Procurement is a tricky business.
It’s a balancing act between what we can predict, and predicting the unpredictable. From sourcing the lowest cost products to finding ways to build a supply chain that’s resilient in unpredictable times, building the perfect sourcing strategy can be tough but it is necessary nonetheless.
Luckily, there are a few strategies that can help you optimize upstream planning.
What is the 7-Step Strategic Sourcing Process?
Streamlining your indirect material sourcing strategy is an important practice for businesses across industries, especially in a time when supply chains have experienced what seems like consistent disruption. As organizations struggle to keep their heads above water, experiencing unplanned downtime is the last thing they can afford right now.
Different models have strived to optimize sourcing processes, but there isn’t a one size fits all solution. In a new technology-driven marketplace, traditional techniques can still work, but they should be reinforced with cutting-edge MRO technology.
Here’s how you can elevate a popular technique for developing a strategic sourcing process with examples.
1. Spend analysis
To determine what’s working and what isn’t, start by taking a critical look at your current procurement processes and suppliers.
Efficient spend analysis occurs when companies proactively seek methods for gathering , analyzing, and categorizing expenditure data at both the facility level and the network level .
This is when you identify what you spend, where you spend, and the ROI for that expense. Spend analysis generates valuable insight that aims to decrease procurement efforts, optimize costs, and improve efficiency through better visibility of the sourcing ecosystem.
It exposes spending with non-contracted vendors so that you can target maverick spend or lost savings on non-negotiated price points. Spend analysis also allows you to pinpoint frequent expenses that don’t have a contracted vendor in place or ways for you to consolidate purchasing contracts with a smaller list of vendors. It’s the starting point for risk elimination and inventory optimization.
Be sure that the data you collect for spend analysis is clear and comprehensive. It should be collected in a consistent way across sites so that you can make sense of it from one location to another.
Because this first step is so critical for reaping the benefits of the next six steps, it’s important to get it right.
Conducting this level of analysis can be an arduous task if it’s done manually, and if when you’re dealing with multiple plants and facilities, consultants may require extensive time to bring back meaningful results. Try to sidestep the hassle and time constraint by using a purpose-built MRO software to get results quickly, it’ll also help with steps farther down the line.
2. Market Research
Market analysis for different vendors and supplies allows you to leverage existing research against existing contracts or identify new vendors.
Whether you go local or international, you want to look for a vendor with a reputation of being reliable, consistent, and high-quality. Look through existing partnerships and their presence in their respective markets.
You should also build an awareness of key cost drivers including:
- part costs
- lead times
- shipping costs
- competition (dependant on whether the industry is growing or shrinking)
- potential political, social, and ecological concerns
Robust research allows you to construct accurate supplier profiles that can be assessed to identify potential pain points, areas of risk, and evaluate vendors’ market positions.
This information can help uncover opportunities to renegotiate contracts, identify new vendors, or find more efficient suppliers. The more awareness you have of a supplier’s market, the better. This is ultimately what will help you most with upstream planning and avoiding potential bottlenecks.
3. Shop around
With a better picture of the market, you can start narrowing down potential strategic sourcing vendors. Consider your organization’s compliance requirements, end goals, and performance objectives.
Having a clear idea about what you want from a vendor can help you in these two ways:
- It helps narrow down your options in the supplier pool.
- Ensures that your selected strategy aligns with your business objectives.
Explore different options across the market by comparing new vendors to those you are familiar with and collect as much information as possible. Understanding where suppliers fit in your market helps leverage contracts, so be thorough. This is also a great spot for you to identify vendors who can consolidate some of your purchases.
Be sure to ask focused questions about bottlenecks in the market you’ve identified, fluctuations in pricing, and supply chain disruption responses. The information you gather will be helpful in building a framework for future contracts.
From there, start creating a comparative list of vendors based on factors like:
- Financial performance
- Historical and current compliance with government and industry standards
- Delivery and warranty policies
Being open to new vendors and thorough in preliminary research can significantly improve implementation and your relationship with suppliers.
4. Negotiate with vendors
Now that you’ve decided who you want to buy from, you can start building out potential procurement processes with your shortlist.
Ask strong candidates to submit proposals that include price points and delivery processes to start negotiations.
Unfortunately, the balance of power has shifted from buyers to suppliers in many industries. In some cases, suppliers have eliminated competition by driving down costs or by developing disruptive technology. In other cases, sky-high demand and disruption has outstripped supply so much that many suppliers can charge much higher prices than companies experienced before.
Regardless, it’s important that you still advocate for your business. There are plenty of tactics out there to turn the deal in your favor.
For example, consolidating purchasing across units can help cut costs because it increases purchasing volume. Consolidating vendors, too, can work similarly. Some suppliers offer discounts for large orders, and it can go a long way in saving on shipping costs.
Understanding manufacturing processes and industry standards also lends an edge in negotiation, so keep any research or relevant data close by. If your supplier knows that you’ve done your homework, you can start your relationship with them on more equitable terms.
