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Strategic Sourcing in Supply Chain Management: Global Strategies for Increasing Profit

Updated on September 18, 2012

Definition of Sourcing: Why is Sourcing an Important Business Process?

The meaning of “sourcing” is “finding suppliers of raw materials or services.” It’s a very important business process. For example, if you’re a furniture manufacturer, you’ll need to procure materials such as wood, nails, and leather. Sourcing, in this instance, is the process of finding suppliers of wood that meet your requirements for quality, cost, etc. (Procurement and purchasing are similar terms usually used in reference to the actual act of purchasing and receiving materials and/or goods.)

B2B Sourcing: An Intuitive Concept

Sourcing in a B2B (business to business, see this link for a list of acronyms) context mirrors personal decisions we make every day. We choose to buy gas from the station down the street rather than the one on the other street because the gas there is more expensive. We don’t shop at certain grocery stores because we’ve had bad experiences with their products or customer service. We choose to go to a certain auto mechanic even though they may be a little more expensive because we have a longstanding relationship and we know we can trust the quality of their work.

Businesses follow the same sort of logic when sourcing for B2B transactions. Sourcing is one of the key stages of supply chain management. Proper sourcing ensures that costs are minimized and quality maximized (in line with the specific business goals and objectives set up through processes like S&OP).

Strategic Sourcing: Business Goals and Objectives

Strategic sourcing aims to seek improvements in one or more of the following areas:

  • Cost reduction
  • Cycle time reduction
  • Development of product/process technology
  • Quality improvements
  • Customer service improvements
  • Profit margin improvements

In many businesses (especially manufacturing companies, though by no means limited to just those), sourcing and the purchase of raw materials constitutes one of the largest expenses. Therefore, strategic sourcing management on a global scale can enable a company to save millions or even billions of dollars – improving their bottom line and making them a leaner and more efficient business.

Sourcing can be classified into two subgroups: direct items and indirect items. Direct items are those directly related to a manufacturing process, while indirect items are those that are still necessary but not directly tied to manufacturing. (This is very similar to the difference between line and staff employees discussed in most introductory managerial accounting courses.)

The Purchasing Process: Purchase-To-Pay

The exact steps in purchasing obviously depend on the specific industry and business in question. Nonetheless, some characteristics are common to the purchase-to-pay process no matter what.

First of all, B2B purchasing is slightly more complicated than B2C (business to consumer) purchasing. Unlike citizens at large, businesses don’t just go down to the “Business Supply Mart” and pick out what they need. Generally, business purchases are billed/invoiced and occur in recurring shipments. They also involve supplier/buyer contracts between companies that may be on opposite ends of the globe. (For example, Apple’s supplier Foxconn is based in China, while Apple HQ is in California.)

There are many pre-order steps involved in the purchasing process. The purchasing team for a company will identify the needs of the business – say, the need to produce wooden chairs. It will then complete specifications, determining exactly how many planks and nails are required for each chair. It will then begin sourcing, and find an appropriate supplier.

The team will create a shortlist of “good” suppliers, and begin the process of tendering. Suppliers will submit offers, and the team will then begin selection (selecting suppliers) and negotiation to determine the details of the buyer/supplier agreements. After finalization, the materials can be exchanged for payment.

There are also several important post-order steps to take after the contract has been established. First, the company starts placing orders with the supplier to fulfill the needs discussed above. Order handling is often automated by enterprise information systems (EIS) like SAP. The information system also provides supply chain managers in the inbound logistics department with tools to track the progress and delivery of the order.

When delivery is completed, accounting collaborates with the purchasing team to confirm that the order contents match the invoice and what was ordered. Once this three way match occurs, accounting will send payment on the invoice.

Strategic Sourcing: Tactics Used

Strategic sourcing utilizes metrics called performance indicators that can give managers an idea of how the supplier is doing. These performance indicators vary widely, but common ones include ways to measure percentages of late shipments and other similar problems. At regular intervals, the purchasing team of any company will review these performance indicators in a price and cost analysis and discuss potential issues of concern with suppliers. If suppliers fail to resolve these issues, companies will often restart the sourcing process and find a different supplier.

Strategic sourcing often involves other tactics as well. For example, a company can use market research and commodity analysis to anticipate and react to future problems in the general market. A certain resource may become scarce and drive up prices, or suppliers may shut down or merge with other companies. New technologies under development might significantly impact products and processes used. An effective supply chain manager must consider all of these areas when engaging in strategic sourcing.

Other sourcing strategies include accurate forecasting. Communication between all organizations in a supply chain is very important, as supply chains should not be managed with a silo mentality.

This article is written by Skyler Greene, all rights reserved. It's hosted on HubPages, an online community where everyday experts like you and me can publish high-quality articles like this one and earn a share of the ad revenue they generate. Sign up for HubPages.

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