Evolving Strategic Sourcing – A Paradigm Shift

Evolving Strategic Sourcing – A Paradigm Shift

Srinivasan Sarangapani

Summary :

Strategic sourcing is a complex commercial process requiring extensive knowledge and

competence. It is satisfying business needs from markets via the proactive and planned analysis of supply
markets and the selection of suppliers with the objective of delivering solutions to meet pre -determined and
agreed business needs. It is advisable for organizations to shift from the Reactive and Tactical sourcing
process and evolve the Strategic Sourcing process. The Implementation of Strategic Sourcing needs Top
Management buy in and High level of competence in doing various analysis to arrive at an optimum
source. The Strategic Sourcing Organization should be highly placed for an easier decision-making. An
extensive market driven analysis should be carried out for implementation of the Strategic sourcing of an
Organization wherein the Organization’s position in the market place is the prima force. The current supply
chain should also be mapped for an effective implementation of the Strategic sourcing. The Analysis
provides with extensive data analysis leading to weighing in the various options and arriving at a sourcing
Plan. The source Identification and strategizing follows the set procedural path making Strategic sourcing
an excellent tool generating bottom line growth and rationalizing the supply chain costs.

1.0 Introduction:

Strategic sourcing is a pivotal activity for purchasing and supply management professionals. It is
relatively important to draw a distinction between Strategic, Tactical and Reactive sourcing. Each
organization should as a priority develop an overall sourcing strategy, of which strategic sourcing should be
seen as a key element. The formation of a Sourcing Board or Panel for discussing strategies and assisting
with decision-making is important in the Effective functioning of Strategic sourcing. The key stage in the
implementation of a strategic sourcing policy is an As-is Analysis. Once the relevant data has been
gathered and consolidated, and appropriate options generated, the outcomes should be presented to senior
management for their consideration. In developing, analyzing and comparing a range of strategic sourcing
options the use of weighted evaluation criteria is recommended rather than simply using cost/price as the
sole basis for arriving at a decision.

• Once the preferred strategic sourcing option has been finalized, the purchasing and
supply management function in the organization should have a key role to play in its
implementation.
• The Strategic Sourcing options should be assessed in terms of the benefits that they
actually deliver as opposed to those, which they may have been expected to deliver as, set
out in the original business case.

Traditionally, sourcing was considered to be the identification of new or potential suppliers. This
is of course still a fundamental aspect of strategic sourcing but this white paper aims to illustrate how the
function has developed and expanded in recent years.

This White paper describes best practice Purchasing and Supply management; encouraging
purchasing and supply management professionals to endeavor to move purchasing and supply management
in their organizations towards strategic sourcing. However, it also appreciates that some organizations are
Evolving Strategic Sourcing – A Paradigm Shift

bound by legislative requirements that demand a different, (or in some cases, a complementary approach)
to that proposed in this white paper e.g. Public sector enterprises and governmental agencies.

2.0 Categories of Sourcing: Reactive, Tactical and Strategic

2.1 Reactive Sourcing

Reactive sourcing as being a procurement approach where no proactive sourcing strategies have
been put in place and so the purchasing and supply management function has an entirely reactive role e.g.
responding to requisitions or other unexpected requirements from the business. It is better the Purchasing
and supply management professionals to move away from this method of sourcing, wherever possible.
However, some organizations still operate entirely on the basis of unexpected demand responding to
individual needs as and when they arise. This response may be professional, but the buyer behavior is
transactional, low level and will not necessarily enhance or promote the purchasing and supply
management profession.

2.2 Tactical Sourcing

Tactical sourcing is to some extent reactive as it covers those business requirements that cannot be
planned in advance, but are provided within a framework of strategic sourcing. It is however, proactively
managed and so resources and processes are set aside to manage it within the purchasing and supply
management strategy An example of tactical sourcing is working with colleagues in Marketing and Sales,
pro-viding a bid support activity within fast moving technology areas. Notwithstanding the above, there
should be no unplanned or unexpected capital expenditure as all organizations have capital investment
plans which purchasing and supply management professionals should obtain and incorporate in the
strategic sourcing strategy.

