Chapter 3: Current Sourcing Process Analysis
In previous chapters, you broke down your current spend by category and analyzed the supplier market. Now you will begin to analyze your current sourcing process.
After completing the market analysis in Step 2, you discovered new information about the components most suitable for your organization. You also identified new potential suppliers who could possibly deliver the components you need. Now it’s time to understand what your current negotiating position is among these new alternative suppliers. Do you understand everything about the components you buy for your category? Are your current suppliers the best quality price partners for you?
To answer these questions, you need to have a benchmark for both products and suppliers. You need to know which supplier provides products with the best functionality, at the best price possible, and with the most reliable service.
Let’s start the analysis with the components you have in your categories that have been bought from different sources.
Procured component analysis
Begin by interviewing stakeholders and asking open-ended questions. For example, you might ask designers why you are using an engineered part instead of a cheaper, easily-replaceable standard component. This might be a case where the designer has accidentally requested a component that makes the end product more expensive. I personally have seen some over-engineered components. Here’s one example that comes to mind: a machine is supposed to work in a normal environment , and in the bill of materials there are dozens of different fasteners made of carbon steel, but one item is made from stainless steel. There is a huge price difference between bolts made of carbon steel or bolts made of stainless steel.
Sometimes you might produce the same or similar products over the space of several years. The product development department is going to be focused on its own design but not at the procured component level. Are the components you’re buying really the best ones on the market? Are they being bought at the optimal price-quality ratio? Current technology is developing so fast, and there are new products and technologies constantly coming onto the market.
Category managers should be experts in their own categories; they should be able to see these new opportunities. When the “catman” finds alternative components or solutions, he or she should consult with product design and engineering. In some cases, the final approval for a new component should be gotten from the end customer.
Category managers should also find similar or alternative components on the market that they can benchmark against the existing components. The benchmarked product should provide a base for comparing the total cost of ownership. As I previously described, the TCO has different cost items, but here you should take into consideration additional criteria, such as ease of assembly and working efficiency. There can also be different benchmarked products for different criteria. For example, best price can be one product but best functionality another. As soon as you identify the benchmarked component, you can define a gap and start thinking about how to close it.
Supplier base analysis
Now you’re going to do the same thing with suppliers as you did with the components. Based on the component research results, start to evaluate potential suppliers and compare data with existing ones. Look over their financial ratios; find out their geographical location and customer references. Make yourself a table to compare the data for your existing suppliers and your potential suppliers. Include one sheet for the company’s overall data and a second sheet for total cost of ownership. You need to get as detailed a picture as possible for the existing supplier value chain and cost. The outcome of this exercise is to find a list of potential suppliers to whom you can send an RFI.
Besides these obvious factors, there might be some hidden ones that could remarkably increase the initial cost of changing suppliers. In order to start doing business with a new supplier, you will have to invest a certain amount of time and money. This is known as the supplier acquisition cost (also referred to as supplier onboarding costs). Try to predict your acquisition costs by looking at the costs for qualification, audits, tooling, testing, training, and travel.
Remember, both benchmarked products and suppliers must be from the global market. Even if you are not going to source from overseas, it is important to have benchmarks from a global perspective.
Supply chain analysis
To begin this analysis, take a look at the geographic reach of your supply chain. Your supply chain will look vastly different depending on whether your suppliers are located next door or overseas. When comparing local suppliers with overseas suppliers, you should look at several factors beyond procurement price. For example, if you move your supply chain to Asia, transit time may increase by up to 60 days and you’ll be buying bigger batches to save on logistics costs. Of course, this will then increase your stock levels. All of this affects your production planning. On the other hand, a local supply chain might be more flexible. With overseas sourcing, you might win on product cost, but you’ll lose on logistics. Therefore, you need to compare total supply chain costs for all possible alternatives and weigh your options.
Benchmark your existing supply chain with both local and global alternatives. Start with delivery terms, transit time, batch order size, and stock levels, but make sure to consider everything when benchmarking your supply chains.
Below are some open-ended questions that can help you identify supply-chain-related challenges involved with changing suppliers. Find two answers to each question – what it’s like with your current suppliers and what it would be like with new ones.
- What is your current sourcing pattern according to the Kraljic matrix?
- What size are your typical batch orders?
- What is your current average inventory level?
- What is your purchasing currency?
- Do you use collaborative e-tools?
- What is your current supply set up?
- Do you buy locally, regionally, or globally?
- What kind of logistics routes do you use?
- Do you have to pay customs duties?
- What are freight costs per unit?
- What kind of risk do you have in the current supply chain?
- Do you have active alternative sources?
- Do you see any options for getting more value out of your current supplier?
Doing this valuable exercise will help you understand your purchasing pattern, which is an essential part of the next step: defining gaps and creating a list of opportunities.
After researching and finding benchmarks from the global market, you will have a lot of new information. Take the time to properly record your findings. Make note of any that seem illogical. For example, why are we buying a bigger volume from a supplier whose product is more expensive? Or why do we have different specifications for the same product? Why are we are using different surface requirements for similar components? These questions will help you start to identify and define the gaps in your sourcing procedures.
A good category manager must be critical of the facts and ask for the reasoning behind them. Write down these “whys” since they may lead to sources of additional savings. This is your list of opportunities.
In most cases, your list of gaps and opportunities will relate to dry facts that will need confirmation from other stakeholders. A sourcing person cannot be an expert in everything, so he or she should look to the experts for additional information. Typical sourcing stakeholders are product designers, production engineers, and logistics specialists. They should be dealt with at the specialist, not managerial, level because you need real data directly from the field.
Present your list of gaps and opportunities to both your team and the specialists and experts you’ve identified as being able to help you with the in-depth data you need. Work together to confirm that the gaps you’ve identified are indeed gaps and not simply misinformation in need of clarification. With the specialists on board, you may be able to identify more gaps between the current situation and the benchmark and come up with new opportunities for savings.
During this step, you will not need to begin problem solving quite yet. Worry about identifying and defining first; then, in Step 4, you will start choosing a strategy to help you bridge these gaps.
After completing this step, you are almost ready to choose a strategy. This is a big thing if you know what your current sourcing setup is and what you can possibly achieve in the future. You will probably have over a dozen ideas and topics, and you’ll see that there’s “low-hanging fruit” but there will also be more complex ideas. Do not overthink this; you cannot pick all the savings at once.
Strategic sourcing in category management is a continuous process of improvement, and you can plan your future actions to pick the tricky “fruits” in the next round. The important thing is that you have identified the gaps, and you know what to do. In strategic sourcing, as in negotiation, the one who has the most information generally has more power and a greater probability of reaching the target.
Don’t forget to share this guide with your colleagues!
Written by Peep Tomingas