Document Sample
					                              DEVELOPING AND IMPLEMENTING A
                               STRATEGIC SOURCING STRATEGY
                  INTRODUCTION                                                x     CIPS believes that strategic sourcing options should
                                                                                    be assessed in terms of the benefits which they
                  CIPS practice documents are not written to be an end              actually deliver as opposed to those which they may
                  in themselves - they are a collection of views on good            have been expected to deliver as set out in the
                  practice within a particular subject area, in this case           original business case.
                  strategic sourcing. The reader is encouraged to extract
                                                                              CIPS has formulated positions on strategic sourcing as
                  those parts of a CIPS practice document that they can
                                                                              this is a key activity for purchasing and supply man-
                  use for their own particular purposes such as writing
                                                                              agement professionals. Traditionally, sourcing was

                  policy statements, guidance or procedures.
                                                                              considered to be the identification of new or potential
                                                                              suppliers. This is of course still a fundamental aspect
                  This range of publications is intended to provide
                                                                              of strategic sourcing but this practice document aims
                  direction on good practice along with some guidance
                                                                              to illustrate how the function has developed and
                  for context and interest. Practice documents are writ-
                                                                              expanded in recent years.
                  ten for use by anyone associated with, or interested in,
                  the purchasing and supply management profession.
                                                                              This practice document describes best practice pur-
                  However, this particular set of CIPS beliefs on strate-
                                                                              chasing and supply management; for many it will
                  gic sourcing is written specifically for the head of the
                                                                              remain simply an aspiration; however CIPS encour-
                  purchasing and supply management function.
                                                                              ages purchasing and supply management professionals
                                                                              to endeavour to move purchasing and supply manage-
                  This document is one of a series summarising the
                                                                              ment in their organisations towards strategic sourcing
                  CIPS view(s) on a wide range of purchasing and sup-
                                                                              as described below. However, CIPS appreciates that
                  ply management subjects. The reader may wish to
                                                                              some organisations are bound by legislative require-

                  refer to the accompanying document which supports
                                                                              ments that demand a different, (or in some cases, a
                  this series entitled ‘Background on Purchasing and
                                                                              complementary approach) to that proposed in this
                  Supply Management Practice Positions’.
                                                                              practice document; the public sector for example must
                                                                              comply with the EC Procurement Rules.
                  CIPS views are stated through-out this practice docu-

                  ment but the key statements are summarised below:
                                                                              CATEGORIES OF SOURCING: REACTIVE, TACTICAL
                                                                              AND STRATEGIC
                  x   CIPS considers strategic sourcing to be a pivotal
                      activity for purchasing and supply management
                      professionals.                                          REACTIVE SOURCING
                  x   CIPS believes it is important to draw a distinction     CIPS defines reactive sourcing as being the procure-
                      between strategic, tactical and reactive sourcing.      ment approach where no proactive sourcing strategies
                  x   CIPS considers that each organisation should as a       have been put in place and so the purchasing and sup-
                      priority develop an overall sourcing strategy, of       ply management function has an entirely reactive role
                      which strategic sourcing should be seen as a key        e.g. responding to requisitions or other unexpected
                      element.                                                requirements from the business. CIPS encourages pur-
                  x   CIPS advocates the formation of a Sourcing              chasing and supply management professionals to
                      Board or Panel for discussing strategies and            move away, wherever possible, from this type of
                      assisting with decision-making.
                                                                              sourcing. However, some organisations still operate
                  x   CIPS considers an 'As Is' analysis to be a key stage
                      in the implementation of a strategic sourcing policy.   entirely on the basis of unexpected demand respond-
                  x   Once the relevant data has been gathered and            ing to individual needs as and when they arise. This
                      consolidated, and appropriate options generated,        response may be professional, but CIPS believes that
                      CIPS recommends that the outcomes be presented          such buyer behaviour is transactional, low level and
                      to senior management for their consideration.           will not necessarily enhance or promote the purchas-
                  x   In developing, analysing and comparing a range of       ing and supply management profession.
                      strategic sourcing options CIPS recommends the
                      use of weighted evaluation criteria rather than         TACTICAL SOURCING
                      simply using cost/price as the sole basis for           Tactical sourcing is to some extent reactive as it covers
                      arriving at a decision.                                 those business requirements that cannot be planned in
                  x   Once the preferred strategic sourcing option has
                                                                              advance, but are provided within a framework of
                      been finalised, CIPS believes that the purchasing
                      and supply management function should have a            strategic sourcing. It is however, proactively managed
                      key role to play in its implementation.                 and so resources and processes are set aside to manage
                                                                              it within the purchasing and supply management strat-
                                                                              egy. An example of tactical sourcing is working with
                                  colleagues in Marketing and Sales, pro-        In order to sustain the high level position, resources
                                  viding a bid support activity within           and influence, CIPS recommends that purchasing and
                                  fast-moving technology areas.                  supply management professionals responsible for
                                                                                 strategic sourcing create a suitable governance struc-
                                  Notwithstanding the above, CIPS sug-           ture so as to:
                                  gests that there should be no unplanned
                                  or unexpected capital expenditure as all           · illustrate where the purchasing and supply
                  organisations have capital investment plans which pur-             management functions sits within the organisa-
                  chasing and supply management professionals should                 tion e.g. alongside Finance, Legal, Human
                  obtain and incorporate in the strategic sourcing strate-           Resources
                  gy. If an unexpected requirement is ad hoc, low risk and           · illustrate the role of the function itself and those
                  low value, purchasing and supply management profes-                people that carry it out - the purchasing and
                  sionals should not be involved with obtaining the                  supply management function's terms of
                  requirement anyway. All low-value requirements should              reference, scope of responsibility and objectives.
                  have been aggregated into call off contracts for use by

