What's Your Sourcing Strategy?
Having a current, flexible sourcing strategy can not only reduce costs and increase efficiency, but also serve as a competitive advantage to help organizations increase the top line.
Supply chain costs, primarily procurement and transportation, can range from 50 to 70 percent of sales, depending on industry. So it is critical to spend considerable time on developing your organization's strategy. Periodically reviewing your sourcing strategy ensures you will achieve desired results and continue to align with business objectives.
Successful sourcing requires a thorough understanding of a company's business strategy, the resources required to deliver that strategy, and the market forces and unique risks within the company associated with implementing specific approaches.
Some sourcing strategies to consider:
- Outsourcing. Having suppliers provide goods and services that were previously provided internally.
- Insourcing. Delegating a job to someone within the company.
- Nearsourcing. A business places some operations close to where its end products are sold to save time and money.
- Vertical integration. Merging companies at different stages of production and/or distribution in the same industry. When a company acquires its input supplier it is called backward integration; when it acquires companies in its distribution chain it is called forward integration.
- Few or many suppliers. A many-supplier strategy is commonly used for commodity products and purchasing is typically based on price. Single-source purchasing refers to purchases from one selected supplier, even though other suppliers provide similar products. Sole-source procurement refers to purchases with only one supplier. Single- or sole-supplier relationships can be high risk, but reap big rewards.
- Joint ventures. A business entity created by two or more parties, generally characterized by shared ownership, shared returns and risks, and shared governance.
- Virtual enterprise. A network of independent companies (i.e., suppliers, customers, competitors) linked by information technology to share skills, costs, and access to one another's markets.
In many organizations, procurement focuses primarily on cost reduction, which perhaps should be one focus if the company has a cost reduction strategy. In today's competitive world, however, where most companies don't focus only on cost as a strategy, there tends to be more emphasis on creating value, while not ignoring cost and waste reduction.
Finding Value Areas
In general, moving toward lean procurement will help you increase total value. While concepts such as just-in-time are lean tools that focus on inventory waste, many other areas in procurement can benefit by:
- Improving the procurement process itself as well as workflows; thereby reducing time and eliminating waste.
- Reducing or lowering costs while improving both product and service quality.
- Improving supplier performance and responsiveness.
- Increasing focus on activities that add value to the firm.
- Enhancing procurement's strategic rather than transactional focus.
Implementing an agile sourcing strategy provides a competitive advantage to help companies lower costs and improve efficiency.