With many people currently locked in doors right now, we know that many are looking for blogs and articles to read during the current situation. That’s why we are making the first chapters from a selection of our learning materials available to read on our Blog free of charge.
This week, we will be providing access to five first chapters from different subject areas, including Supply Chain, Warehousing and Transport. Our final article this week is an introduction to Sourcing and Procurement, taking a look at what Sourcing is and why effective management of Sourcing and Procurement is important.
WHAT IS SOURCING?
A supply chain cannot truly be managed without the upstream activity of sourcing being given a recognised status within the organisation. Sourcing is the identification of organisational need, analysis of the marketplace, identification of risk, summary negotiation and implementation of appropriate contracts and purchase orders. The sourcing activity needs to ensure where possible the correct products and services are provided to the customer.
Sourcing then, involves the quantitative and qualitative assessment of potential suppliers and the ongoing relationship management of the successful vendors. The average person in the street ‘buys’ goods and services without considering the long term implications involved in the relationship.
Sourcing is involved in asking key questions: What are the costs involved to the organisation in terms of acquiring, storing and moving the goods? What effect will quality have on supply? How reliable is the source? How committed are they to the buying organisation? Are they financially sound? What motivates them to work with us? What capacity do they have and how much can they guarantee? Where will they be in the future and what are their plans to keep ahead of the competition? Does their structure and culture match that of the buying organisation or support a ‘can do’ mentality?
The sourcing activity is the vanguard of any organisation. The analysis of market places and sources ensures that the organisation is guarded against unnecessary risk arising from suppliers who can not provide quality goods and services now or in the future, or who’s commercial focus does not match that of the buying organisation.
For sourcing to be successful:
- Purchasing and material objectives must be integrated through strategic, tactical and operational levels.
- The initial requirements must include all the necessary information to identify sourcing opportunities.
- The five rights must be applied both upstream and downstream along the supply chain.
Strategic importance will be analysed through cost and risk. From initial analysis it will be identified which items carry most value using Pareto or ABC analysis. Once spend has been established, the number and location of suppliers will identify risks to supply.
WHAT IS SOURCING MANAGEMENT
Buying goods and services is a simple role in our daily environment. Working on our budget and the perceived priority that is given to the goods and services we buy, we make regular decisions on what groceries and other household requirements we will acquire.
Sourcing management has a more strategic role to play within an organisation than merely buying goods and services. For the sourcing activity to be managed properly, it will need to be responsible and accountable for the key purchasing decisions within the organisation. It will have an extended role upstream in the total supply chain collating information on second and third tier suppliers and raw material producers. Furthermore, the role of the sourcing management team will be to liaise with the downstream activities within the organisation to ensure total supply chain management is achieved.
There are a number of links that sourcing needs to manage:
- The primary upstream link between purchasing and first tier supplier.
- The secondary upstream link between supplier and their supplier.
- The tertiary and successive upstream links between second and third tier suppliers back to raw material sources.
- The downstream links between purchasing and stores / production.
- Finally there are the subsequent downstream links between customer, finance, legal, sales and marketing.
As product progresses down the supply chain it typically passes through a number of functional activities involved with buy, make, move and sell. Often it will pass through functions, such as purchasing or manufacturing, more than once.
For sourcing to be successful, there are two areas that will need to be addressed:
EFFECTIVE AND EFFICIENT MANAGEMENT
Translation of these words into different languages is difficult but we see organisations striving to be strategically effective and operationally efficient. These are words that mean different things to different people, but we believe it is beneficial to think about them as follows.
Effectiveness is about doing the right thing. This could entail changing your product design to suit the latest fashion and conforming to the customer requirements. If this is not done your strategy will not sell the product and would be deemed less effective.
Efficiency is about doing things right. A lot of supply chain activity was focused on efficiency in the early 1990’s. In particular use has been made of ISO9000 to document and record processes. It is of course possible to document a process that is not the best way of doing something. In other words you can document a bad process and do the wrong things well.
In summary, effective gets results, efficiency reduces cost and waste.
Clearly doing the right thing in sourcing is critical to performance if a customer is to receive what they ordered when they wanted it. Therefore it may be better to think about the best way to undertake the activity and then concentrate on doing it right.
Sourcing is an integral part of supply chain management it challenges traditional management thinking and if thought about in a strategic and tactical way, as well as, an operational one it can have dramatic impacts on business performance. Having considered these two concepts it is possible to group organisations as follows:
WHY IS SOURCING AND PROCUREMENT MANAGEMENT IMPORTANT?
With continued pressure in the marketplace competition from competitors for goods and services has never been greater. The customer continues to demand cheaper goods of high quality delivered yesterday.
With global markets now becoming the norm pressure continues to grow from sourcing activities within Eastern Europe, Asia and other parts of the world. Global economies continue to develop and are highly focused on providing the low cost quality goods demanded by the marketplace.
This decreases the upstream competition where suppliers continue to build closer relationships with their customers. Amalgamations and buy-outs decrease the potential sources for the buying organisations creating a scenario in which a restricted supplier base becomes the norm.
To counteract these factors there is a critical priority for sourcing to play an integral role in an integrated supply chain that identifies and understands downstream needs and balances this with the knowledge and understanding that the sourcing activity has with upstream capabilities.
The effects of upstream and downstream competition can be influenced by efficient and effective sourcing. Identifying and managing the right sources can ensure costs are managed and reduced through lean supply. Reducing the time involved in ordering and delivery from suppliers can ensure goods reach the market quicker than the competition and at a lower price.
If the customer doesn’t perceive the product has value then the customer will not buy it, regardless of what the supplier thinks. The customer will then be more likely to buy from a competitor. The market demand will be shared between your company and its competitors. The basis of how it will be shared will be dictated by the value that customers receive from purchasing and using your product and services compared with your competitors. In order to satisfy the demand a company must convert inputs acquired from suppliers into outputs. Since many of the suppliers will also be suppliers to your competitors the way in which you convert them into outputs will determine how successful you will be. Sourcing management therefore plays a critical role by identifying and managing suppliers to maintain competitive advantage.
Service is key to the customer value perception. Clearly, you can create value through providing a service that no one else does.
Quality in the sense of conformance to requirements or fitness for purpose can also add value.
Recognising the varying perceptions of quality adds another dimension to the situation. By ensuring the products and services sourced are fit for purpose, the anticipated quality expected by the customer can be maintained.
Cost or how much it costs a customer to do business with you can also add value. This does not necessarily mean lower prices. It might be, for example, that your service has more reliable and consistent lead times allowing your customer to hold less safety stock. Clearly this would reduce the cost of doing business for your customer.
Finally cycle time can also be a route to improving value. If you can bring new products to the market quicker or respond to changes in the business environment more swiftly this has potential to add value to the customer.
We hope that you enjoyed this first chapter. If you are interested in learning more about Sourcing and Procurement why not consider studying one of our LLA Online Short Courses? We are currently providing a 10% discount for all of our Short Courses until 31st May 2020. Prices start from just GBP340.00 (reduced to GBP306.00) for our Introductory Sourcing and Procurement short course. For more information, visit our Short Course page or email firstname.lastname@example.org.