Sourcing Strategies

What are your company’s sourcing strategies, and is your company getting the benefits needed when executing these strategies?

As everyone knows, companies rely on the revenue streams generated by their product lines.

Procurement, in addition to supplying raw materials, is being asked to provide a competitive advantage when doing so. This advantage may depend heavily upon procurement’s sourcing strategies.

Levels of Sourcing Strategies

There are five different levels of sourcing strategies that companies typically transition through. Throughout these stages, there exists cost reduction and supply chain management opportunities. Each of these stages have criteria that cross-over into an adjoining stage, depending on how the company defines and applies the definitions. The stages are described below.

Entry-Level Sourcing Strategy – Stage One. This is the basic level of sourcing strategy, i.e., a buying company begins realizing the need to find credible sources of supply. If needing a source to manufacture a product, it is primarily concerned with obtaining a quality product and getting delivery on-time.

Progressive Sourcing Strategy – Stage Two. The company is growing so its purchases are increasing. With the growth of product lines, there have been increases in the volume and the total spend for raw materials. Increases in purchases offers the company opportunities to generate multiple supplier inquiries and as such seek competition. The company begins leveraging its buys.

Strategic Sourcing – Stage Three. The company’s success in sourcing, during the first two stages, creates interest in reducing costs to further the business objectives. Reduced raw material costs can help increase margins, or reduce sales prices yet maintain margins. Global sourcing is now a consideration, as the company looks to ‘low-cost’ countries for additional reduced costs. Procurement begins searching for strategic partners for its raw material purchases, and considers long term agreements to fix purchase price. If the right supplier partner is found, more information and technology is exchanged as a partnership and ‘trust’ begin to develop. Supply base rationalization begins.

Advanced Strategic Sourcing – Stage Four. The buying company looks to take advantage of the synergy when partnering with preferred suppliers. Efforts are made to use cost analysis and value engineering. Early Supplier Involvement programs are launched. Supply base consolidation continues. Strategy formulation is conducted between the buying company and its preferred partners to gain advantages.

Competitive Advantage – Stage Five. At this stage, the buying company is working to position itself competitively using its supply base and strategically manage costs. The buying company is working to create ‘trust’ at all levels in the supply chain. There is a concerted effort at multiple levels throughout the supply chain to form partnerships and begin looking at ways to reduce the ‘total cost’ of doing business together.

The Bottom Line

There are different levels of sourcing strategy. It is important to identify your company’s current level of sourcing to develop actions to achieve the goals of your company. There are cost reduction and supply chain management opportunities at each level of sourcing strategy. Developing and executing a sourcing strategy can provide a competitive advantage to your company.

Related Topics

Sourcing and Procurement. Is your company’s sourcing and procurement program robust enough today, to meet global competition, in both cost and delivery? For more on this topic, please follow this link.

Supplier Sourcing. It is important that the company pay fair and reasonable prices for these products and services. This can depend heavily upon the development and execution of the company’s supplier sourcing strategies. For more on this topic, please follow this link.

Procurement Strategy. Today, Procurement spends half or more of every dollar the firm receives in support of operations. Because of this, the Procurement group is expected to bring value to the entire business enterprise. To learn more how Procurement strategy is helping the firm to make ‘targeted profits,’ Please follow this link.

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