Six Internal Organizational Conditions Related to Sourcing Strategies in Supply Chain Management.
Following are six Internal Organizational Conditions Related to Sourcing Strategies in Supply Chain Management.
Allowing sufficient time for sourcing helps ensure that the best price is captured for a product or service that meets or exceeds requirements. This timing cannot be dictated solely by supply management. Rather, it needs to be coordinated among supply management and the functions that require the goods or services being sourced. The internal customer’s timing requirement is also one of the factors affecting sourcing strategy. For example, if production needs to obtain commodities for a new product launch quickly, or the internal customer requires a service to be performed with little advance notice, then evaluating for the best price that meets specifications may be the best strategy. In both these scenarios, global sourcing may not be fast enough to meet the needs.
Internal financial strategies can dictate sourcing strategies. An organization may need to capture savings quickly to meet short-term financial targets. Under this circumstance, best-price evaluation with the support of an e-auction may be the best strategy to quickly achieve savings. Based on financial targets, the speed of the savings capture may be more important than maximizing the amount of savings achieved. In circumstances where an organization wants to maximize the amount of savings to meet a longer-term goal, then a combination of strategies can be implemented.
Sales forecasts are the basis for operations schedules that, in turn, are the basis for sourcing decisions. Sales forecasts and other marketing activities such as product promotions, advertising campaigns, and new product or service introductions help supply management professionals determine what categories sourcing should focus on. A category that is forecast to grow significantly may be a target for strategic sourcing because the new volume can be leveraged for a better price, and more capacity via a larger supply base may be needed. Sales or marketing strategies also influence sourcing strategies because they determine the size and importance of a category. If a category is forecast to shrink, then the relevant sourcing strategy may be to reduce the number of suppliers, and simplify the order and replenishment process. Associated services to promote the product or service, such as advertising, may also be reduced.
It is important to create a consensus within the organization on where supply management could add value. Every class of product or service an organization purchases should have a defined sourcing strategy. A strategy is a long-term (three- to five-year) action plan that defines what needs to be done to attain a stated goal. A strategy should enable an organization to establish or maintain a competitive advantage. This strategy must support the business unit, corporate goals and organizational strategies, as well. Some of the components that make up a sourcing strategy are the definition of the category, category spend, buying policy, sourcing policy — including desired number of sources, type of source and location(s) of source(s), supplier relationship, supply marketplace conditions, competition among suppliers, number of qualified suppliers, competition among buying firms for the purchased item or service, lead times, contractual obligations, and role and location of inventory. Sourcing strategies need to be reviewed and potentially modified each year, or whenever a significant market change has occurred.
A technology strategy defines how information technology should be used as part of an organization’s overall business strategy. The importance of technology, internal resource capabilities, and the level of commitment of financial resources for technology all influence sourcing strategies. Several sourcing strategies, such as relationship restructuring, are best implemented when technology support is available. For example, technology is critical in creating a mechanism to share information and link all key parties throughout the supply chain, which is one of the leading tactics within relationship restructuring.
Working collaboratively with the internal product and service development team (or teams) is key to supply management’s success. Along with at least some of the internal organizations listed above, the supply management group needs to develop a cohesive strategy and forecast to align with the organization’s product/ service development goals and budget.
Understanding Stakeholders’ Objectives in strategic sourcing and supply chain management
To be successful, organizations must make good decisions about which resources to purchase and which suppliers to use. Supply management professionals have an important role in shaping these decisions even before the sourcing cycle begins. First, they must understand the organization’s strategy and goals to make good sourcing decisions. For example, if an organization’s strategy is to be a leader in innovation, supplier product development and technical capabilities are likely to be more important than the lowest price when selecting key suppliers. Japan Display learned this the hard way when Apple switched to cutting-edge display screen technology for the iPhone 8® and did not use it as a supplier.3
Second, supply managers should proactively work with internal customers to understand how well their current needs are being met as well as their future plans, demand forecasts, budget expectations, and operating constraints. For example, if demand is forecast to increase, you should proactively determine if current suppliers have the capacity to meet the future delivery requirements. If not, by understanding supply market conditions and supplier capabilities, supply managers can work with internal customers to determine an appropriate strategy, such as collaborating with current suppliers to increase capacity or engaging additional suppliers. In this situation, current suppliers are external stakeholders, as they will be affected by the higher volume requirements so it is important to communicate with them as well.
In addition to internal customers, there are other internal stakeholders who are affected by sourcing decisions. Opportunities to create value through sourcing should be communicated to and supported by the executive management team, a group of important internal stakeholders as they are ultimately responsible for the organization’s overall performance. Depending upon the type of purchase, other internal stakeholders may include finance, engineering, operations, quality, and logistics. For example, a supplier’s quality will affect the quality department’s workload, and its delivery performance will impact planning, scheduling, and receiving. Thus, you must have a holistic view of how sourcing strategies will affect all internal and external stakeholders.
Recognizing Needs in strategic sourcing and supply chain management
When a purchase is needed, the sourcing cycle begins. For routine purchases or rebuys, internal customers communicate their needs to supply management in three different ways. One way is for an internal customer to complete an electronic form (a purchase requisition) to describe the products or services needed. Purchase requisitions follow a standardized format and contain information such as a complete description of the purchase, the quantity needed, the date the product or service is needed, special requirements, and the account to be charged. Based on knowledge of the organization’s previous and current purchases and the supply market, you may suggest changes to the requirements that will enhance value for the organization. For example, the internal customer may have asked for a specific brand name product. If available, you can suggest purchasing a lower-priced or more readily available non-name brand product of equal quality.
For repeat purchases, a purchase requisition can also be generated by the inventory control department. For example, an order may be issued automatically when the inventory level reaches a predetermined reorder point. A requisition may also be generated by an organization’s materials planning requirements (MRP) system based on a bill of materials. A bill of materials is like a “recipe” that provides the list of quantities and descriptions of all materials required to produce one unit of a finished product.
When the organization is developing new products or services or doing other major projects, such as outsourcing or process upgrades, needs are identified collaboratively with internal customers or as part of a cross-functional team. In these situations, a needs analysis identifies the purchase characteristics that will meet the organization’s business requirements.4 During the needs analysis, it is important to distinguish between the “needs,” which are required, and the “wants,” which are desired but not necessary. Requirements that are nice to have are not essential and can reduce the number of suppliers that are available, increase delivery lead time, and increase costs. For example, when purchasing a new machine, engineering may want a ten-year useful life. However, if the product and its technology are expected to change in three years, a useful life of three years is needed, which is likely to reduce the machine’s purchase price.
There are many different considerations when determining needs and the importance of each depends upon the type of purchase. The technical requirements of the product or service must be identified. What are the performance expectations, under what conditions, and for how long? What features are essential? What quality is required and how will it be measured? Are there regulatory issues that need to be addressed, for example, for food products, conflict minerals, or hazardous materials? What is the demand forecast and expected product lifecycle? How does the supplier need to package, label, and ship the product? What is the order frequency and delivery timeframe? Will vendor-managed inventory be used?
After the purchase needs are identified, the next step is to develop a sourcing strategy that is consistent with and meets the objectives of the category plan. There are many strategic decisions that must be made at this stage concerning the choice of suppliers. Should suppliers be internal to the organization or external? If the decision is to buy rather than to make, should existing or new suppliers be used? What supplier location is best (domestic or international) for the organization? What capabilities and supplier characteristics are needed? For example, should the organization purchase from a distributor, or would it be best for the organization to work directly with a manufacturer? The remaining sections will describe these decisions.