                  end users; those that are low value, yet high risk, are pre-   CIPS also recommends that the purchasing and supply
                  cisely those that require strategic sourcing plans.            management function creates a Sourcing Board
                                                                                 (sometimes referred to as a ‘Procurement
                  STRATEGIC SOURCING                                             Board/Panel’) comprising, for instance, decision mak-
                  Strategic sourcing is a core activity in purchasing and        ers, opinion leaders and influencers. The Sourcing
                  supply management. It is a complex commercial                  Board should be used to discuss strategies, policies,
                  process requiring extensive knowledge and compe-               approaches, assist with decision making and to help
                  tence. It can be defined as ‘ satisfying business needs        influence others in the organisation on behalf of the
                  from markets via the proactive and planned analysis of         purchasing and supply management professionals.
                  supply markets and the selection of suppliers with the
                  objective of delivering solutions to meet pre-deter-           b) ‘As is’ Analysis
                  mined and agreed business needs’.
                                                                                 The second, and very resource-consuming stage in
                  Developing the strategic sourcing strategy is a funda-         strategic sourcing involves the ‘As is’ analysis stage

                  mental part of the purchasing and supply management            which includes:
                  process. Strategic sourcing is a logical process involving
                  the application of tools by skilled, competent and             Customer and business requirements
                  knowledgeable people; however - developing and                 x  what do our customers need and what does the
                  implementing strategic sourcing is a functional process.          business need?

                  Since it is such a broad area, it is advisable to sub-divide   Spend analysis
                                                                                 x  historical usage analysis of goods or services
                  the subject into a number of sections as follows.
                                                                                 x  supplier positioning
                                                                                 x  supplier historical analysis
                  a)   Positioning Purchasing and Supply Management              x  transaction cost analysis
                       for Strategic Sourcing                                    x  critical nature of products.

                  CIPS strongly recommends that every purchasing and             Future spend analysis
                  supply management function develops a written, and             x   forward/expected usage of goods and services
                  regularly updated, overall strategy which states their         x   trends in the market.
                  objectives and activities over a given timeframe. The
                                                                                 Market analysis
                  strategic sourcing activity should form one part of the
                                                                                 x  assessment of the market capability
                  overall purchasing and supply management strategy.             x  analysis of power dependency in supply chains
                  The first stage in implementing strategic sourcing is          x  analysis of individual marketplaces
                  the positioning of the purchasing and supply manage-           x  supplier preferencing
                  ment function within the organisation. In order to             x  relative positioning of your organisation
                  undertake strategic sourcing, purchasing and supply            x  supply chain cost analysis
                  management must be positioned at the appropriate               x  the nature of the market - appropriate type of
                  level (senior) within an organisation and should report           sourcing strategy - global, regional or local
                  to the Board (or via an appropriate Board representa-          x  potential size (and actual size) of the supply base.
                  tive) and it must possess suitable human resources.            Several analytical tools are appropriate for this stage
                  Strategic sourcing requires the application and inter-         including Porter's Five Forces, PEST (Political,
                  pretation of sophisticated strategic sourcing tools and        Economic, Social, Technological) and SWOT
                  techniques such as relationship management, by suit-           (Strengths, Weaknesses, Opportunities and Threats).
                  ably authorised and competent professionals.                   Further information on such tools is available from
                                  c) Mapping Supply Chains                     all stages in strategic sourcing but where this is not
                                                                               possible, it is better to attempt some aspects of it than
                                   The process of mapping supply chains        not undertake it at all.
                                   can be complex and the extent to which
                                   it is undertaken is dependent on the        Options should be perceived as ‘baskets of opportuni-
                                   value and risk of the procurement in        ties’. In summary, this stage involves brainstorming
                                   question and limited by the resources       options to fulfil the requirements, such as identifying the
                  allocated to strategic sourcing by the organisation. The     offering of suppliers and identifying whether there are
                  ‘As-is’ analysis and ‘Mapping’ stages can take typically     other ways to fulfil the requirement e.g. instead of pur-
                  between three and six months. CIPS recognises this           chasing PCs i.e. goods, rather purchase a desktop service
                  timeframe is too long for some organisations and more-       i.e. outsource the PC desktop provision. Another exam-
                  over impracticable for some procurement situations.          ple would be instead of buying meters, buy a billing ser-
                  However, the longer term benefits of such proactive          vice including meter reading and customer billing. A
                  strategic sourcing are invaluable.                           public sector example would be the PPP/PFI which is a
                                                                               sourcing option that can offer value for money in appro-

