Strategic Sourcing

Strategic Sourcing

Strategic sourcing is a procurement process applied in institutions for continual improvement and re-evaluation of the purchasing activities of the organization (Nishiguchi, 1994). Often, it is considered a component of supply chain management when it is applied in a production environment. In supply chain management it is used as a tool for delivering a number of cost reductions as well as other benefits. To be specific, it is an event that is practiced periodically and that manages to identify and select initial commercial arrangements with a particular supplier leading to either a creation or resetting of a relationship. This paper will compare strategic sourcing to traditional sourcing, the impact of strategic souring decisions on performance in SCM, the features of strategic supplier relationship and the scope that strategic sourcing can be applied in during recession and difficult economic times.

Strategic sourcing
One requirement of strategic sourcing is for the organization to divide their spend into categories which will then be classified based on how important the product or service is as well as on how complex the market place is (Monczka et al, 2005). Both the purchasing organization and the supplier organization must then take into account the various relationships required. Cost might be used as the basis in the least strategic relationship on one hand. On the other hand, the ability to create new opportunities in business or create advances in technology might be used as the basis in most strategic suppliers. The specific formal targeting and searching for suppliers with the aim of filling this role is what constitutes strategic sourcing. Combining strategic sourcing with both strategic supplier management and effective daily purchasing activities would result in a true supply advantage.
The need to focus on strategic sourcing
A core mission of purchasing and supply functions in the past has been driving costs to the lowest possible price points followed by these price points being tracked and reported (Wisner and Keah, 2000). Despite the fact that many CEOs still value cost-reduction initiatives such as this, most of them also believe that the role of purchase and management is not limited to cost cutting alone. Supplier relationships now place priority on reduction of costs, improvement of quality, increased access to new resources and enhanced sales (Kearny, 1997). In addition, the leaders in Kearney’s study who placed value on end-product competitiveness as a basic objective also considered establishing relationships with leading suppliers to be of value. One common practice in these organizations was the providence of strategic positioning advantage and enhancement of revenues by purchasing and supply management professionals.
Organization leaders recognizing the important role of strategic sourcing as well as strategic supply management have an opportunity of being on the center stage as players in the success of their organization. Innovation will arise from the alliances that they will form with their suppliers. New product opportunities will also be identified resulting from the alliances. In addition, they will bring access to advanced technology or new markets and also provide new intelligence that will be used in strategic decision making.

An example of an organization that has strategically selected supplier relations in its sourcing strategy is Cisco systems (a provider of Internet networking material that is based in San Jose, California (Hadeler, 1994). The organization chose to inaugurate a build-to-order program. It also rolled out extranets which would enable suppliers to monitor as well as fulfill the orders of the customers. Introducing this cooperative relationship with suppliers together with the organization’s high percentage outsourcing have made it possible for the company to significantly slim down costs and contributed greatly to its recent growth. This strategy has made it possible for the company to quadruple its output without investing in new plants and reduced the time taken for its products to reach the market by three times. In addition, the close cooperative efforts of Cisco have quadrupled the shareholder value of the company in three years.

Despite the promising benefits strategic sourcing has to offer, not many organizations have managed to apply both sourcing and strategic supplier management. Proactive professionals in purchasing and supply who have chosen to capitalize on working with suppliers with the aim of fostering innovation and to develop markets are still rare. There are organizations that do not place focus on establishment of purchasing processes aimed at creation of genuine supply advantage.

The hesitation to apply process-oriented procurement instead of a transaction-oriented one often stems from the purchasing organization and not the supply base. Majority of suppliers would readily contribute to their customer’s success in any way they could so that their own revenue can increase through improved cooperative relationships. Suppliers are a vast resource which is many times not tapped. Relationships between supply and purchasing can sometimes become a guessing game where suppliers look for ways of determining how they can increase value (Kulkarni, 1997). Many times the customers do not provide the answers. For this to change in the future, purchasing and supply organizations aiming to succeed will have to project some of their core objectives on the sourcing process by basing the choice of supplier on strategic objectives and ensuring that constant evaluation is carried out on current suppliers for the same contribution.

