Introduction
A sourcing strategy is essential for any organization looking to either push a product into a market or get supplies of products and services from producers or suppliers. The selection and development process of these strategies will be influenced by certain issues, and in the long-run, the strategy selected will develop problems due to change within the organization or due to market forces. This paper aims at looking at the issues to be considered when developing a sourcing strategy, the potential problems that may arise from the strategies and relationships with key suppliers that will be created, and possible solutions to the problems.
Firstly, one has to recognize that the sourcing strategy sets the framework and the limits within which sourcing undertakings will operate, and at the same time, creating a link between all these sourcing activities to form an organized and interconnected system. The Sourcing strategy will assess, rationalize and implement every sourcing activity and setting the criteria to be used when selecting a sourcing agent.
We must first understand the process of developing a Sourcing Strategy Plan, then we can delve into the issues and problems involved in Strategic sourcing.
The diagram below shows the steps in setting a sourcing strategy. From the diagram, an explanation will follow on each stage and the issues or problems that may arise together with their possible solutions.
This involves a review of the current sourcing strategy. The main aim of this stage is a review of the expenditure data so as to get an in-depth view of cost reduction, improvement of performance and the contract compliance opportunities. An analysis of the current cost ratios and the procurement history of the company is done. In this stage, the following questions are answered:
- What is the company buying?
- How often is the company buying?
- Where or from whom the company buying?
- At what price is the company buying?
The main problem encountered in this stage is selecting which approach to use in the spend analysis. The following are the available options and their challenges:
- Manual approach: here ordinary tools such as excel are used. Many companies, mainly SMEs use this manual approach. The short fall with this approach is that it can be done only once. They can only support a sourcing project that is to be done only once. This is because of the tedious nature of the approach and the fact that it is highly prone to human error. Therefore, the effort is discarded, and the spend analysis cannot be used again when it is required.
- Internal efforts: here, internal staff, mainly the IT staff of the organization look to develop a database application that is tailored for the organization. These efforts usually almost always do not succeed. This is because data mapping and the refreshing of data becomes challenging in the long-run. This coupled with the challenges of the hierarchy of the organization makes it a difficult endeavor over time.
- Packaged solutions: since 2007, the most software producers have been offering Spend Analysis applications that vary in size and price, to suit the intended business or organization. These are less tedious and time saving. They produce only the data needed, hence making it easier to identify leak areas and areas where savings can be done by either cost cutting or replacement of the method or commodity in question.
Stage 2: Review of Supply Market
This is a market analysis of the available suppliers and the viable options that are available to the organization. During this step, an evaluation of the current supplier performance is done, this helps serves as a benchmark towards developing the suitable sourcing strategy. Here, an understanding of the kinds of supplier markets that exists is built, and key suppliers in the market are duly noted. The kind of competition that lies in the market, is also taken note of, and how suppliers value their customers.
The first step is to study the market structure. The second step is to define the kind and level of competition within the market, which will build an understanding of availability and pricing of products. The final step is defining the supplier’s value of the customer, i.e. How much bargaining power do the suppliers allow their customers. Here, there is also a draft of the risks involved with sourcing from a supplier. This aids in constructing more efficient sourcing strategies by enhancing the value for money during negotiation.
The major obstacle to this stage is the accessibility to the needed data to ensure a comprehensive market analysis. This condition of data asymmetry, where not all of the stakeholders in the market have all the relevant data can be sorted out by having an online database where all the suppliers within an industry avail their data on prices and range of goods.
Stage 3: Total Cost Analyses (Total Cost of Ownership-TCO)
Here, the complete life cycle of the product is analyzed. The cost over the whole cycle is determined regardless of the initial price given by the supplier. The following components are involved:
- Initial Cost Savings – this the cited price of service or commodity per unit delivered.
- Process Cost Savings – these are costs that are incurred due transacting with the supplier(s) e.g. additional legal fees, transactional costs due to mode of payment.
