Strategic sourcing is Key to Value chain excellence
 

    Rameshwar Dubey, Faculty
    NSHM Business School&Supply Chain Consultant( former Sales Unit-logistics manager and project coordinator at ACC Limited),
    Phd Scholar at MNNIT, Allahabad.
    &
    Dr. Tripti Singh, Faculty
    School of Management Studies, MNNIT(Motilal Nehru National Institute of Technology), Allahabad

Abstract:

Today strategic sourcing in supplychain practice is increasingly becoming very popular because sourcing&procurement is the backbone of supply chain management.Till date in India due to irrational practices like tactical sourcing,myopic view towards prourement&purchasing activity resulted in huge irreparable loss but these key suggestion will certainly help to realize the benefit of strategic sourcing&procurement.

Design/methodology/approach:Article based on observation of recent practice in retail sectors.
Keywords:Strategic sourcing,RFQ,RFP,e-procurement.
Paper type:Article based on interview with sourcing&purchasing managers,literature survey.

Introduction:
In today’s competitive scenario,when entire nation is guessing why there is so much FDI’s in retail sector in India which is at present growing at the rate of 3% but it is expected by the end of 2010,the retail sector will grow at the rate of 7%(source:FICI report) which will transform entire retail sector in India into a robust and organized one and guess! what is the key for success of retail sectors in India ? Yes,it is strategic sourcing which is the one of the key activity of achieving excellence in value chain.The Reliance Fresh retail strategy based upon strategic sourcing(souce:ET 22 Feb,2007).

In todays competitive retail sector the profit of the firm depends on the controlling cost of the operation .In most of the sector specially in retail sector 60% to 70% of the cost spending on the procurement function.Hence there is significant oppurtunity in improving the bottom line through strategic sourcing .The strategic sourcing is a comprehensive process aimed at obtaining maximum advantage on cost,technology,process and quality by leveraging company,s buying power.
Here before we move ahead let’s understand what is “strategic sourcing”?
Strategic sourcing is a comprehensive process of purchasing/procurement of raw materials needed to be transformed into desired product/services keeping certain parameters into account such as least cost,minimum lead time,good quality etc.Strategic sourcing assumes a pivotal position in achieving value chain excellence through proper selection of vendors and entering through long term contracts and negotiation there is potential savings and this strategy is clearly reflected in retail sector positioning strategy because even they operate at lower margin inspite of higher operating costs but due to strategic sourcing retail sector can afford to operate at lower margin.To focus more on how strategic sourcing (clearly sourcing) achieve value chain excellence(net value generated through sourcing activity establishes the footing of the firm) .To understand it lets focus on the various activities of value chain of a firm which finally add value to the net value of the firm.Here sourcing constitute bottom line of value chain because earlier firm hardly paid any heed towards sourcing and procurement but for last five years sourcing and procurement has become one of the important primary activity of the firm and one of the prime area of focus. With strategic sourcing, major manufacturers, retailers, governments and financial institutions, are achieving double-digit cost savings while strengthening ties with suppliers offering the best quality products and customer service.
Strategic sourcing is also good for innovative and competitive suppliers, including small and medium-sized businesses that might not have imagined they could compete against larger companies for major contracts. Strategic sourcing can even be used by suppliers themselves to achieve similar savings and benefits.
The main objective is minimizing costs, but strategic sourcing takes an enlightened view of the supplier-customer relationship.
Strategic sourcing recognizes that people, including innovative suppliers, are a valuable part of an organization and focuses on reducing waste or non-value-added costs. It is defined as: "A disciplined, systematic process for reducing the total costs of externally purchased materials, products and services while maintaining or improving levels of quality, service and technology."
Is strategic sourcing is different from tactical sourcing?