Comparison between strategic sourcing and traditional sourcing
Except for the inherent risks associated with global sourcing, it is known to offer numerous benefits to organizations for instance by lowering the costs of materials and labor. In addition, a much closer integration is required among the supply chain partners. Strategic sourcing differs from traditional sourcing in that it involves the search for and development of ongoing relationships with trading partners that will account for the biggest potion of an organization’s spend (Purchasing funds). Through maintenance of close relationships, provision of materials or services that are main constituents in the eventual product or service is possible or materials/services that can assist the buyer make the desired profit as well as achieve its goal of customer satisfaction (Sheth, Jagdish and Sharma, 1997). Strategic sourcing is different from traditional sourcing in its focus and execution.

Traditional purchasing places focus on purchase price while true cost to the customer is the key focus in strategic sourcing. Price and cost are very different components as making a choice of a component based on the lowest normal price may not necessarily be translated directly to mean low cost. This applies, for example, if the components that are low priced are unreliable and do not last long. It can be illustrated further that the savings initially made in the production of the finished goods will be impacted negatively following shipping back of the fail goods and the repair or disposal of them. These costs of reverse logistics together with the lost business from the unsatisfied customer who was a prospective life customer will greatly impact on the initial savings made in the production of the goods. At the same time, cost reduction can be realized from strategic sourcing through the consolidation of purchases with a limited number of suppliers. In addition, the centralized departments negotiating leverage through economies of scale (the purchase of increased volumes) would be allowed (Wisner and Keah, 2000). Another component that can be reduced by strategic sourcing is frequency of purchasing orders which then translates to a reduction in the inventory handling costs.

Traditional sourcing is transactional and is applied sporadically with each purchase being treated as a discreet transaction. Common communication methodologies include haggling over prices, complaints regarding late shipments or the disruption in product quality. The exchange of information in traditional sourcing that may take place through electronic communication between parties is only tactical such as the billing of orders or the change of orders. A traditional approach to sourcing, which is also termed as ‘buy on the market’, is opportunistic since the purchase made by organizations are made in response to immediate needs and the organization is free to choose from any of the suppliers that can supposedly meet these needs (Kulkarni, 1997). Technical purchasing requirements like specification and certification processes get to be shared between parties in traditional sourcing but not strategies or plans as is the case in strategic sourcing.

In contrast to traditional sourcing, strategic sourcing involves ongoing relationships rather than transactional ones therefore an opportunity for mutually beneficial collaboration between the suppliers and the buyer is available. As a result, each partner in the relationship can benefit from improved profitability all through the supply chain. The value of the final product or service would also have been added. Concepts in SRM and strategic sourcing require a company to share information with its suppliers in real time so that the cost of materials can be cut, inventory minimized, shortages reduced, and deliveries expedited (Christian et al., 2009). Furthermore, the suppliers are given the opportunity to participate in improving the system hence better products will be produced, customer satisfaction will be higher and more customers will get to be retained.

Other differences between traditional and strategic sourcing include the approach, motive, and relationship, number of suppliers, risks, and activities. The approach used in traditional sourcing is an Ad hoc with individual suppliers whereas strategic sourcing utilizes a network approach. The motive in traditional sourcing is solely cost compared to the motive in strategic sourcing which is strategy. The numbers of suppliers in the traditional sourcing are numerous, while in strategic sourcing only few suppliers are involved (Nishiguchi, 1994). Strategic sourcing aims to develop a relationship of trust with the suppliers. On the contrary, traditional sourcing only relates with the suppliers in terms of contract hence their relationship being transactional only. The risk in strategic sourcing is shared between the purchasing organization and the supplier while traditional sourcing places the entire risk on the individual. It is also of note that strategic sourcing applies on a global playing field whereas the playing field of traditional sourcing is national.

