the best strategy for dealing with it. For example, if your suppliers have bargaining power over their customers (including you) can you form a consortium of other buyers to re-balance this power?
Other things you need to consider when assessing the supply market is whether or not new entrants can be attracted to increase competition; whether technology changes will change the nature of the supply market; the key capabilities needed to succeed in this market and which suppliers have these capabilities; how capacity is defined in the industry and what how well this is utilised. All of this is useful information to have when negotiating or will guide you towards alternative suitable suppliers.
3. Analyse prices and costs. Analysing prices tells you whether or not the price you are paying is fair. Essentially, you use test the price against a benchmark to judge for reasonableness. You can use the price paid last time as a benchmark if you adjust it for inflation or deflation since you last bought it or you can use external benchmarks if any exist (for example, catalogue prices for stationery).
Price analysis will only ever tell you the price is fair if comparable benchmarks exist. If they don’t, you will need to analyse the cost of the item. One way to do this is to send a request for information to a number of potential suppliers (say five) and ask for a cost breakdown plus the price. This will allow you to calculate the profit element (something the supplier may not give you if you ask for it directly). You are then in a position to compare the individual cost elements across all five suppliers as well as the profit element. In turn, this will allow you to judge what is a fair cost and profit and by adding the two together the fair price.
4. Armed with your information on what you currently buy, the price you should 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 organisation.
5. The final element is to go to market with a tender and possible negotiations around the product range, prices and service levels.