- Cost Avoidance Savings – this analyses the additional post-sale services and expenses that the supplier is willing to cover. This includes warranty in the case of defects in the commodities purchased, additional installation and repair costs that other competitor’s products and services do not incur and the guarantee of the useful life of the commodity, and how it fairs with the competitor’s products in the market.
- Value Add – will replenishing stock attract additional costs? Is the supplier willing to provide upgrade services in the case of emergence of new technologies? Is the supplier involved in new product development to improve services and better products?
The challenge in this stage of the process is the reluctant nature of suppliers to reveal information on the value added on their products and services. This is because; this would reveal their profit margins, facts that would easily cause them to lose customers or clients should they find out the gap between normal and supernormal profits that the supplier might be making. This causes information asymmetry between the supplier and the organization.
The only possible solution to obtaining this vital information is through obtaining presentations that the suppliers provide to the investment community. Attending conferences scheduled by the supplier where financial performance of the supply company is the agenda, would disclose information that they would be less willing to divulge to the clients.
Stage 4: Scouting and Identification of Potential Suppliers
Given the Market analysis and the TCO analysis of the Suppliers within the market, there can be a draft of a list of potential suppliers; these suppliers have to meet the criteria suitable for the organization. For instance, an organization can chose to use the following criteria to shortlist potential buyers in order of preference.
- Product quality
- Bargaining leverage offered to clients
- Discount offers and special price offers to clients
- Responsiveness to time inquiries
- Quality and timeliness of delivery
- After sale services and offers
- Guarantee and warrantee offers
- Geographical mobility of the supply chain used in delivery
- Total Cost of ownership
- Quality of customer care services offered
There are many methods to identifying potential suppliers using the select criteria that suit the organization. They include:
- Use of trade directories, business directories and trade associations, as these have consolidated data on suppliers and show competitiveness of the services and products offered by each supplier within a market
- Use of the internet by reviewing the suppliers’ pages and websites and trade bulletin boards
- Business and product exhibitions by suppliers
- Use of supply chain professionals and specialists
- Networking with similar buyers in the market
The challenge of this stage of the process is finding suppliers who are an exact fit to the chosen criteria. This is because all suppliers operate a profit driven business and as such, there is usually a general market standard followed by suppliers within an industry. This will mean a marginal difference in the total operations of suppliers. The differences would be in the after sale services, special price offers and quality of customer care services offered. Thus, there will need to be a compromise and the criteria chosen has to be prioritized based on the most important or urgent needs of the organization.
Stage 5: Sourcing Strategy Development
This stage involves the consolidation of all the information acquired through the initial four stages and coming up with a formal document. The document will start by highlighting the mission and vision of the Strategic Sourcing Plan. It will highlight the four previous areas and give the detailed information, figures, graphs and diagrams to show clearly the intent and validity of the plan.
The plan would create solutions tailored to the organisations needs in line with the organization’s mission and vision statement. The plan will come up with work streams. This will involve tender processes, selection of suppliers criteria and basis for negotiation with suppliers.
The challenge of this stage of the process is the actual cost of generation of the plan that is tailored to fit the organization's vision and mission objectives. This process requires the work of a specialist or professional on supply chain management. These professionals are expensive to hire or employ, and the process may take from three to six months. This is time consuming and costly. However, in the long-run, the revenue saved far outweighs the cost of developing the plan.
Stage 6: Negotiation with Suppliers
This stage is done in two phases. Both the two phases of negotiations are based on the new negotiating strategy plan that has been developed in the Strategic Sourcing Development Plan that has been documented.
Firstly, is to negotiate with the current crop of suppliers that are contracted to the organization. These negotiations will conform to the new negotiating criteria. There will be expected reluctantness by these suppliers to conform or accept the new terms, as they would naturally look to cut cost and reduce the price at which the organization purchases their goods and/or services. The suppliers who are willing to meet the new terms and conditions while those who would not accept have their services terminated.
