1_Procurement Insights

Information for Informed Sourcing Decisions

sourcing decisions

Information is most important for making right decisions. Information has to be reliable and available in time. For Sourcing Decisions, source of internal information are companies ERP system. External data are Market intelligence data those are essential for sourcing decisions like budgeting & forecasting processes.

To decipher the internal data obtained from companies ERP system, Spend Analysis is the most popular tool.

What is Spend Analysis, how it helps in Sourcing Decisions and what do we look for in spend data?

Spend Analysis is a process of analysing historical spending of an organisation, typically by commodity, category or suppliers. Answers of following questions are sought for major spend category-

  1. What is being purchased?
  2. How much quantity is purchased?
  3. What are the prices?
  4. Who are the suppliers?

What information Spend Analysis provides to Sourcing?

  1. Areas where standardisation is needed in purchase
  2. Where can we reduce cost by leveraging spend with fewer suppliers
  3. Opportunities to reduce supply base

Cost saving are of two types, Cost Reduction and Cost Avoidance

Cost Reduction methods reduce the acquiring cost of purchase whereas cost avoidance is about preventing cost increase. Alternate sourcing is a popular method of cost reduction whereas cost avoidance can be done by value analysis & negotiations.

What are the Steps of Spend Analysis?

  1. Collecting the data from ERP, procurement software being used in organisation
  2. Cleansing the data and removing the redundant data
  3. Mapping the data with standard classification schema
  4. Analyse the Data and report

Spend analysis helps sourcing team to identify addressable and non-addressable spends. Although some of the spends may seems like non-addressable, with proper presentation to management all spends can be treated as addressable.

External source of Information – How Market Intelligence helps in Sourcing Decision Making?

Market intelligence is the process of gathering and analysing the forces those impacts or influence the supply & demand of specific commodity or service.

It also includes study off Suppliers Industry, technology and trends.

Market Intelligence helps Sourcing Manager to take informed decision in new product/service design decisions, Budgeting & Forecasting.

Market intelligence can be gathered from various sources like information collected from suppliers through RFIs, Suppliers company website, company press release, Trade journals, news magazines, Government websites and various benchmarking resources etc.

Market intelligence is used to understand market condition. Understand market condition is vital for taking important sourcing decisions. Market Intellegence helps to understand following market conditions –

  1. Product/service Life Cycle – in which stage of its life cycle the product is,
  2. Whether it is buyers or sellers market.
  3. Risk-value matrix of product/service being purchased.

What are the Product Life Cycle stages and how the sourcing strategy varies?

Product/Services Life cycle consist of five stages –

  1. pre-commercialisation
  2. introduction
  3. growth
  4. maturity and
  5. Decline.

At different stages of product/service life cycle sourcing strategy will be different for success.

In pre-commercialisation stage sourcing looks for flexible suppliers because of the uncertainty of the product/service. Suppliers are involved in early stages in specification development for the product/service. Sourcing decisions mainly focussed on fast delivery of materials for research and development, standardisation in material and design.

In introduction stage sourcing decisions are focussed in timely delivery of adequate material for production, develop reliable source to avoid supply risk, manage engineering changes with suppliers, prepare standby suppliers and reduce supply risk.

In growth stage Sourcing ensures continuity of supply, developing additional source of supply and focus on reducing cost. Sourcing Manger also thinks about in-house manufacturing to reduce dependency on suppliers and increase control in some critical products.

In maturity stage sourcing decisions and targeted on reducing lead time, implement long term contracts and continuous improvement to drive total cost down.

In the decline stage, Supply Manage keep on working to reduce total cost along with more insist on asset and inventory recovery. Also explore the opportunity of full sub-contacting of the product to release the equipment for other new products. Here rapid adaptation of change is more important than price of the sourcing.

Buyer’s of Seller’s Market

A buyer’s market occurs when the supply exceeds demand and sellers market is the reverse. In Buyers market there are higher chances that the buying price will be closer to the buyer’s expectation. Buyers get more favourable payment terms, inventory stocking terms and delivery.

In Sellers market, Sourcing Managers need to maintain relations with as many suppliers as possible to ensure timely delivery of product/service because the market economics are in favour of suppliers.

Risk / Value Matrix

A two by two matrix that represents supply risk in one axis and value in one axis, known as Kralzic Matrix, first introduces in 1983.

Market intelligence help to gather data about supply risk.

Items are categorised in 4 types depending on where it falls in the matrix. There will be different sourcing strategies for different group of materials.

High Value & High Risk items should be handled most strategically and work towards building partnership or collaborative relationship with suppliers.

High Value & Low Risk are the leveraged items and our target should be to get better and better prices standardise and consolidate the supply base.

Low Value & High Risk items are critical bottleneck items for which our strategy should be to develop multiple suppliers to mitigate any supply failure of single supplier.

Low Value Low Risk items are non-critical items which should be automated to reduce transaction or administration cost.

Conclusion

Information required for informed Sourcing Decisions is either company’s internal data or external data of supply market. Internal data source is mainly company’s ERP data that is further cleansed and analysed in Spend Analysis. Spend Analysis helps us to focus & prioritize our sourcing actions. Collection of external data is Market Intelligence that helps us to understand supply & demand scenario in the marketplace. Sourcing Strategies that works for Buyer’s Market are different than strategies those work for Seller’s Market. Sourcing Strategies for new product development is entirely different than a product that is already selling at its peak. Risk and Value analysis of purchasing categories helps us to take up appropriate action to get the most benefit out of our sourcing strategies.   

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