To understand contrast between strategic sourcing from tactical sourcing the keys points that separate these two commonly synonymously used term are:
(1) Spend analysis: Examine critically the amount of money spend in sourcing & procuring in each category of goods or services.
(2) Supplier relationship management: Measure supplier performance and spend time in meeting with their most important supplier to implement improvements.
(3) Technology implementation: Strategic sourcing & purchasing teams frequently update and add technologies that measurably reduce costs, decrease cycle time and make purchasing process more efficient.
(4) Developing project plans: Developing Gantt chart, PERT & CPM analysis will reduce idle time, optimize resource utilization.
(5) Enterprise-Wide contracts.
(6) Forecasting: It is very challenging in this fastest changing environment and is chief cause of Bullwhip (distortion of supply chain) effect in supply chain.
(7) Involvement in strategic source & procurement team.
(8) Development of productivity tools.
(9) Supplier development.
(10) Work responsibility refinement.

In order to meet the growing challenge of sourcing and procurement there are many firms which are primarly engaged in identifying right vendors through RFQ(Request for Quotation)/RFP(Request for Proposal) and evaluating Quotation and Negotiating.The firm main activity involves creating and maintaining database of suppliers,transporters who will ship the material from source to destination at least cost thus company has now created value for itself and or its client.
The strategy is to shift the companys focus from the current “transaction” oriented independent buying of goods and services to a “product” oriented strategic approach. The strategic sourcing approach is designed to:
 Drive reduction in total cost of acquisition of goods and services.
 Thorough understanding of the supply market and internal companys requirement.
 Deliver significant earnings to bottom line.
 Deliver improved value to all.
High value opportunities:
How can a firm identify the highest impact cost reduction opportunities:
 Understand what to buy and from where to buy.Thoroughly reviewing accounts payable history and mapping expenditures,can provide tremendous insight into corporate savings opportunities.There are varieties of solution to address.
 Increase customer leverage and buying power.
 Rationalizing product specification.
 Source more effectively.
 Improve financial controls and contract compliance.
 Doing procurement right.
The significant steps:
How can a firm effectively achieve measurable and sustainable cost savings?
 Strategic Assessment of Opportunities.
 Identify Source for savings.
 Turn contracts.
 Management tools.
 Kaizen Practice.
 Categorization process.
 Spend-profile each sourcing profile.
 Formulate strategy.
 Create supplier profile.
 Competitive supplier profile.
 Implementation methodology.
 Integerate the strategic agreements into operations.
 Benchmark to improve.

Tips for success:

 Develop Competitive Value-based Pricing: Pricing plays a role in any supplier selection criteria, but many vendors incorrectly assume it is the most important part of a formal proposal. A strategic sourcing team is interested in more than the sticker price. When pricing your goods or services consider the overall cost to the purchaser. For example, fragile or perishable products have higher handling or inventory costs. Maintenance or disposal costs are higher for some items. Find ways to drive those overall costs down and you're on your way to becoming a strategic sourcing player.
 Be Innovative: Strategic sourcing purchasers are not only interested in new products and services that deliver a competitive advantage, but also new ways of doing business. How quickly can you adapt to changing customer requirements? Do you use the latest technology? Are you passing along the benefits of your own cost reductions? Using eProcurement to process invoices, handle inquiries and supply other information is one example.
 Emphasize Support And Service: One competitive advantage for suppliers in strategic sourcing is strong customer service and support. This ranges from how the supplier answers complaints to whether it guarantees levels of performance, such as on-time delivery and damage-free products. In your discussions and any proposal to a strategic sourcing team, emphasize early in the process the value-added service and support you offer.
 Form Strategic Alliances: You can effectively compete against larger, national competitors by forming alliances with similarly innovative businesses.
 Invest In Technology: One way many large businesses reduce supply chain costs is with electronic commerce and better use of technology. This cost efficiency does not go unnoticed by strategic sourcing companies.
 Promote Pro-actively: A key to success for many businesses lies in ensuring potential customers are aware of their products, services and added value.
 

Action plans:

 Rationalization of suppliers.
 Material cost reduction.
 Vendor(suppliers) development.
 Developing operation research model based on least cost of inbound logistics.

Bibliography:

Chopra,Sunil and Meindl,Peter “Supply Chain Management-strategy,planning and operation,Second Edition:204-222.
Cooper, M. C., and L. M. Ellram. 1993. Characteristics of Supply Chain Management and the Implications for Purchasing and Logistics Strategy. The International Journal of Logistics Management, 4, 2, 13-24. Strategic sourcing @RBC:www.rbc.com