why should companies use strategic sourcing

Finding more-qualified partners to provide critical functions usually allows companies to enhance the core capabilities that drive competitive advantage in their industries. Understanding the Basics: What Is Strategic Sourcing? - Workday Blog For many functions, including transaction processing, design, engineering, and customer service, the Internet and an increasingly sophisticated telephone infrastructure have made physical proximity much less relevant, at least from a cost perspective. Compare each of your outsource-worthy capabilities cost and quality to those of top-performing rivals or suppliers. Complete visibility. The question is no longer whether to outsource a capability or activity but rather how to source every single activity in the value chain. Four Key Strategic Sourcing Benefits | QAD Blog A strategic sourcing process helps companies to improve their relationships with suppliers. This requires a comprehensive supplier management strategy. Credit-card giant American Express, for example, outsourced its crucial transaction processing function when it no longer provided proprietary advantage. Single sourcing gives businesses more control over finding suppliers that align with their company values, such as ethical sourcing of materials or similar labor standards. You can maximise volume leverage to attain attractive pricing. To illustrate the power of capability sourcing, lets take a detailed look at one dramatically successful practitioner, which began as a most traditional, vertically integrated company. After considering many options, Keyes concluded that the best way to save the U.S. company was to adopt the Japanese model. Make sure you involve your team throughout this process. Why Does My Company Need a Vendor Management System? Strategic sourcing helps an organization build long-term relationships with its suppliers. For example, a start-up technology company could outsource its non-core activities, such as payroll processing, which would allow . Its important to set benchmarks for suppliers and products, identify knowledge gaps, and create a list of opportunities. Even some of the largest enterprises still execute sourcing activities using a clunky combination of legacy systems, spreadsheets, email, and manual processes. For 7-Eleven, they are product ordering and in-store merchandisingthe pricing, positioning, and promotion of ready-to-eat food, gasoline, and sundries for car-driving consumers. Recommended Articles Key Takeaways Strategic sourcing is a proactive and comprehensive approach to procurement that aims to identify opportunities for cost savings and supplier performance improvement. about us, and our long history of helping companies just like yours. An entire value chain of an organization needs to be committed to the cause of sustainability. Note anything that seems off, such as buying larger volumes from more expensive suppliers. It's also focused on setting up a reliable supply chain with quality alternatives in case a supplier is no longer available. In narrowing its focus to a small, strategically vital set of capabilitiesin-store merchandising, pricing, ordering, and customer data analysisthe company has reduced its capital assets and overhead while streamlining its organization. Questions to Ask. Out of all the business processes, sourcing can provide the greatest ROI. After identifying risks, you can develop a plan to mitigate them or avoid them altogether and seek new suppliers when necessary. Those that appear in the lower left section are potential prospects for captive sourcing. Such exclusive arrangements reduce the strategic risk of sharing customer information while greatly expanding the set of unique products 7-Eleven can offer. Strategic Sourcing: What Is It, Why It Is Important, and How To With these requirements in mind, the team may then draft and distribute an RFP to multiple software vendors. So it has set up a consortium to provide multipurpose kiosks in its stores. More consistent quality. Strategic Sourcing Process: Benefits for Businesses | SpendEdge This creativity can be particularly important in fast-growing organizations that need to move quickly to find creative solutions for a scaling businesss needs. In this article, we provide an in-depth overview of strategic sourcing, its critical role in the business, and how strategic sourcing systems can empower teams to adapt to a changing world. Youll start with high-level categories like direct/indirect, materials/services, critical/non-critical, and domestic/import. Browse hundreds of articles, containing an amazing number of useful tools, techniques, and best practices. Companies like UPS, Solectron, and Hewitt have created new business models by concentrating scale and skill within a single function. What is Strategic Sourcing? Here's How It Works | MSU Online High EQ helps these team members remain focused while being empathetic to their stakeholders and suppliers, allowing them to find the most mutually beneficial solutions possible. As companies scale and grapple with new business challenges, enterprises can no longer afford to overlook their sourcing and procurement organizations. And that, in turn, is changing the way companies think about their organizations, their value chains, and their competitive positions. The five forces model looks at industry competition, the potential of new entrants, supplier power, consumer power, and