Second, is to negotiate with new suppliers. They have to be willing to meet the new terms and conditions developed or offer better deals.
The main challenge with obtaining new suppliers is mutual trust. Trust developed with previous suppliers over time is an asset that cannot be valued. Generation of goodwill will take time with new suppliers. However, the overall revenue saved would surpass the cost of losing previous suppliers.
Stage 7: Implementation of New Supply Structure
Once negotiations are complete, the new supply structure is officially documented and implemented as company policy. This criteria would apply to all negotiations across all company transactions and dealings. Supply tenders are then awarded, and the selected suppliers are contracted. Contractual terms and conditions are finalized with the consent of the suppliers.
The main challenge of this stage is the rigidity within the organization to accept and conform to these new standards and criteria. This raises the issue of managing organizational change. Many employees would not be willing to accept the new set structure without some element of resistance.
Stage 8: Track Results and Restart Assessment
This is a continuous cycle. The supply market is constantly changing due to changing legislature, environmental and socio-economic aspects. These coupled with the emerging trends and technological developments in the supply market; necessitate the continuous nature of the process. The Strategic Supply Development plan has to be constantly reviewed and edited accordingly to fit the changing aspects of the market.
The major challenge of this stage is its continuous nature. This would require an individual or team that keeps tabs with all the changing facets of the industry and market. Hiring or employing these professionals would be costly.
In summary, the following are the challenges that have been highlighted in the whole process of Strategic Supply Development Plan.
- Inadequacy or lack of trained workforce
Most of the ordinary employees in most organization are trained to manage planned activities and not procurement that is founded on understanding the supply market capabilities and opportunities. Consultants and professionals need to be hired to handle these aspects as inhouse education and mentoring on the field is slowly groomed.
- Obstacles due to organizational structure
Inter-organization divisions’ competition hinders the success of projects. A parent organization may have different divisions that may be so engulfed with the in-house competition that they may be contracted to the same supplier but operating under different contract terms. This diminishes the bargaining power of the organization as a whole in the market.
- Inadequate data for effective decision making
The availability of data that is needed to recognize and examine the possible saving opportunities and accomplish management of the performance of the plan, can be either scarce or too scanty and shallow to be relied on. Therefore, the organization has to take the tasking step of finding innovative methods of collection of adequate data to enable effective decision making.
- Lack of commitment from senior management
The value of Strategic sourcing might not be fully understood by top management, and as such, they may view it as unnecessary expenditure by the organization. The capacity for an organization to embrace change (Organizational Change) is more of a behavioural change than a process change. This has to be taken from top management, as direction and interpretation of the organizational vision and mission statement is obtained from the highest level of management.
- Organizational Inertia
This is the inability of an organization to readily accept change, this can either be from the top, as highlighted in the previous point, or from the bottom. Most employees do not readily accept change from what is considered to be the norm in an organization. The ability to change transactional methods and criteria developed by the strategy entirely depends on the acceptance of employees to change. Otherwise, the organization will be prone to shortfalls from the new stated projections and goals.
Conclusion
In conclusion, the obstacles that an organization faces can either be internal or external. However, these obstacles can be overcome through effective organizational change management and innovative methods. Strategic Sourcing development can be a tedious process that may require constant management and revision with changing markets and will be exposed to new and different obstacles with the changing market elements.
Critique
These set steps have been proven over time to achieve the best results for most companies. However most SMEs (Small and Medium Enterprises) might find it difficult to incur or make provisions for the cost of the process within their budget. These organizations operate within a tight budget. However, they counter this by their nature of flexibility, i.e. the ability to change and alter operations with the changing market. This process and the department in charge of handling this process may prove to be critical to any organization, to give them an edge on competition, reduce cost and maximize profits. Its benefits far outweigh the costs, disadvantages and obstacles associated with it. In my opinion, every organization, whether profit making or non-profit making, should incorporate this Strategic Sourcing approach in their operations to ensure minimized cost.
Bibliography
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