If an unexpected requirement is ad hoc, low risk and low value, purchasing and supply
management professionals should not be involved with obtaining the requirement anyway. All low-value
requirements should have been aggregated into call off contracts for use by end users; those that are low
value, yet high risk, are precisely those that require strategic sourcing plans.

2.3 Strategic Sourcing

Strategic sourcing is a core activity in purchasing and supply management. It is a comple x

commercial process requiring extensive knowledge and competence.

It can be defined as ‘ satisfying business needs from markets via the proactive and planned
analysis of supply markets and the selection of suppliers with the objective of delivering solutions to meet
pre-determined and agreed business needs’.

3.0 Implementation of Strategic Sourcing

Developing the strategic sourcing strategy is a fundamental part of the purchasing and supply
management process. Strategic sourcing is a logical process involving the application of tools by skilled,
competent and knowledgeable people; however - developing and implementing strategic sourcing is a
functional process.

Since it is such a broad area, the Paper will focus on the subjects in a brief manner, A Strategic Sourcing
analysis model can be seen in Fig 1

3.1 Positioning Strategic Sourcing:

Positioning Purchasing and Supply Management for Strategic Sourcing is a very critical step in
the whole process. Every purchasing and supply management function needs to develops a written, and
Evolving Strategic Sourcing – A Paradigm Shift

regularly updated, overall strategy which states their objectives and activities over a given timeframe. The
strategic sourcing activity should form one part of the overall purchasing and supply management strategy.
The first stage in implementing strategic sourcing is the positioning of the purchasing and supply
management function within the organization. In order to undertake strategic sourcing, purchasing and
supply management must be positioned at the appropriate level (senior) within an organization and should
report to the Board (or via an appropriate Board representative) and it must possess suitable human
resources. Strategic sourcing requires the application and interpretation of sophisticated strategic sourcing
tools and techniques such as relationship management, by suitably authorized and competent professionals.
In order to sustain the high level position, resources and influence, the purchasing and supply
management professionals responsible for strategic sourcing should create a suitable governance structure
so as to:

• Illustrate where the purchasing and supply management functions sits within the
organization e.g. alongside Finance, Legal, Human Resources ·
• Illustrate the role of the function itself and those people that carry it out - the purchasing
and supply management function's terms of reference, scope of responsibility and
objectives.

The purchasing and supply management function should create a Sourcing Board (sometimes
referred to as a ‘Procurement Board/Panel’) comprising, decision makers, opinion leaders and influencers.
The Sourcing Board should be used to discuss strategies, policies, approaches, assist with decision making
and to help influence others in the organization on behalf of the purchasing and supply management
professionals.

3.2 As – Is Analysis:
Evolving Strategic Sourcing – A Paradigm Shift

This is a very resource-consuming stage in strategic sourcing which includes establishing:

3.2.1.Customer and Business requirements:

• What do our customers need and what does the business need? An analysis of getting the
Customer and Business Wants / Needs.

3.2.2. Spend analysis:

• A historical usage analysis of various goods or services the business is in.
• How the Supplier positioning is
• A Supplier historical analysis
• Analysis on Transaction cost.
• An Analysis on critical nature of products.

3.2.3 Future spend analysis

• Establish a Forward/ Expected usage of goods and services in your business.
• Trends in the market on the Goods/ Services you procure.

3.2.4 Market analysis

• Assessment of the market capability, how the market is going to behave and what is the
general Market trend.
• Analysis of power dependency in supply chains, which department has the Maximum
power wield.
• Analysis of individual marketplaces
• Supplier preferencing
• Relative positioning of your organization with respect to your competitors and similar
industries.
• Supply chain cost analysis
• The nature of the market and how it behaves and responds to the fluctuations.
• What type of Sourcing Strategy - global, regional or local will be applicable for the
Organization.
• Potential size (and actual size) of the supply base.

Several analytical tools can be used as appropriate for this stage including Porter's Five Forces,
PEST (Political, Economic, Social, Technological) and SWOT (Strengths, Weaknesses, Opportunities and
Threats).

3.3 Mapping Supply Chains

The process of mapping supply chains can be complex and the extent to which it is undertaken is
dependent on the value and risk of the procurement in question and limited by the resources allocated to
strategic sourcing by the organization. The ‘As-is’ analysis and ‘Mapping’ stages can take typically
between three and six months. The timeframe is too long for some organizations and more over
impracticable for some procure ment situations. However, the longer-term benefits of such proactive
strategic sourcing are invaluable.

