How to understand the merits of a company’s approach to sourcing?

The sourcing function has transformed from the earlier back-office activity (with a tactical operating focus) to managing global suppliers’ networks (strategic and best-in-class), embracing fresh procurement models, bettering speed to market, and furthering enterprise innovation.

How can one assess a company’s approach to sourcing?

Review Bill of Materials (BOM) and suppliers of raw materials with management

A BOM is a holistic list of all the required items for product manufacturing. It’s an all-inclusive production planning system detailing the raw materials, assemblies, components, and parts’ inventory. It also gives information of quantities and cost of production. Reviewing BOM helps in planning the purchase of raw materials, approximating material costs, controlling inventory, tracking and planning material needs, reducing waste, ensuring supplies, and retaining accurate records.

Review supply constraints and capacity limitations of suppliers

Assess supplier market constraints (capacities, minimum or maximum order, etc.) to identify the key category players, the underlying dynamics, and marketplace trends. Executing sourcing plans require constraint-free planning and a timely assessment of KPIs. Research indicates supply chains could benefit from dynamic performance efficiency driven by suppliers’ capacity limitations, a high level of responsiveness, market (customer) demand variability, order and inventory management policies. If the firm has deployed a system capable of delivering the same product within a shorter lead time, it can deliver positively on performance measurements even with inventory instability.

Understand price drivers and projected movements

Procurement price drivers must be analyzed for core purchases to avoid wrong business decisions and mitigate risk. Identify price drivers for a broad range of buys by examining supplier pricing and identifying business behaviors resulting in higher prices. Examine cost drivers proactively to manage costs and reduce risks swiftly. These dynamics would allow forecasting projected movements plus process improvement, cost control, time efficiencies, and risk mitigation.

Review buying patterns with management and currencies of transactions

Procurement processes and buying patterns are evolving as a result of digital transformations. Accordingly, ‘Strategic Sourcing’ becomes the formal way of collecting and using information in a way that organizations are able to align their purchasing strategy to occupational objectives. It enables the procurement process to be better price-focused, and purchasing strategy farsighted with respect to dynamic buying patterns. The end-result will demonstrate clear-cut advantages in terms of reduced total cost with extensive ripple effects. Occasional inclusion of blockchain in the supply chain management can potentially enhance accuracy and visibility in selected cases.

Review historical financials for currency exposure

Currency risk (exposure) is a primary barrier in global sourcing activities. It impacts the achievement of incremental cost savings, even leading to zero or negative procurement yield results. Check historical financials to assess the company’s risk appetite. Check if increased costs are being transferred to customers or not, as these would determine the level of currency risk exposure. If forex exposure is hedged (and resultant losses due to currency movements are limited), verify who faces the currency risk (buyer or seller). Check if the contracts carry a specified clause for the transactional currency to change per the exchange rate. This approach is meant to transfer the risk to the supplier from the buyer. See if both the parties have contractually agreed to share currency risk (in case of a high currency rate fluctuation). If solely the buyer is the risk taker, examine if a token premium is charged to the supplier on the buyer’s currency risk exposure.

Review the buying patterns with management and the timing of purchasing decisions

Adopting strategic sourcing necessitates analyzing buying patterns in terms of product specifications, sourcing options, pricing parameters, other technicalities, and the time of procuring. The process entails devising a plan based on historic spending and existing metrics leading to the development of predictive models per the geopolitical factors, timing, and market conditions. It enables developing a comprehensive and adaptable system catering to the business’ long-term total value.

Apply volume expectations in management projections to theoretical and practical supply stack limitation

Appropriate planning, placement of warehouses and transport optimization are crucial for supply chain management. Issues linked to inventory, warehousing, physical networking, and transportation are extremely complex, leading to abysmal outcomes if not considered by design teams in advance. It is necessary to include the head of supply chain into the planning team and update the supply chain plan as and when the business plan is rationalized or reorganized. In addition, executing network redesign exercises tends to ensure optimization, as re-running network flow models involves considering diverse volume expectations having significantly different inventory, transportation, and warehousing costs.

Review the economies of scale of the company relative to competition

Economies of scale benefit suppliers due to higher volume, allowing them to transfer better value to the sourcing company. Figure out if, relative to competition, the company is able to source (e.g., raw materials) at a volume independent of the unit cost dynamics (gaining procurement economies). If yes, it means the company can deliver on an increased scale of output (with a reducing unit cost). Volume purchases by the company can benefit the buyer and supplier, whilst developing a competitive advantage (in sourcing, manufacturing, and sales). Also know if the company has bargaining power and leverage in sourcing. Suppliers tend to compete via Bertrand competition (pricing), whilst facing production capacity limitations. With scale economies, dynamic performance is achievable due to capacitated supply chains. Check the company’s capacity planning efficiency relative to competition to assess production and market efficiency.

Review purchasing relationships of the company versus competitors

Strategic (non-reactive, growth-oriented and forward-focused) purchasing relationships offer the company leverage with preferred suppliers, bettering their performance. Sincere interactions with and management of third-party (high-value) vendors goes a long way in sourcing cost-efficient goods, services, and materials, in a sourcing relationship of higher value. Assess the company’s purchasing relationships’ strength by checking if they’ve embraced the emerging strategies for streamlining organic supplier management. Review the company’s Supplier Relationship Agreement (SRA).

Fully burdened, determine how the company can improve efficiencies and margins without owning the supply stack

Key to maintaining positive margins without owned supply stacks is syncing supply chain plans with the business plan, and periodically reviewing it. This requires modeling the inventory holding cost upfront and analyzing historical price trends. The process involves scheduling inventory consumption, and managing assembly lines with lean inventory. Integrated forecasting by a combined team of operations, sales, marketing, and supply chain heads, with or without expert contribution, plays a crucial role.

Sourcing strategies are vital for a company to optimize its production. Right supplier identification, appraisal and engagement for acquiring goods and services is the central function of sourcing. The focus should be on moving from an operating function of purchasing to strategic sourcing.