the threat of substitute products to help determine the best way to work with a supplier. These challenges tend to shine a bright light on strategic sourcing, one of the key tools companies can use to blunt the impact of global forces like inflation and supply chain disruption. Strategic sourcing should consider a companys overall business goals and work to align them with procurement practices. This new approach to sourcing had profound effects on the automakers operations and management. Now that you have a short list of qualified companies who could become vendors, challenge your existing supplier by sending an RFQ, or a request for quotation. Instead, the retailer mines its extensive data on local customer purchasing patterns to make those decisions on a store-by-store basis. Formulating the strategy is, of course, only the first stage of a sourcing effort: Partners then have to be chosen, contracts negotiated, and management structures established and monitored. Same-store sales have grown in four out of the last five years. As a spin-off, First Data could aggregate Amexs volume with that of other companies (issuing banks would have been reluctant to outsource processing to Amex as a competitor). In this article, well describe how and why the role of sourcing is changing in the twenty-first-century economy and lay out a practical strategic framework to guide companies through the transition. To determine commonality, they had to look outside their companyeven outside their industry. Strategic sourcing - Wikipedia But as it lends its brand and merchandising expertise to an increasing array of productsfrom golf instruction centers to MP3 players to eyewearits evolving into a focused provider of marketing services to other companies. Technology can give strategic sourcing teams deeper insight into supplier relationships and help them better leverage their business for increased cost savings. This involves, for example, running competitive bids, e-procurement, issuing purchase orders, and overseeing invoicing and payments. For category management, its best to select team members for each category. The first step is to identify the components of your business that represent the core of the core. Opportunities that fall in the middle of the sourcing opportunities map generally require more detailed analysis of both your company and your industry. You may be able to negotiate to receive small, frequent deliveries and so improve inventory control. Its important to create categories that work from the beginning because changing categories makes analyzing spend more difficult. Then the company negotiated a long-term service contract with the newly independent entity, First Data. It suggests that increasing resilience will be a priority for many as they emerge from the current crisis. The role of strategic sourcing doesnt end once the contracts are signed, however. Virgin, for instance, has successfully extended its brand management capabilities from planes and trains to music, mobile phones, personal finance, and even bridal wear. In organizations of all sizes, it can be difficult to grow sourcing from a purely behind-the-scenes function to a strategic partner to the business. So, to ensure that it doesnt quickly become obsolete, a sourcing strategy needs to consider not only present circumstances but also future alternative scenarios. As companies continue to grow, they must rely on their strategic sourcing teams to anticipate risks and empower the business with scalable supplier relationships. 7-Eleven also agreed to share productivity gains from a services agreement with Hewlett-Packard. Sourcing teams that are empowered to be strategic partners can help their companies keep up with evolving consumer demands, ensure supplier compliance, and support the business as it scales. And would the company suffer a high degree of strategic damage if rivals could imitate that capability? A recent Bain survey of large and medium-sized companies reports that 82% of large firms in Europe, Asia, and North America have outsourcing arrangements of some kind, and 51% use offshore outsourcers. Benchmark your existing chain with local and global alternatives, including delivery and transit times, batch order size, and stock levels. For a few targeted product segments, 7-Eleven has identified opportunities that call for an even deeper level of collaboration. Choose team members based on their geographic location, their business area, and the categories you developed in step one. Sourcing Strategy. 7 Steps for an Effective Sourcing Process (with a Once you get the questionnaire back from each potential supplier, you can create a scorecard for your requirements. (See the exhibit The Measure of Success.) Furthermore, after its acquisition of two regional U.S. chains (Christys Markets in the Northeast and Red D Mart in the Midwest), the firms new business model helped grow sales by more than 30% and increase gross profit margins by 2%. Understanding the Basics: What Is Procurement? Without a digitized sourcing process, companies may be leaving critical dollars on the table. Once youve discovered which capabilities promise high potential for alternative sourcing, the next question is: How should you source them? If you can gain insights into these areas, you should be able to create better results from this process over time. These outdated and overly complicated workflows block effective collaboration among stakeholders and make performance metrics difficult to measure. Manufacturing and procurement managers usually make sourcing decisions about . For 7-Eleven, the core of the core is in-store merchandising and product ordering. Improve product speed to market. What Are the Benefits of Strategic Sourcing? 