Impacts of strategic sourcing decisions on supply chain management performance
Depending on the decision made in strategic sourcing the performance of supply chain management gets to impacted in a number of ways. The decisions reached at depend on the findings from the strategic process initially carried out. The choice to form long lasting and productive relationships with the most reliable suppliers in the market would guarantee reduced costs for the purchasing organization. In the strategic process the company that the organization buys in large volumes would have to be analyzed. The market place for these products would then have to be reviewed. In addition, the economics and usage of the organizations supplying these products would be taken into consideration. A procurement strategy would then be developed and finally an integrated working relationship with the supplier would be established.
Different suppliers have varying profit margins that they seek to obtain from their sales. Also, products from different suppliers come in varying qualities. It is therefore important to not only look at the cost of the product from the supplier but also its quality and the costs associated with quality problems (Monczka et al, 2005). Following this process comprehensively would give findings that would essentially lead to appropriate decisions in the strategic sourcing.
Choosing to purchase from the supplier supplying products at the lowest price would lead to reduction in the cost incurred by the purchasing company. However, the evaluation carried out in the strategic process would reveal the suppliers who are supplying products at a lower price but whose products are of low quality. Low quality products would be supplied at a lower cost but the costs incurred from shipping back the products as well as the costs of repair or disposing them would translate to losses rather than profits for the purchasing organization. Strategic sourcing decisions therefore are based on reliable findings from the strategic process leading to appropriate decisions that will reduce costs.

Flexibility is impacted negatively when the purchasing organization utilizes strategic sourcing. The need to conduct thorough evaluation of the available suppliers as well as the product market puts a restriction to the impulse decisions regarding which supplier to purchase products from. The decision regarding which supplier to form a relationship with and at what price to purchase products has to wait for the evaluation to be carried out and the trend to be observed for a short time. As a result of this strict process, the purchasing organization is not flexible in its operations as it would have been had there been no strategic process to determine major decisions.
The time products take to reach the market gets to be extended by the strategic sourcing decisions. In the traditional sourcing, the process taken before the decision to transact with a particular supplier was reached was not long. The supplier offering products at low price was recommended since the costs of the purchasing organization would be reduced in this instance. However, strategic sourcing requires a particular process to be followed before any decision regarding suppliers is to be reached. As a result, the products take longer to reach the market (Roth et al, 2008). However, in the long-term the lead-time becomes shorter as the relationship created between the purchasing organization and the supplier ensures information regarding demand of products is passed on in time hence products get to be made available in time and reach the market much faster.

Strategic sourcing decisions affect the quality of performance in chain supply management in a positive sense. Strategic sourcing requires the purchasing organization to evaluate the various suppliers and form a mutually beneficial collaboration with one or a few of the top suppliers. This relationship between the purchasing organization and the chosen supplier is supposed to be based on trust and reliability. If there any supposed changes that are predicted to apply in the near future, the supplier is expected to inform the purchasing organization. The purchasing organization is required to inform the supplier of the products that they will order in the future so that the supplier will ensure they are available at the time they are needed. This will avoid the supply of low quality goods when products are demanded but they are not immediately available. In addition, the close relationship between the two parties will lead to satisfied customers and more customers will be retained. In the long run, the quality of performance will be improved since all the parties have nothing to complain about and the products supplied are of high quality (Monczka et al, 2005).

Value is added when strategic sourcing decisions are applied. As a result of the satisfactory relations between the suppliers and the purchasing organization, shareholder confidence will be increased hence the value of shareholder stock will increase. An increase in the value of shareholder stock attracts investment from interested parties in the organization (Hadeler, 1994). High quality products being produced due to the effective communication between the supplier and the purchasing organization on manufacture and supply adds value to the performance of the SCM.

