STRATEGIC SOURCING

Strategic sourcing is an institutional procurement process that continuously improves and re-
evaluates the purchasing activities of a company. In a production environment, it is often
considered one component of supply chain management. Strategic sourcing techniques are also
applied to non traditional area such as services or capital.

The steps in a strategic sourcing process are:

1. Assessment of a company's current spend (what is bought where?)

2. Assessment of the supply market (who offers what?)
3. Total cost analyses (how much does it cost to provide those goods or services?)
4. Identification of suitable suppliers
5. Development of a sourcing strategy (where to buy what considering demand and supply
situation, while minimizing risk and costs)
6. Negotiation with suppliers (products, service levels, prices, geographical coverage, etc.)
7. Implementation of new supply structure
8. Track results and restart assessment (continuous cycle)

The term "Strategic sourcing" was popularized through work with a variety of Blue Chip
companies by a number of consulting firms such as A.T. Kearney, Booz Allen Hamilton,
KPMG, PricewaterhouseCoopers, and PRTM in the late 80s and early 90s. This methodology
has become the norm for procurement departments in larger, sophisticated companies.

 Outsourcing is a method that can be employed as part of the overall sourcing strategy for
services. This involves the transfer of staff and assets to an external or third-party
company which then provides them back as a service.

Sourcing optimization
Operations Research is the discipline of applying advanced analytics to help make better
decisions. Optimization, in turn, utilizes mathematical algorithms to rapidly solve a business
problem by evaluating all possible outcomes (or many outcomes) and selecting those ones that
yield the best solution.

When applied to sourcing and supply chain operations, optimization helps the sourcing
professional simultaneously evaluate thousands of different procurement inputs. This evaluation
can take into consideration the global market, specific current supply chain conditions, and
individual supplier conditions, and offers alternatives to address the buyer’s sourcing goals.

History Of Purchasing
Prior to 1900, purchasing was recognized as an independent function by many railroad
organizations, but in few other industries.Prior to World War I, purchasing was regarded as
primarily clerical.

During World War I & II – The function increased due to the importance of obtaining raw
materials, supplies, and services needed to keep the factories and mines operating.
1950s & 1960s - Purchasing continued to gain stature as the techniques for performing the
function became more refined and as the number of trained professionals increased. The
emphasis became more managerial. With introduction of major public bodies and
intergovernmental organizations, such as United Nations, procurement becomes a well-
recognized science.

1970s & 1980s - More emphasis was placed on purchasing strategy as the ability to obtain
needed items from suppliers at realistic prices increased.

1983 - In September 1983, Harvard Business Review published a ground-breaking article by

Peter Kraljic on purchasing strategy that is widely cited today as the beginning of the
transformation of the function from "purchasing," something that is viewed as highly tactical to
procurement or supply management, something that is viewed as very strategic to the business.

1990s - Procurement starts to become more integrated into the overall corporate strategy and a
broad-based transformation of the business function is ignited, fueled strongly by the
development of supply management software solutions which help automate the source-to-settle
process.

2000s - The leader of the procurement function within many enterprises is established with a C-
Level title - the Chief Procurement Officer (sometimes called the Head of Procurement).
Websites, publications, and events, and that are dedicated solely to the advancement of Chief
Procurement Officers and the procurement function arise. The global recession of 2008-2009
places procurement at the crux of business strategy.

2010s - The elevation of the function continues as Chief Procurement Officers are recognized as
important business leaders and begin to take on broader operation responsibility

Procurement steps
Procurement life cycle in modern businesses usually consists of seven steps:

Information gathering: If the potential customer does not already have an established relationship
with sales/ marketing functions of suppliers of needed products and services (P/S), it is necessary
to search for suppliers who can satisfy the requirements.

Supplier contact: When one or more suitable suppliers have been identified, requests for
quotation, requests for proposals, requests for information or requests for tender may be
advertised, or direct contact may be made with the suppliers.

Background review: References for product/service quality are consulted, and any requirements
for follow-up services including installation, maintenance, and warranty are investigated.
Samples of the P/S being considered may be examined, or trials undertaken.

Negotiation: Negotiations are undertaken, and price, availability, and customization possibilities
are established. Delivery schedules are negotiated, and a contract to acquire the P/S is completed.

Fulfillment: Supplier preparation, expediting, shipment, delivery, and payment for the P/S are
completed, based on contract terms. Installation and training may also be included.