                  CIPS considers that best practice supply chain map-          priate circumstances. The process of generating options
                  ping includes:                                               is an iterative process in that colleagues examine, discuss
                  x   identifying profit and gross margins in supply           and criticise options and their feedback stimulates the
                      chains                                                   production of further options.
                  x   understanding interdependencies in supply chains
                      e.g. power dependency                                    Having brainstormed a list of potential options the
                  x   mapping the required products and services onto
                                                                               strategic sourcing team should subject each to a
                      these supply chains
                  x   analysing spend by each supplier in respect of           SWOT analysis and where appropriate, a detailed risk
                      category and business unit                               analysis. The options which seem to be the most
                  x   buying patterns by product, service, supplier, and       favourable are then prioritised on the basis of the ben-
                      business unit                                            efits and savings that they can deliver. Clearly, any pro-
                  x   sourcing patterns                                        posed strategic sourcing plan must fully support the
                  x   pricing patterns - both past and forecasted, and         organisation's objectives. Examples of options include
                      also purchase price analysis                             make/buy options; dual/single source decisions; feasi-
                      historical performance of suppliers

                  x                                                            bility of starting up partnerships with suppliers; bene-
                  x   historical market trends and associated cost             fit sharing etc.
                      drivers (there are specialists in various fields)
                  x   value chain analysis
                                                                               SELECTION OF OPTIONS
                  x   identifying and addressing dominant players in
                      the supply chain

                  x   critical asset analysis (i.e. identify your critical     CIPS suggests that once a range of suitable strategic
                      assets which should be borne in mind when out            sourcing options has been identified, these should be pre-
                      sourcing)                                                sented by senior purchasing and supply management
                  x   technical analysis - alternative solutions to specifi-   professional(s) to the organisation's directors or Sourcing
                      cation of requirement                                    Board to be considered in the light of where the business
                  x   risk assessment                                          currently stands and what the customers require.
                  x   cost modelling                                           Occasionally, the strategic sourcing teams will be
                  x   portfolio analysis                                       required to investigate further, or support their sug-
                  x   PEST analysis                                            gestions with business cases, ROI (return on invest-
                  x   complexity reduction i.e. standardisation                ment models) and so on. Equally, the organisation may
                  x   ascertaining the demand e.g. formulating the
                                                                               require further options, or clarification or changes to
                  x   demand challenge - does the organisation need            those options preferred.
                      the ‘requirement’ (Defer, Diminish, Delete)
                  x   market potential/market modelling                        If a purchasing and supply management function is
                  x   determining the policy areas which need to be            insufficiently resourced, the presentation of such strate-
                      accounted for in sourcing - environmental and            gic sourcing options can be a means of securing more
                      ethical policies for example                             appropriate levels of resource from senior directors.
                  x   determining funding e.g. PPP/PFI.                        Equally, where the purchasing and supply manage-
                                                                               ment professional's impact on spend is limited, or
                                                                               where bought out expenditure is only 20% of
                  CONSOLIDATE DATA AND GENERATE OPTIONS                        turnover, the presentation of strategic sourcing
                                                                               options to senior directors, may be seen as a method of:
                  Once the analysis has been undertaken and supply                  · increasing the strategic sourcing remit
                  chains have been mapped, the next stage is to consol-             · increasing other value-add of the purchasing and
                  idate the data and to generate options. Although not              supply management function i.e. not simply price
                  ideal, where resources are tight, in terms of time and            reduction
                  skills availability for instance, it is possible to omit          · penetrating aspects of the business which can be
                  some of the analysis stages and go direct to the brain-           transformed into bought out expenditure, via out
                  storming of options. It is good practice to undertake             sourcing for instance.
                                  SOURCING PLANS                               MEASUREMENT

