Taking Sourcing to The Next Level
Sourcing is a critical business function that has significant impact on an organization’s bottom line. Sourcing and Procurement spending can account to as much as 50% of an organization’s total annual expenditure. An effective sourcing model must have the essential elements such as identifying the targeted spend areas, creating the sourcing team, developing a supplier portfolio, and managing supplier relationships. Effective sourcing and procurement practices help enterprises save and reinvest in driving improved performance. As a result, procurement teams are playing increasingly important role in managing spend and optimizing end-to-end sourcing and procurement across the organization.
Historically, sourcing has served a function that was more transactional in nature. Sourcing organizations made their decisions primarily on pricing and delivery and was not fully in tandem with corporate vision in its buying decisions. Sourcing today is increasingly working more closely with various silos within the organization in order to operate at its maximum efficiency. There are two primary sourcing methods than an enterprise can use.
Tactical Sourcing
Tactical sourcing is a more short-term, transactional approach to procurement and is typically used by smaller enterprises. Sourcing decisions are based on fewer criteria, based primarily on price and available delivery dates in tactical sourcing.
Using the tactical model, a procurement department purchases materials based on need and do not necessarily take into account other factors such as total cost of ownership (TCO) or the objectives of the larger organization. TCO is a framework to evaluate the complete lifecycle of purchase and includes acquisition, operation and personnel costs.
Strategic Sourcing
Strategic sourcing is an approach that is normally used by larger organizations and involves a longer-term focus. Using a strategic approach, enterprises do not only base their purchasing decisions on availability and price but also work to reduce the TCO as much as possible.
There are multiple steps that enterprises can take in implementing strategic sourcing however, three of the most important steps are identifying opportunities, performing a need analysis to establish gap-closure strategies as well as implementing a transformational plan.
Good communication also plays a key role in this process as it facilitates continuous improvement initiatives between the partners. It is imperative to emphasise innovation around commercial models and technology as these have the potential to yield great rewards.
Benefits of Strategic Sourcing
Increased Profit
Every rupee the enterprise saves in procurement directly goes into the P/L bottom line and effective sourcing systematically aims at savings from the whole supply chain, offering a competitive advantage to the company.
Managed Supply Risks
Strategic sourcing needs every supplier as well as every category of spend to be analysed. All existing supplier is separately assessed for financial risk, availability and quality risk and level of cooperation. Once an enterprise has visibility on the risks, a framework for mitigating the risks can be put in place.
Improved Sustainability
Strategic sourcing not a one-time project or initiative but a continuous cycle. Category managers within the team keep an eye on supplier performance and category. With every succeeding cycle, they can go deeper to identify additional opportunities to bring value to the enterprise.
Procurement & Sourcing departments need to take centre stage in any digital transformation initiative at it is one of the greatest opportunities for Sourcing and Procurement today, comprising three main requirements that together lead to a successful digital organization. The first requirement is the development of tools that support all of the main functionalities across the digital procurement landscape. Second, enterprises must ensure digital adoption by creating a high-quality user experience. The final requirement is to incorporate current and future technologies including automation, big data, and block chain.
The application of digital technologies to procurement and sourcing is already bringing a vast change in the impact it is delivering. These include:
- Faster and more efficient sourcing through e-tendering tools and related analytics
- Greater visibility and control through smart contracting
- Insights through better data visibility
- Improved operational efficiency through automated processes that increases process agility
- Real-time spend management through machine learning and sophisticated algorithms
- Forecasting of demand using advanced analytics
Sourcing and Procurement automation is the answer to simplifying the day to day tasks and can bring much value to the function with respect to improving spend visibility, improve supplier relationships and boosting overall productivity.
Automation Opportunities in Sourcing & Procurement
E-Sourcing
E-Sourcing automates the entire tender process so that it involves minimal efforts from the buyer organization and helps find the best suppliers and prices for the business’ needs. Processes such as cataloguing, tender creation, response analysis and contract awarding could be automated based on pre-determined criteria.
Supplier Relationship Management
Enhancing supplier relationships is a promising way to reduce supply chain risk. Enterprises are increasingly relying on Supplier Relationship Management (SRM) solutions to create a centralised environment for buyers to communicate with suppliers, have easy access to relevant information and seamlessly engage with their suppliers.
Supplier Selection using Machine Learning
Supplier selection and sourcing from the right suppliers is an increasing concern for many supply chain organizations across the globe. Machine Learning can help predict the best possible scenario for supplier selection and risk management. Information generated from SRM actions, such as supplier assessments, audits, and credit scoring provide an important basis for further decisions regarding a supplier. With the help of Machine Learning, supplier selection can be more predictive and accurate.
Supplier Collaboration
Enterprises need to collaborate with all supply chain players to gain visibility in the quality and delivery processes in their upstream supply chain. Supplier Collaboration automation helps enterprises visibility into supplier information that is in most cases fragmented across the company’s departments. It turns inaccurate, inconsistent, or disconnected information into clean, consistent, and connected information.
Contract Management
Contract management tools enable the business to easily manage their entire supplier database from a central location. Availability of supplier contracts makes it easier to recognize service delivery issues, including non-competitive and/or non-sustainable pricing terms and slow service times.
Leading Marketing Services Enterprise Implements E-Sourcing to Save Procurement Costs
The organization needed to streamline the procurement process and enable competitive sourcing for productive services. The company utilized an existing platform to procure services from its network of suppliers. However, this system was designed to only manage the purchase order and requisitioning process and did not have the strategic sourcing capabilities needed to drive savings and improve efficiencies. The organization wanted to add e-sourcing capabilities to their procurement process. The ability to integrate e-sourcing into their existing platform was an important requirement, to ensure minimal disruption and continued utilization of their existing platform and capabilities. For example, the capability to apply transformational bidding, using configurable custom fields and a powerful rules engine to execute events specific to the marketing services industry.
The organization employed E-Sourcing platform which integrated to the company’s existing systems and provided the advanced functionality that was essential to implementing the procurement requirements. The ease-of-use of the e-sourcing platform enabled organization to drive consistent and high usage of its new e-sourcing capabilities and realize savings ranging from 12% to 18% in procurement costs for printing services.
Sourcing is strategic to any enterprise. When done well, enterprises have been able to increase revenues, accelerate the speed of execution while increasing business insight.