5. Create a procurement contract
Now that you have research and negotiated price points on hand, you can begin to draft a procurement contract or reevaluate your existing one.
This is a critical part of streamlining your strategic sourcing process, especially if there are existing bottlenecks you want to address. No detail is too small to address, and no stone should be left unturned.
To help you target your needs, use collected data to write clear agreements surrounding:
- Terms and conditions
- Payment terms and pricepoints
- Delivery terms
- Delivery delays
- Supply shortages
Getting the details out in the open helps avoid ambiguity and confusion at the start of your relationship, building a foundation of transparency and accountability. The benefits of reliable suppliers manifest themselves in a wide range of areas, from reasonable prices to shortened delivery times.
What’s more, contracts can be excellent tools to measure supplier performance as well. They communicate clear benchmarks with your suppliers and offer measures to keep them accountable when those terms are not met. For instance, you may choose to write in a rebate for late deliveries or create agreements for alternate sourcing in cases of backorder.
Your contract will give you something to measure data against, because ultimately if you’re cutting costs through rebates for delayed deliveries, you may not actually be optimizing your sourcing process.
6. Establish strategic relationships with your vendors
With your contract in place, you can begin to establish a strategic relationship with your vendor.
Onboarding your new vendor is a critical part of optimizing your sourcing process, especially if you are moving on to a new vendor. You should address the concerns and needs of both vendors and team members responsible for interacting with the new supplier.
Iterating the importance of using only contracted vendors while purchasing can help reduce lost savings and duplicate spending. It’s best practice to do this by centralizing procurement processes and spending data so that you can continue to conduct robust spend analysis.
Keeping your vendors and suppliers in the loop is also critical. Forge a resilient relationship with them by keeping them in constant communication and demonstrating their importance. They should be a part of relevant compliance meetings and made aware of strategic efforts to scale up so that they can provide you with services that go beyond timely deliveries.
7. Evaluate MRO performance
Your strategic sourcing process doesn’t end after onboarding your suppliers, nor will it be perfect on the first go. Given the dynamic nature of the global market, conditions can change rapidly, making your MRO sourcing strategy a constant work-in-progress that always has room for improvement.
It’s important that your procurement team evaluates and measures the performance of your suppliers over time by collecting harmonized data and benchmarking supplier performance. This will shed light on areas that need attention, and you can quickly notify your suppliers before it snowballs into a bigger problem.
Make the process more efficient
The 7-step strategic sourcing process is a widely used strategy for optimizing indirect material sourcing. The tried and true method has worked for many, and it may even work for you.
Luckily, some tools exist now to further streamline the process. Coupling this well-regarded approach with technology can help your team see results faster.
Streamline data collection and comparison
When data is scattered and fragmented across multiple sites, analysis can be extremely difficult. There may be too much disparate data for you to make sense of true inventory numbers, indirect material spending, and supply chain resilience.
Decentralized systems are susceptible to rogue spending, duplicate parts, and shortages of key materials. Even if sites are properly managed, small inefficiencies in spending across the board add up and can impact your bottom line.
Use a materials management intelligence tool that will help you consolidate data into a single AI platform. Harmonized data returns true inventory numbers, tracks maverick spend, and helps identify the strongest and weakest links in your enterprise network. This ultimately helps reduce overall cost while simultaneously balancing risk.
Leverage MRO intelligence tools
Artificial intelligence and machine learning can take your indirect material sourcing process to the next level.
This technology uses historical data to derive valuable insights that are used to render suggestions and action items to optimize spending. Plus, this technology is smart enough to keep up with and integrate incoming data so that optimization is an ongoing process. This results in the highest possible ROI because it builds on current procurement strategies, rather than phasing it out in stages.
These tools also allow you to monitor Key Performance Indicators (KPIs) so that you can evaluate suppliers based on performance. Not only does this give you the ability to hold vendors accountable, but it is also an excellent way to ensure that you reap the benefits of your negotiated contract.
Keep procurement strategies consistent
Investing in the right tool can make upstream planning simpler for everyone involved. For one, it makes negotiated contracts accessible across sites and mitigates the need for shopping around.
It also keeps purchasing to a minimum by keeping current inventory numbers front and center. Consistent procurement strategies can help you increase purchase volume by consolidating spending across sites, ultimately allowing you to negotiate the best possible procurement contract.
Couple tried and true methods with new tech
Using new technology to streamline data collection and centralize procurement processes can help you see high-yield results from your optimization strategies.
These systems also make your sourcing scaleable and can help you respond to unpredicted disruptions with informed decisions. In the end, the advantages of these new tools help you exercise as much control as possible in an ever changing supply chain. Traditional approaches to streamlining indirect material sources still work, but adopting the right tools to enhance those processes will generate faster longer-lasting results.
To learn more about balancing efficiency and responsiveness through material management software, download the ebook on overcoming MRO challenges today.