28 Questions to Ask Your Boss in Your One-on-Ones - Harvard Business Review The benefits of having a sourcing strategy Having a sourcing strategy mapped out is essential for the cost structure and competitiveness of businesses. Some strategic sourcing leaders like to set up weekly office hours to give other teams a chance to ask questions and present upcoming projects. Strategic sourcing involves collaboration with both internal stakeholders and suppliers. More frequent deliveries mean fresher products, which draw more customers into the stores. And you might still think of Nike as a sneaker and sportswear company. Strategic Sourcing Works Better with the Right Tools, Strategic sourcing is a process that aims to set up procurement teams. If you havent created that yet, you should still have your spend separated into different cost accounts. Outsourcing has grown so sophisticated that even critical functions like engineering, R&D, manufacturing, and marketing canand often shouldbe moved outside. Likewise, when the data on beer sales showed that certain packaging options were more successful than others, 7-Eleven forged a tight partnership with Anheuser-Busch to build sales in those categories. The same dynamics were also at work in the credit card industry, which restructured in response to a dramatic change in the basis of competition fueled by technological innovation. AT&T, with its direct control of the American telephone network; Bethlehem Steel, with its large-scale manufacturing plants; and Exxon, with its vast oil reserves, each dominated its respective industry. Strategic Sourcing: To Make or Not To Make - Harvard Business Review Second-rate materials. Category risk level analysis: Conduct a category risk assessment to determine whether working with this supplier is worth the risk or not. Sourcing and procurement professionals are able to bring deep market insight and expertise in negotiating and managing enterprise needs and supplier agreements. To win a significant share of their business, chosen suppliers had to meet tough cost and quality specifications. Price hikes. In return, 7-Eleven shares its customer information so together the two companies can develop innovative marketing programs, such as a cobranded NASCAR promotion targeting 7-Elevens core customers and a Major League Baseball promotion campaign. Company As strategic sourcing team would first meet with key stakeholdersin this case the companys finance leadersto understand what they need from the new software. Both parties shared in the savings generated from improved efficiency, which provided ongoing incentives to identify and remove unnecessary costs. Creating value through procurement outsourcing | McKinsey The practice is a part of supply chain management and emphasizes customized solutions and strategic partnerships. Rather than selecting suppliers based only on cost, for example, Chrysler consolidated component purchases with several suppliers it believed could sustain competitive costs, high quality, and efficient delivery. Keep your process transparent and include the awarding selection criteria and weights so everyone knows how the winner will be chosen. This team is also instrumental in evaluating and driving supplier performance, and ensuring the chosen vendor delivers on its contractual obligations. Consider the hidden costs associated with changing suppliers. They would have to purchase various raw materials and equipment. FedEx positioned itself at the leading edge of the $225 billion logistics-outsourcing industry by planning and managing inbound transportation for more than 1,500 product suppliers into 26 General Motors power train facilities. Planergy offers an easy solution for each step of this process, from sourcing through accounts payable. Maintain your spend categories in the ERP material master. Third-party logistics specialists had neither the skill nor the scale to handle those functions. This is the new discipline of capability sourcing.. Digital sourcing technologies will only become more essential to enterprise success as companies move toward a hybrid working environment. Six Reasons Outsourcing Could Benefit Your Business Jul 3, 2023, Jul 3, 2023, Captive Audience: Why Contact Center Employees Make Ideal Vishing Targets Jul 3, 2023, Manager Versus Leader:. July 3, 2023. Decide what to insource. Using one tool for every step of the entire procure-to-pay (P2P) is the best way to ensure that your strategic sourcing process works, and is the easiest for all stakeholders involved. Imagine leaders from Company A are in the market for a new financial management software solution that can help them automate their processes and gain deeper insight from their finance data. With better relationships come faster deliveries and better quality. Greater focus on capability sourcing can improve a companys strategic position by reducing costs, streamlining the organization, and improving quality. Global Sourcing: Is It Really Worth It? - Supply & Demand Chain Executive It even owned the cows that produced the milk it sold. This capability puts FedEx at the leading edge of the $225 billion logistics-outsourcing