Features of Strategic Supplier relationship
As the market place becomes increasingly competitive, firms are seeking new and creative approaches that will enhance a competitive advantage. A strategic function that is playing a key factor in competitive positioning in present day is purchasing. Strategic sourcing in supply chain management places a lot of value in the relationship between the purchasing company and the supplier. Good relationships with both customers and suppliers would impact positively on the purchasing organization with increased satisfaction being observed in the three parties. It is with this logic in mind that strategic sourcing applies the enhancement of supplier relationships.
Majority of alliances do not last long especially if the selection process was not done comprehensively enough (Wilson, 1995). Common features of supplier relation can be summed up into two big elements namely; selection and maintenance of supplier relationships. In the selection, a competent and high quality criterion should be used. The success of the relationship is dependent on several factors such as mutual benefit, management support from the senior leadership and trust and commitment to the realization of long-term goals. The suppliers and buyers are required to demonstrate trust and commitment toward the achievement of a long-term goal, objective of vision. With trust and commitment in the relationship, common barriers to success get to be eliminated. Another feature is mutual benefit whereby both the buyer and the seller get to benefit from the relationship. If one party was to desire to benefit without taking into consideration what the other party wants from the relationship, soon enough the relationship would have to die.

The strategic team in the firm needs to have support from the top management if the supplier relationship is to get any success. Examples of companies whose top management has offered support to supplier relationships hence leading to the success of the relationships include Wal-Mart, Roadway Express, DuPont, and Corning. The CEOs of both Wal-Mart and Corning have supported supplier relationships and as a result the relationship of the two organizations is successful. Similarly, Roadway Express and DuPont have established an Executive Board which coordinates the meetings of both organizations therefore improving their relationship (USGAO, 1994).

Compatibility of the organizational culture is the other feature. The two firms planning to form a relationship should have culture that is compatible. Sharing common values and common reward systems, for instance, would make it possible for both firms to have a foundation of relating. Two telecommunication firms can, for example, fail to realize a successful supplier relationship if their work philosophies are different. With one firm having an intense work philosophy and the other a laid back philosophy, it would not take more than six months before the relationship fails (Fong, 2008).

Information is also very important in supplier relationship as well as the need to share it. Transaction oriented exchanges posses a lot of uncertainty. Relationships set in to reduce this uncertainty. Bothe parties become more certain when they share information and interact less needlessly. Bailey Controls is an example of control systems manufacturer that shares idea with two of its main electronic distributors and as a result its inventories and costs have been reduced (Magnet, 1994). Sometimes misunderstandings occur between the two companies that have collaborated. However, these misunderstandings can be reduced if the two organizations were to practice open and strong communications. In addition, the quality of the relationships would be enhanced once the open and strong communications are applied.

The contract made between the two firms needs to be simple and flexible in order to enhance the relationship since contracts guide the two parties rather than specifying every contingency. Kodak’s contract with IBM when Kodak outsourced its computer support services to IBM ran eleven-pages compared to the contract applied in typically small businesses which run an estimate of 30 pages. For a supplier relationship to be well maintained the management of both firms needs to be intensively involved. Cross functional teams from the two firms get to meet periodically with the aim of enhancing their relationship. Ford can be used as an example whereby its salespeople are used to provide consumer feedback to its suppliers (USGAO, 1994).

Performance monitoring is very important for relationships. To be specific, formal performance valuation appeal to suppliers even more. Motorola, for instance, conducts evaluations and then a score card is generated for all of the company’s suppliers (Magnet, 1994). These suppliers base their next order on the previous performance of the supplier. This knowledge is appreciated and considered to make them compete better. Internal controls are another feature in supplier relationships. Both companies have an obligation to protect confidential information from being accessed and distributed through rigorous internal controls. In every relationship, be it a doctor-patient relationship, parent-child relationship, and even lovers relationships, conflicts arise at one time. In anticipation of such scenarios, problem solving procedures should be established in order to reduce more conflicts or prevent them (Sheth, Jagdish, and Sharma, 1997). One way this can be achieved is through the application of frequent communication at the various levels of the customers and Supplier Company.

Strategic sourcing in difficult times
The recent recession has affected the whole world with each region experiencing varying effects. The Centre on Budget and Policy Priorities reported that 44 of the 50 states experienced a negative growth for the 2012 Fiscal Year with the shortfall of some states being more than 20 percent of their 2011 General Funds expenditures. The current budgetary crisis was so severe because the revenues were far less compared to previous recessions (Christian et al., 2009). This applied despite the fact that many people were eligible for services funded by the government as a result of job losses.