Consumption, maintenance, and disposal: During this phase, the company evaluates the
performance of the P/S and any accompanying service support, as they are consumed.
Renewal: When the P/S has been consumed and/or disposed of, the contract expires, or the
product or service is to be re-ordered, company experience with the P/S is reviewed. If the P/S is
to be re-ordered, the company determines whether to consider other suppliers or to continue with
the same supplier.

CROSS FUNCTIONAL TEAM

A cross-functional team is a group of people with different functional expertise working toward
a common goal. It may include people from finance, marketing, operations, and human resources
departments. Typically, it includes employees from all levels of an organization. Members may
also come from outside an organization (in particular, from suppliers, key customers, or
consultants).

Cross-functional teams often function as self-directed teams responding to broad, but not specific
directives. Decision making within a team may depend on consensus, but often is led by a
manager/coach/team leader.

A non-business, yet good example of cross-functional teams are music bands, where each
element plays a different instrument (or has a different role). Songs are the result of collaboration
and participation, and the goals are decided by consensus. Skills to play all the instruments
involved are not required since music provides a standard language that everybody in the team
can understand. In short, music bands are clear examples of how these teams work.

A film production team is also a cross-functional team. The director actually is the team leader
but if he said action and at the same time the sound manager found some distortion or noise or
any thing which he is not convinced within his job, he can take the decision to stop until this
problem is solved. Simply put, every expert is the leader or the manager of the whole operation
when there is a problem related to his specialty.

Effects
The growth of self-directed cross-functional teams has influenced decision-making processes and
organizational structures. Although management theory likes to propound that every type of
organizational structure needs to make strategic, tactical, and operational decisions, new
procedures have started to emerge that work best with teams.

1) Less unidirectional - Up until recently, decision making flowed in one direction. Overall
corporate-level objectives drove strategic business unit (SBU) objectives, and these in turn,
drove functional level objectives. Today, organizations have flatter structures, companies
diversify less, and functional departments have started to become less well-defined. The rise of
self-directed teams reflects these trends. Intra-team dynamics tend to become multi-directional
rather than hierarchical. Interactive processes encourage consensus within teams. Also the
directives given to the team tend to become more general and less prescribed.

2) Greater scope of information - Cross-functional teams require a wide range of information to

reach their decisions. They need to draw on information from all parts of an organization’s
information base. This includes information from all functional departments. System integration
becomes important because it makes all information accessible through a single interface.

3) Greater depth of information - Cross-functional teams require information from all levels of
management. The teams may have their origins in the perceived need to make primarily strategic
decisions, tactical decisions, or operational decisions, but they will require all three types of
information. Almost all self-directed teams will need information traditionally used in strategic,
tactical, and operational decisions. For example, new product development traditionally ranks as
a tactical procedure. It gets strategic direction from top management, and uses operational
departments like engineering and marketing to perform its task. But a new product development
team would consist of people from the operational departments and often someone from top
management.

In many cases, the team would make unstructured strategic decisions—such as what markets to
compete in, what new production technologies to invest in, and what return on investment to
require; tactical decisions like whether to build a prototype, whether to concept-test, whether to
test-market, and how much to produce; and structured operational decisions like production
scheduling, inventory purchases, and media flightings. In other cases, the team would confine
itself to tactical and operational decisions. In either case it would need information associated
with all three levels.

4) Greater range of users - Cross-functional teams consist of people from many parts of an
organization. Information must take a form that all users understand. Not only engineers use
technical data and not only accountants use financial data and not only human resources
personnel use HR data. Modern organizations lack middle managers to combine, sort, and
prioritize the data. Technical, financial, marketing, and all other types of information must come
in a form that all members of a cross-functional team can understand. This involves reducing the
amount of specialized jargon, sorting information based on importance, hiding complex
statistical procedures from the users, giving interpretations of results, and providing clear
explanations of difficult concepts. Slicing and dicing techniques may prove useful in providing
different views of the information to different users. Data visualization systems can present
complex results in an intuitive manner.it is important to have monkeys in the organisation.