The Best practice supply chain mapping generally includes:

• Identifying profit and gross margins in supply chains

• Understanding interdependencies in supply chains e.g. power dependency
• Mapping the required products and services onto these supply chains
• Analyzing spend by each supplier in respect of category and business unit
• Buying patterns by product, service, supplier, and business unit
• Sourcing patterns
Evolving Strategic Sourcing – A Paradigm Shift

• Pricing patterns - both past and forecasted, and also purchase price analysis
• Historical performance of suppliers
• Historical market trends and associated cost drivers (there are specialists in various fields)
• Value chain analysis
• Identifying and addressing dominant players in the supply chain
• Critical asset analysis (i.e. identify your critical assets which should be borne in mind when out
sourcing)
• Technical analysis - alternative solutions to specification of requirement
• Risk assessment
• Cost modeling
• Portfolio analysis
• PEST analysis
• Complexity reduction i.e. standardization
• Ascertaining the demand e.g. formulating the requirements
• Demand challenge - does the organization need the ‘requirement’ (Defer, Diminish, Delete)
• Market potential/market modeling
• Determining the policy areas that need to be accounted for in sourcing - environmental and ethical
policies for e.g. determining funding.

3.4 Consolidate Data and Generate Options for Strategic Sourcing

Once the analysis has been undertaken and supply chains have been mapped, the next stage is to
consolidate the data and to generate options. Although not ideal, where resources are tight, in terms of time
and skills availability for instance, it is possible to omit some of the analysis stages and go direct to the
brainstorming of options. It is good practice to undertake all stages in strategic sourcing but where this is
not possible, it is better to attempt some aspects of it than not undertake it at all. Options should be
perceived as ‘baskets of opportunities’. In summary, this stage involves brainstorming options to fulfill the
requirements, such as identifying the offering of suppliers and identifying whether there are other ways to
fulfill the requirement e.g. instead of pur-chasing PCs i.e. goods, rather purchase a desktop service i.e.
outsource the PC desktop provision. Another example would be instead of buying meters, buying a billing
service including meter reading and customer billing.
The process of generating options is an iterative process in that colleagues examine, discuss and
criticize options and their feedback stimulates the production of further options. Having brainstormed a list
of potential options the strategic sourcing team should subject each to a SWOT analysis and where
appropriate, a detailed risk analysis. The options that seem to be the most favorable are then prioritized on
the basis of the benefits and savings that they can deliver. Clearly, any pro-posed strategic sourcing plan
must fully support the organization’s objectives. Examples of options include
Make/buy options; dual/single source decisions; feasibility of starting up partnerships with suppliers;
benefit sharing etc.

3.5 Selection of the Strategic Sourcing Options

Once a range of suitable strategic sourcing options has been identified, these should be presented
by Senior purchasing and supply management professional(s) to the organisation's directors or Sourcing
Board to be considered in the light of where the business currently stands and what the customers require.
Occasionally, the strategic sourcing teams will be required to investigate further, or support their
suggestions with business cases, ROI (return on investment models) and so on. Equally, the organization
may require further options, or clarification or changes to those options preferred.

If a purchasing and supply management function is insufficiently resourced, the presentation of

such strategic sourcing options can be a means of securing more appropriate levels of resource from senior
directors. Equally, where the purchasing and supply management professional's impact on spend is limited,
or where bought out expenditure is only 20% of turnover, the presentation of strategic sourcing options to
senior directors, may be seen as a method of:
• Increasing the strategic sourcing remit.
Evolving Strategic Sourcing – A Paradigm Shift

• Increasing other value-add of the purchasing and supply management function i.e. not
simply price reduction.
• Penetrating aspects of the business that can be transformed into bought out expenditure,
via out sourcing for instance.

3.6 Sourcing Plans

Once the preferred strategic sourcing options are agreed, these are developed into ‘Sourcing
Plans’, which should be innovative and creative solutions to the organization’s requirements in support of
the organization’s mission and objectives. Strategic sourcing plans should generate work-streams i.e. clear
milestones to be achieved with resources e.g. project teams allocated appropriately. This is where the
process of acquisition begins involving design teams, outcome-based specifications, market development,
advertisements, and policy compliance for instance. Strategic sourcing plans include determining processes
for tenderer and supplier selection and performance criteria ensuring the supplier continues to meet
customers' expectations.

