Recommend Strategic Sourcing Strategies for Cost Reductions
1. Initial Spend Analysis
As a first step, Sourcing1 completes a spend analysis by reviewing and classifying all expenses by expenditure categories (i.e. raw materials, equipment, packaging, printing, lease programs, legal services etc.). Simultaneously, Sourcing1 ranks these categories by their business impact (strategic vs. routine), level of difficulty (complex/high risk vs. low risk/less complicated), value improvement potential (low vs. high savings potential), time and speed to complete (quick hits vs. it is best to delay).
2. In-depth Due Diligence
Once Sourcing1 has identified the expenditure categories that provides the most promise, a more thorough due diligence is required. This involves significant data mining and information gathering. For example, we expect our clients to have a complete understanding of the program’s annual and monthly volumes, specifications, requirements, and any distinctions associated with the current program and current supplier(s). It is also valuable to interview all current stakeholders that have a vested interest in the program so that each one has all the critical data needed along with their input, expectations, and perspective. Also, these interviews can assist in compiling both current and future requirements for the program. Keep in mind that invoices can provide basic information such as pricing, terms, freight and volume information, but they do not offer any insight into special services, unique deliverables, future demand and next generation requirements.
Finally, it is always wise to invest in a value analysis to ensure our clients are receiving the optimum value and what is being specified is not hindering their competitiveness and productivity. Whenever there is a specification required for a product or service – Sourcing1 expects to be asked why! An over-engineered product can result in unnecessary costs associated with a specification or tolerance that is not really required. On the other hand, a supplier may be able to provide an additional service or specification improvement – which could significantly reduce the downstream labor or processing costs – resulting in a better overall value.
3. Market Analysis
Sourcing1 compiles a list of current suppliers and potential alternative suppliers. Ideally, these are “best in class” suppliers within the market who our client already knows has a good quality and service reputation. Sourcing1 examines geographic considerations: a client may want to weigh national vs. regional suppliers since their response time, proximity to the plant, and the associated freight expenses could be important factors. When a client is unsure which suppliers are potential best fits, Sourcing1 would conduct a survey which can include a meeting with each of these suppliers to review all critical requirements.
Typical areas of interest are:
A - Capability: Expertise to meet or exceed our clients’ product requirements
B - Capacity: Ability to fulfill current and future needs
C - Quality and Performance: Can supplier consistently deliver a quality product or service
D - Financial Health: Financially sound and are continually investing in their business often with state of the art equipment and future plans of growth.
E - Motivated and Creative: Supplier shows genuine Interest in our client’s business – promotes ideas and products that will advance our clients competitiveness and success.
F - Ease of doing business: Responsive, Professional, Precise and Effective
Once Sourcing1 has completed a data review, value analysis, internal interviews, and market analysis, we are then ready to develop a custom strategies for each client. For example, Sourcing1’s investigation may have uncovered that there are 5 suppliers currently in place providing similar products within a client’s company across multiple plants, which can be easily reduced to 1 or 2, or Sourcing1 may have discovered that several suppliers have the ability to provide multiple products and services which are currently supplied by numerous suppliers. Both these scenarios offer an opportunity to reduce the number of suppliers, which will provide increased leverage, lower costs, and ultimately better services when a client’s status is elevated with the awarded supplier(s).
Another example may be that Sourcing1 has uncovered a new product or process that could significantly increase productivity and value for our client but it will require getting all the internal stakeholders on board. The strategy may involve the assistance of a client’s key manager(s) or a formal presentation with several key staff and management in order to explain, educate and introduce these new supplier(s).
There are many different strategy options but several that Sourcing1 will ask our clients to consider would be:
A - Serious collaborative efforts with suppliers to increase efficiencies and reduce costs
B - Product improvements or process improvements
C - Inventory Reduction: i.e. consignment arrangements, shorter lead-times, vendor-managed inventories, reduced minimums, extended payment terms etc.
D - Supply chain improvements
E – Re-engineering of product/processes to improve efficiencies and productivity
F - Mutual cooperation to challenge the status quo.
5. Create Comprehensive RFP
Once Sourcing1 has identified the best potential suppliers, then our clients are ready to develop the Request for Proposal(RFP). When creating a comprehensive RFP, Sourcing1 compiles all the information needed by the supplier to accurately quote the product or program. This includes the service or products to be quoted with specifications, volumes, performance expectations, delivery criteria, pricing with price breaks on volume, and financial terms. Sourcing1 also includes all the unique requirements, special services, and conditions of the program to the prospective suppliers. Sourcing1 sets out all the non-negotiable requirements up front (within the RFP or reverse auction) so that the suppliers fully understand the basic must-have items As a final note with the RFP, Sourcing1 routinely asks each supplier to provide any unique ideas, services or offers that could distinguish their products and production process from the others. Sourcing1 has found this encourages the participants to be creative and has the potential to generate new ideas and a competitive advantage for those suppliers who are willing to “think outside the box”. Sourcing1’s goal is to select a supplier/partner who will provide the best value proposition but is also always looking for ways to improve their business and competitiveness in the marketplace that can benefit all of our clients.
6. Final Discussion
When reviewing the various proposals, Sourcing1 often includes key management staff in the evaluation process to ensure their ideas and perspectives are considered and nothing is overlooked. Once the value propositions and any implementation costs have been considered, the 2 or 3 best suppliers are selected. At this time, Sourcing1 usually informs all key management of our logic and preliminary decision so that they can offer any last minute ideas/questions as well as to gain their approval to proceed. When given the “approval” the final suppliers are invited in to discuss their proposal and negotiate any open points that still need to be finalized or agreed upon. During this meeting, Sourcing1 often asks how the supplier would, if selected, assist in making the transition as seamless as possible. Sourcing1 may inform them of our clients’ future business plans and inquire how the supplier can help our clients achieve their objectives, or simply ask how the supplier can assist our clients in becoming more effective, productive and profitable in the future.
7. Final Selection and Award
Prior to making the final announcement of a supplier change on a product vendor, Sourcing1 suggests to all of our clients that adequate inventory be in place to address any transition issues or potential delays. Sourcing1 encourages a prompt, courteous, and honest communication with all suppliers that participated in the bid process. It is important to treat all suppliers; especially incumbents who are losing their position, with respect and courtesy so that they feel the process was fair and they were handled professionally and with integrity. Sourcing1 may never know when they may need one of these suppliers, and how they are treated could have a major impact on their future response. Unfortunately, Sourcing1 has witnessed a number of these “break ups” fall short of common courtesy – where an incumbent is left hanging for weeks or is sent a very brief email concluding the arrangement. Sourcing1 suggests a direct phone call or possible meeting thanking the incumbent for the service and work they have done during their term and suggesting that maybe next time things will work out differently.
8. Establish a Timeline of Change
Finally, Sourcing1 will establish a timeline of change, the process and address any existing commitments and remaining inventory so these issues do not create any future problems. With new suppliers, a final transition plan should be created that includes input from all key management positions/departments such as: Finance, Customer Service, Operations, Shipping and Receiving. It is critical that the new supplier’s performance is monitored during this initial change so that they do not get off on the wrong foot internally.
9. Retaining a Record
Lastly, Sorcing1 shall retain a record of the whole process, information gathered, logic and final decisions for future reference. The intellectual capital gained and compiled during this effort required many hours to accomplish and is incredibly valuable. This will be immensely be helpful for the next review and/or particularly for our clients’ successor who could benefit from having access to this prior process, which can be built upon as needed.