                                 Once the preferred strategic sourcing         CIPS believes that all strategic procurement, including
                                 options are agreed, these are developed       the design and implementation of sourcing plans,
                                 into ‘sourcing plans’ which should be         should be measured in terms of the benefits that they
                                 innovative and creative solutions to the      are delivered compared with what they were expected
                                 organisation's requirements in support        to deliver as set out in the original business case. This
                  of the organisation's mission and objectives. Strategic      might take the form of a post-contract audit perhaps
                  sourcing plans should generate work-streams i.e. clear       one year after the contract had been let. The findings
                  milestones to be achieved with resources e.g. project        should be reported to and discussed by the purchasing
                  teams allocated appropriately. This is where the             and supply management professional(s) and their
                  process of acquisition begins involving design teams,        Sourcing Board in order to learn from experiences and
                  outcome-based specifications, market development,            build on current commercial arrangements.
                  advertisements, policy compliance for instance.

                  Strategic sourcing plans include determining processes
                  for tenderer and supplier selection and performance          CIPS holds that sound and effective sourcing expertise is
                  criteria ensuring the supplier continues to meet cus-        a key element in the purchasing and supply management
                  tomers' expectations. CIPS advocates the use of              professional's tool kit. Increasingly, the term ‘Sourcing’ is
                  weighted evaluation criteria when determining the pre-       incorrectly replacing the terms ‘Procurement’ or
                  ferred options as this is one method of persuading           ‘Purchasing’ or ‘Supply Chain Management’. Strategic
                  internal colleagues that purchasing and supply man-          sourcing encompasses aspects of all of those activities
                  agement is not focused on price and cost alone but           and is not a replacement activity.
                  considers issues such as speed to market and other
                  appropriate and relevant criteria. Therefore strategic       CIPS believes that strategic sourcing is a skill set which
                  sourcing plans include producing and managing the            must be learned, developed and refreshed. Strategic
                  ITT process, conducting negotiations and everything          sourcing, as described in this policy, is a relatively new
                  up to the recommendation of contract award.                  skill set for purchasing and supply management pro-
                                                                               fessionals. It requires great resource and excellent

                  IDENTIFYING NEW SUPPLIERS                                    management information and so only some organisa-
                                                                               tions are currently in a position to implement it.
                  Traditionally, sourcing has been perceived as the iden-      Further, strategic sourcing should only be Carried out
                  tification of new or alternative suppliers e.g. sources of   by competent and knowledgeable professionals.
                  supply. Methods of identifying suppliers have included:

                  · Internet e.g. suppliers' own pages and B2B trade bul-      This practice document makes a clear distinction
                  letin boards                                                 between reactive, tactical and strategic sourcing and
                  · trade associations and trade directories                   encourages purchasing and supply management pro-
                  · business directories like Kelly's, Sell's etc.             fessionals to move away from the former and to take a
                  · supplier exhibitions                                       more proactive and strategic approach.
                  · networking with other buyers
                  · talking to specialist end users.                           CIPS believes that strategic sourcing, and as appropri-
                                                                               ate tactical sourcing, have a vital role to play in the
                  This process is now part of the strategic sourcing           overall corporate plan with the potential to make a sig-
                  work streams i.e. only part of the sourcing process.         nificant and positive contribution to the bottom line.
                                                                               Inevitably this begs the question as to how to measure
                  Following the development of strategic sourcing plans        the effectiveness of any strategic sourcing policy. This
                  and the identification of work streams, the purchasing       is an area which is briefly touched on in this practice
                  and supply management function should facilitate the         document; a more comprehensive analysis of the the-
                  implementation of the strategic sourcing strategy. This      ory and practice of purchasing performance measure-
                  may involve helping with, or leading, the contracting        ment as a whole may be found in the various publica-
                  process, educating the internal customer or order plac-      tions available from CIPS Bookshop.
                  er; enabling the supplier e.g. getting the supplier ready
                  to deliver by developing and managing them etc.
                  In many larger organisations, the strategic sourcing
                  part of purchasing and supply management is what
                  purchasing and supply management professionals are
                  primarily involved with. They are rapidly becoming
                  less involved with the other aspects of contracting; i.e.
                  purchasing and supply management professionals
                  have trained colleagues to manage the less strategic
                  and more straight-forward aspects of purchasing and
                  supply management.