The 7 Step Strategic Sourcing Process!

7 Step Strategic Sourcing Process

Why Use a Formal Strategic Sourcing Process?

Experience has shown that the 7 step* strategic sourcing process developed in 2001 has stood the test of time and with variations, has become best practice. The main objective of strategic sourcing is to save money but other reasons include improving the acquisition process, supplier performance and minimizing risk.

Step 1 - Profile the Category 
Understand everything about the spend category as the first step in the strategic sourcing process. This means defining the category and commodities in it. What is the current quantity used, types and sizes. Who are the users, where are they located, what are the processes used and who else is involved in the supply chain? Data must be documented in as much detail as possible as changes may be needed. 

5 Key Phases to Evaluate your Spend Category:

  1. Define Sourcing Category;
  2. Evaluate Category Characteristics;
  3. Conduct Process Review & Mapping
  4. Analyze & Review the Market Place
  5. Identify Key Cost Driver

Deliverable for Step 1:

Category Definition & Profiling

Step 2 - Supply Market Analysis
Identify potential new global and local suppliers. Study the cost components of the product or service, and analyze the suppliers’ marketplace for risks and opportunities. Key raw material prices and other variables such as labor and transportation must be priced and calculations done of the suppliers’ cost elements.

Step 3 - Develop Sourcing Strategy
Deciding where to buy while minimizing risk and costs is how you develop the strategic sourcing strategy. Using a cross functional project team is a must. The strategy will depend on what real alternatives there are to the current suppliers, how competitive the supplier marketplace is and importantly, how open the users are to new suppliers.

4 Key Phases for Sourcing Strategy:

  1. Understand Buying Power
  2. Determine Category Complexity
  3. Determine Sourcing Approch(es)
  4. Position Sourcing to Maximize Savings Effect

Deliverables for Step 3:

  • Formal Sourcing Strategy
  • Cross-Functional Team
  • Management Approval

Step 4 - Research & Qualify Potential Suppliers

The most common method of sourcing for suppliers is to use a Request for Proposal process for soliciting bids. It includes product or service specifications, delivery and service requirements, pricing breakdown & cost analysis & legal and financial terms & conditions. Often the evaluation criteria are also stated.

3 Key Phases for Researching & Qualifying Suppliers

  1. Identify Existing Supplier Base
  2. Research Additional Suppliers
  3. Establish Supplier Qualification Criterion

Deliverables for Step 4:

  • Established Criterion for Shortlisting Suppliers
  • List of Pre-Qualified Suppliers for Next Phase

Step 5 - Negotiate & Select Suppliers?

The first round of the negotiation process, after reducing the bids to the valid ones, is conducted with many suppliers asking for clarifications and more detail where needed. A good strategic sourcing strategy is to conduct multiple rounds of negotiations to get to a short list. The final selection is usually done by the team and signed off as per the approval process.

3 Key Phases when Negotiating 

  1. Develop Negotiation Strategy
  2. Conduct Negotiations
  3. Develop & Execute Agreement

Deliverables for Step 5:

  • Supplier Selection Finalized
  • Negotiations Terms Agreed Included in Contract

Step 6 - Implement & Integrate
Notify the successful suppliers and ensure that they are involved in the implementation process. Implementation plans vary depending on the degree of changes. The communication plan in the strategic sourcing strategy will include any improvement to specifications or process, changes in delivery or service requirements or pricing.

Step 7 - Benchmark, Track Results & Improve

This is a key element of the sourcing management process. It is the start of a continuous cycle, starting with benchmarking the current status of the commodity or category, monitoring the results and ensuring that full value is being achieved.

Then back to Step 1 to review the supply market again and restart the process in a constantly evolving marketplace.

3 Key Phases in Step 7:

  1. Create Implementation Plans
  2. Document Savings Measurement & Tracking Process
  3. Execute Implementation Plan

Deliverables for Step 7:

  • Implementation Plan
  • Communication Strategy
  • Cost Savings Methodology

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*Source: 2001 A.T. Kearney