By Hans Dau - December 26, 2020
A proper strategic sourcing approach is grounded in microeconomic principles and designed to reduce costs for both parties in the long term.
Here are a few more final key steps:
Perform disaggregated analysis on bidding data: A bidding process or request for proposal (RFP) is the main source of data and can be quite complex. Strategic sourcing analysis is usually about uncovering many small improvements that add up to meaningful savings, blocking and tackling, tedious iteration, and outworking the suppliers, rather than big, brilliant insights. The availability of big data methods enables sophisticated analysis and any simplification of pricing approaches merely to facilitate analysis is not necessary nor acceptable.
Negotiate for optimal supplier configuration: Negotiation is the iterative process of leveraging the fact that the buyer is now in possession of more information than the suppliers. Based on the highly disaggregated analysis, one can find each supplier's sweet spots and configure a preferred supplier base where each purchase is routed to the most competitive source. It is critical that all bidders remain convinced that they can gain a lot or lose a lot of business and that there is no preference for anyone outside cold, hard economics, and math.
Implement for ongoing competition: Even the most sophisticated and thoughtful pricing arrangements cannot account for unknowable innovation, temporary excess capacities, new entrants, etc. Therefore, it is critical to maintain ongoing competition while balancing the commitment to the preferred supplier base. This can be accomplished by allowing purchase level competition subject to an agreed-upon pricing umbrella with minimum / maximum market shares within the preferred supplier set.
Strategic buyers should not go back to business as usual, but instead, create a competitively differentiating supply chain for the long-term. The COVID supply chain experience provides the organizational urgency to act and the likely ongoing weakness in the world economy provides the motivation to suppliers to cooperate.
Most strategic sourcing initiatives take about six to nine months and return three to five times their investment within the first year of implementation, but require a high-level of expertise and analytical sophistication. If such resources are not available internally, senior management should build or bring in the talent and capabilities required before the opportunity passes.