A weighted evaluation criteria when determining the preferred options as this is one method of
persuading internal colleagues that purchasing and supply management is not focused on price and cost
alone but considers issues such as speed to market and other appropriate and relevant criteria. Therefore
Strategic Sourcing plans will include producing and managing the Invitation to tender process, conducting
negotiations and everything up to the recommendation of contract award.

4.0 Identifying New Suppliers

Traditionally, sourcing has been perceived as the identification of new or alternative suppliers e.g.
sources of supply. Methods of identifying suppliers have included:
• Internet e.g. suppliers' own pages and B2B trade bulletin boards
• Trade associations and trade directories
• Business directories like Thomas registry, Kelly's, Sell's etc.
• Supplier exhibitions
• Networking with other buyers
• Talking to specialist end users.

This process is now part of the strategic sourcing work streams i.e. only part of the sourcing
process. Following the development of strategic sourcing plans and the identification of work streams, the
purchasing and supply management function should facilitate the implementation of the strategic sourcing
strategy. This may involve helping with, or leading, the contracting process, educating the internal
customer or order placer; enabling the supplier e.g. getting the supplier ready to deliver by developing and
managing them etc. In many larger organizations, the strategic sourcing part of purchasing and supply
management is what purchasing and supply management professionals are primarily involved with. They
are rapidly becoming less involved with the other aspects of contracting; i.e. purchasing and supply
management professionals have trained colleagues to manage the less strategic and more straight-forward
aspects of purchasing and supply management.

5.0 Measurement

All strategic procurement, including the design and implementation of sourcing plans, should be
measured in terms of the benefits that they are delivered compared with what they were expected to deliver
as set out in the original business case. This might take the form of a post-contract audit perhaps one year
after the contract had been let. The findings should be reported to and discussed by the purchasing and
supply management professional(s) and their Sourcing Board in order to learn from experiences and build
on current commercial arrangements.
Evolving Strategic Sourcing – A Paradigm Shift

6.0 Conclusion

An effective sourcing expertise is a key element in the purchasing and supply management
professional's tool kit. Increasingly, the term ‘Sourcing’ is incorrectly replacing the terms ‘Procurement’ or
‘Purchasing’ or ‘Supply Chain Management’. Strategic sourcing encompasses aspects of all of those
activities and is not a replacement activity. Strategic sourcing is a skill set which must be learned,
developed and refreshed. Strategic sourcing, as described in this paper, is a relatively new skill set for
purchasing and supply management professionals. It requires great resource and excellent management
information and so only some organizations are currently in a position to implement it.
Further, strategic sourcing should only be carried out by competent and knowledgeable
professionals having the requisite Industry and sourcing Knowledge. This paper is to make a clear
distinction between reactive, tactical and strategic sourcing and encourages purchasing and supply
management professionals to move away from the former and to take a more proactive and strategic
approach.
So, Strategic Sourcing, and as appropriate tactical sourcing, have a vital role to play in the overall
corporate plan with the potential to make a significant and positive contribution to the bottom line.

Bibliography

1. JR Tony Arnold, Stephen N. Chapman, Introduction to Materials Management, Thompson

press, 4thEd.
2. Sunil Chopra, Peter Meindl, Supply Chain Management- Strategy, Planning and
Operations, PHI,2nd Ed
3. Institute of Supply Management, CPM Study guide, 1997
4. Monczka, Trent, Handfield, Purchasing and Supply chain Management, Thomson Press, 2nd Ed.
5. www.ism.ws
6. www.apics.org

The Author is a Demand Planner for GE Aircraft Engines working with the Analytics Centre of excellence
of GE, Bangalore. He is a CPIM (APICS), CPM (ISM) and has extensive experience on Sourcing and
Supply chain in the Automobile and Compressor Industry. He was formerly Head of materials at the
Reciprocating Compressor Division, Elgi Equipments ltd, Coimbatore and also a Senior Executive -
Purchase at Ashok Leyland , Hosur . You can get in touch with him at
srinivasan.sarangapani@mail.ad.ge.com.