industry. Automation and optimization commonly go along with outsourcing, thus allowing businesses to save on operational costs. And that, in turn, is changing the way firms think about their organizations, their value chains, and their competitive positions. In return, Hershey gave 7-Eleven the exclusive right to sell the straw for its first 90 days on the market. Strategic Sourcing: A Big-Picture Approach to Procurement - G2 Learn More About Strategic Sourcing and Procurement. Establishing trust and credibility with cross-functional stakeholders is essential for those leaders who are looking to elevate strategic sourcings role in the business. Getting started with strategic sourcing can be a long and arduous process, so providing digital tools to streamline procurement goes a long way. Consider two factors: Your strongest candidates for outsourcing? As companies like Chrysler, American Express, and 7-Eleven have discovered, a strategic approach to sourcing can dramatically improve your companys competitive position. When U.S. automakers began losing market share to Japanese companies, they were forced to confront a growing gap in both cost and quality. How to gain visibility and control of your indirect spend. Migrating from a vertically integrated company to a specialized provider of a single function is not a winning strategy for everyone. For tangible products that must be shipped, however, proximity plays a large role in both cost and timeliness considerations; it may not be feasible to manage the movement of such products from afar. Creative problem-solving: Because these teams work with many departments, they are uniquely positioned to solve cross-functional challenges. Strategic sourcing is an approach to supply chain management that formalizes the way information is gathered and used so an organization can use its consolidated purchasing power to find the best possible values in the marketplace and align its purchasing strategy to business goals. In working through this process with clients, weve found that three steps can ensure that decisions are made objectively and are based on facts. In particular, they've zeroed in on the cost-cutting of their organization's day-to-day transactions. In this article, well explore why you implement strategic sourcing at your organization and give you seven steps to get started. Beginning as purely tactical functions, sourcing and procurement teams were tasked with basic duties such as keeping the lights on and maintaining a steady stream of office supplies. Strategic Sourcing - ProcureDesk Historically, procurement teams have focused on the tactical aspect of sourcing. With a birds-eye view into supplier relationships across business lines, sourcing and procurement teams can also make connections throughout various parts of the business to enable better outcomes. Gasoline retailing, for example, represents an important source of revenue for many 7-Elevens, as gas is often the reason customers come to the stores. Strategic Sourcing: Five Steps to Secure the Best Suppliers Six Reasons Outsourcing Could Benefit Your Business - Forbes Organizations can even encourage their suppliers to innovate new products and services. Supplier interviews: Send requests for information from potential suppliers and compare that to what youre spending with current suppliers. This map will help you determine which key capability gaps your company needs to fill. case studies, client success stories, and testimonials. Typically operating behind the scenes, sourcing and procurement teams are vital to the success of the business. Thinking and playing the long game You've probably heard prudent financial investing in the stock market should be regarded as a long-term investment. Ensure that your examining the data and feedback you have on your suppliers, evaluate market changes, and check in with all stakeholders on how the process is going. You need to stop focusing on incremental cost improvement targets, step back, and reevaluate your strategy and your capabilities. To further promote the unique product, 7-Eleven joined with its syrup supplier, Coca-Cola, to come up with a Twizzler-flavored version of its proprietary Slurpee drink. Earn badges to share on LinkedIn and your resume. Strategic sourcing professionals must be experts in navigating complex conversations and the emotions of others. Importance of Strategic Sourcing Skills - Small Business Here are the top skills that sourcing and procurement team members flex every day to help strengthen supplier partnerships, increase cost savings, and drive bottom-line impact: High EQ: Not to be confused with its cousin IQ, EQ refers to emotional intelligence or the ability to identify and understand both your emotions and those of others. It requires teams to analyze spend, assess supplier risk, develop risk management strategies, and build supplier relationships that increase purchasing power. Allow team members to play a role in the decision-making process and encourage everyone to keep the lines of communication open at all times. Produced by Rob Szypko , Rachel Quester , Alex Stern and . Another way you can grow your influence in the business is to ensure its as easy as possible to partner with the team. Where capabilities fall on this grid establishes appropriate goals for an outsourcing relationship. As part of his initial assessment, Keyes studied the companys highly successful Japanese unit, whose keiretsu model of tight