The same problem is experienced in Canada where the provinces have been put in a fiscal hole at a time when an aging population us projected to increase budgetary demands. The budgetary predicament being experienced at the moment is not a new one, but possibilities of it fading into the background any time soon are almost impossible. The situation created by the recent recession requires immediate action to be taken in fixing the budgetary challenges presently in play. Strategic sourcing would be a recommendable approach in such a time of difficulty. Strategic sourcing would utilize the private sector since it allows private organizations to be competitive in accordance with the prevailing market conditions and be transparent at the same time (Christian et al., 2009). Currently, though, not many states and provinces are applying strategic sourcing and those that do, do not seem to take complete advantage of the opportunities it offers.

Strategic sourcing focusing on making purchases in a way that money is saved based on initial gathering of detailed requirements, conduction of a market analysis in order to understand the business needs better and the application of the strategic process on supplier management. If these practices were to be aligned with current marketplace practices, the government would be able to leverage its buying power considerably so that it can get better prices as well as better services (Nishiguchi, 1994). The scope of strategic sourcing is not limited to cost reduction alone, but also long-term initiatives such as organizational restructuring and capability building. The practice of strategic sourcing rationalizing the sourcing process from a holistic total cost perspective ensures that the need for low costs does not blind the organizational in question from other costs that result from the purchase.

Similar to the desire of governments to embrace strategic sourcing in recession and during economic recovery, purchasing organizations can also benefit from strategic sourcing in hard times. Strategic sourcing starts with data collection on the available suppliers and an analysis to develop a deeper understanding of where and how the organization spends money on purchases (Nishiguchi, 1994). During the assessment the suppliers are comprehensively evaluated as well as the product market. At the end of the assessment, the findings presented provide a baseline for decisions to be made regarding which supplier to form a long-lasting relationship with and which practices the organization needs to improve on. Following the assessment, the trends found get to be monitored for some time. Recession causes the prices of commodities to rise and introduces tension and panic in the market place. As a result, the market trends cannot be understood well enough without thorough and comprehensive analysis of the market place and the related players in the market. Strategic sourcing ensures a detailed analysis is carried out and a short period is allocated to monitoring of the market trend.

Strategic sourcing is therefore the best approach in a time like this as it works based on reliable statistics obtained from the strategic process. The decisions made from the strategic process are appropriate leading to reduced costs which are really needed in a marketplace that is characterized by high product prices. Most organizations continue to experience losses despite choosing suppliers offering products at lower costs (Christian, 2005). However, there are other causes that result from a purchase which should be taken into consideration before a purchase such as the costs of shipping back products which are of low quality and additional costs of repairing them or disposing them. Strategic sourcing takes into account the total costs in its evaluation therefore avoiding such inconveniences.

During economic recovery, organizations strive to get a hold on their position in the market as the conditions get to get better. Strategic sourcing ensures improved quality, reduced costs and creation of mutually beneficial relationships with one or a number the suppliers (Hadeler, 1994). The improved quality attracts more customers, the customer satisfaction from the trust based supplier relationship ensure customers are retained and the long-lasting relationship created with the supplier breeds loyalty hence any hiccups in the market place or the economy would not affect the purchasing organization since it is confident that the supplier is loyal to them at all times.

Strategic sourcing has over time gained popularity regarding its efficiency and reliability. A number of differences exist between strategic sourcing and traditional sourcing including its focus, number of suppliers, and type of activities, risks, and scope. Strategic sourcing decisions get to impact on the performance of supply chain management in a number of ways. It leads to reduction in costs, improvement in quality, reduced flexibility, longer lead-time, and added value. Several features are found in strategic supplier relationship such as the need for trust and commitment to long-term visions, mutual benefit, communications that are strong and open, support from top management, information sharing, and application of problem solving procedures. Times of recession and economic recovery are characterized by unpredictable market changes and high product prices. Strategic sourcing is a recommendable approach in such times as it works under reliable statistics and avoids impulse purchases ignited by false trends and baseless supplier decisions.

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