partnerships with suppliers was unique within 7-Eleven. From office chairs and laptops to software subscriptions and janitorial services, these teams work tirelessly in the background to ensure the business not only functions, but thrives. Keyes found it hard to believe that the company could be best-in-class in every one of those functions. At this point, you have everything you need to keep the strategic sourcing process running. Sourcing automation also helps boost team efficiency by offloading manual tasks such as data migration and reporting, giving teams more time to act strategically. The five steps we recommend here for building a robust energy strategy are not revolutionarybut systematically applying them to a company's energy use is. By asking five key questions executives can make a richer decision about the initial transaction while establishing a framework to regularly evaluate the total product lifecycle: 1. Demand analysis: Examine your spend for each category and split it by supplier. The aim is to create a cascade of sustainable practices that flows smoothly throughout the supply chain, or, as we prefer to call it, the supply network. It's easier to streamline and integrate systems with a single supplier. The way 7-Eleven has structured each partnership depends on how important each function is to the companys competitive distinctiveness. Tail Spend Analysis: What Is It, How To Perform It, and the Benefits, Supply Chain Risks: Different Types and How To Mitigate Them, Governance Risk Management & Compliance (GRC). Such trends will only accelerate in the future, and those companies that have recognized and prepared for them will be the first to capitalize on them. Sometimes you have to start out small in order to establish yourself and build credibility, and then grow from there to tackle more strategic projects.. So how do you make something thats always been tactical more strategic? Then, compare your spend to the suppliers total revenue. This adds an element of competition, so you can be sure to get the best value. Nov 15 Written By Bilal Malik- Copywriter & Content Strategist Strategic sourcing is the use of a third-party organization to aid in procurement for organizations. Many readers tell us they would have paid consultants for the advice in these articles. Creating a sourcing strategy involves examining how you do sourcing now and figuring out where youd like to be. But unlike other convenience store companies, 7-Eleven doesnt allow Frito-Lay to make critical decisions about order quantities or shelf placement. The battery manufacturer would analyze the market and suppliers, negotiate contracts and terms, build a relationship with their key suppliers, and set themselves up with a strong supply chain by finding alternative suppliers. HR must change its approach to attracting and - McKinsey & Company Have document-sharing platforms in place to make it easy to share information across time zones and departments. Five Critical Questions So how can procurement, supply chain and operations executives help their companies reap the rewards and mitigate the risks of global sourcing? Company executives figured out that their traditional, do-it-yourself approach to creating branded products was cutting the company off from the superior scale, resources, and creativity of major food suppliers. By working with their finance counterparts, strategic sourcing and procurement can give the business much-needed insight into overall enterprise spend. In ourreport with Harvard Business Review Analytic Services, 92% of respondents classified their sourcing technology as less than best in class going into the shift to remote work. A recent Supreme Court ruling put freedom of expression above freedom from discrimination. Mike Barriere, Miriam Owens, and Sarah Pobereskin, " Linking talent to value ," McKinsey Quarterly, April 12, 2018. For example, 7-Eleven worked with Hershey to develop an edible straw based on the candy makers popular Twizzler treat. The company operated its own distribution network, delivered its own gasoline, made its own candy and ice. As globalization and technology transform more industries, all companies will eventually have to let go of that comfortable but simplistic guideline. Yet despite moving at a rapid pace, Keyes remained cautious about losing control and avoided the temptation to take a one-size-fits-all approach to outsourcing. The reason for adopting a vertical integration strategy or an outsourcing strategy is to make a business's operations more efficient. For example, despite having enviable scale in its own transaction-processing operations, American Express, in a prescient strategic move, spun off its transaction-processing business in 1992. In the past two years, it has dominated the industrys vital statistics, with same-store merchandise growth at almost twice the industry average, revenue per employee at just about two-and-a-half times higher, and inventory turns at 72% more than the industry average. The vertical axis of the map measures how proprietary a process or function is; the horizontal dimension assesses the degree of commonality, both within and outside your industry. By allowing Frito-Lay to distribute its products directly to the stores, 7-Eleven has been able to take advantage of the chip makers vast warehousing and transport system. Everything else exists to support the core of the core. Why Would The Irs Send Me A Letter 2022, Articles W