5) Less teleological - Since the publication of Peter Drucker’s views on Management by

objectives, business decision making has become more goal-oriented. Managers have come to
view decision making generally, and strategic thinking in particular, as a multi-stage process that
starts with an assessment of the current situation, determines objectives, then determines how to
reach these objectives. Management by objectives took this basic scheme and applied it to
virtually all significant decisions. Today many firms have started to opt for a less structured,
more interactive approach. One way of implementing this involves using self-directed cross-
functional teams. Proponents hope that these teams will develop strategies that will re-define
industries and create new “best practices”. They feel that mere incremental improvements do not
suffice. Cross-functional teams, using unstructured techniques and searching for revolutionary
competitive advantages, allegedly require information systems featuring increased interactivity,
more flexibility, and the capability of dealing with fuzzy logic. Artificial intelligence holds out
the promise of one day proving useful in this regard. Teams consist of members with variable
levels of skills and experiences brought together to reach the objectives.

E-PROCUREMENT
E-procurement (electronic procurement, sometimes also known as supplier exchange) is the
business-to-business or business-to-consumer or Business-to-government purchase and sale of
supplies, Work and services through the Internet as well as other informations and networking
systems, such as Electronic Data Interchange and Enterprise Resource Planning.[1]

Typically, e-procurement Web sites allow qualified and registered users to look for buyers or
sellers of goods and services. Depending on the approach, buyers or sellers may specify costs or
invite bids. Transactions can be initiated and completed. Ongoing purchases may qualify
customers for volume discounts or special offers. E-procurement software may make it possible
to automate some buying and selling. Companies participating expect to be able to control parts
inventories more effectively, reduce purchasing agent overhead, and improve manufacturing
cycles. E-procurement is expected to be integrated into the wider Purchase-to-pay (P2P) value
chain with the trend toward computerized supply chain management.

E-procurement is done with a software application that includes features for supplier
management and complex auctions. The new generation of E-Procurement is now on-demand or
a software-as-a-service.There are seven main types of e-procurement:

 Web-based ERP (Enterprise Resource Planning): Creating and approving purchasing

requisitions, placing purchase orders and receiving goods and services by using a
software system based on Internet technology.
 e-MRO (Maintenance, Repair and Overhaul): The same as web-based ERP except that
the goods and services ordered are non-product related MRO supplies.
 e-sourcing: Identifying new suppliers for a specific category of purchasing requirements
using Internet technology.
 e-tendering: Sending requests for information and prices to suppliers and receiving the
responses of suppliers using Internet technology.
 e-reverse auctioning: Using Internet technology to buy goods and services from a
number of known or unknown suppliers.
 e-informing: Gathering and distributing purchasing information both from and to internal
and external parties using Internet technology.
 e-marketsites: Expands on Web-based ERP to open up value chains. Buying
communities can access preferred suppliers' products and services, add to shopping carts,
create requisition, seek approval, receipt purchase orders and process electronic invoices
with integration to suppliers' supply chains and buyers' financial systems.

The e-procurement value chain consists of Indent Management, eTendering, eAuctioning,

Vendor Management, Catalogue Management, and Contract Management. Indent Management
is the workflow involved in the preparation of tenders. This part of the value chain is optional,
with individual procuring departments defining their indenting process. In works procurement,
administrative approval and technical sanction are obtained in electronic format. In goods
procurement, indent generation activity is done online. The end result of the stage is taken as
inputs for issuing the NIT.Elements of e-procurement include Request For Information, Request
For Proposal, Request for Quotation, RFx (the previous three together), and eRFx (software for
managing RFx projects).

Global sourcing
Global sourcing is a term used to describe practice of sourcing from the global market for goods
and services across geopolitical boundaries. Global sourcing often aims to exploit global
efficiencies in the delivery of a product or service. These efficiencies include low cost skilled
labor, low cost raw material and other economic factors like tax breaks and low trade tariffs.

Common examples of globally-sourced products or services include: labor-intensive

manufactured products produced using low-cost Chinese labor, call centers staffed with low-cost
English speaking workers in the Philippines and India, and IT work performed by low-cost
programmers in India and Eastern Europe. While these examples are examples of Low-cost
country sourcing, global sourcing is not limited to low-cost countries.

Majority of companies today strive to harness the potential of global sourcing in reducing cost.
Hence it is commonly found that global sourcing initiatives and programs form an integral part
of the strategic sourcing plan and procurement strategy of many multinational companies.
Global sourcing is often associated with a centralized procurement strategy for a multinational,
wherein a central buying organization seeks economies of scale through corporate-wide
standardization and benchmarking. A definition focused on this aspect of global sourcing is:
"proactively integrating and coordinating common items and materials, processes, designs,
technologies, and suppliers across worldwide purchasing, engineering, and operating locations
(p. 304)" [1]

The global sourcing of goods and services has advantages and disadvantages that can go beyond
low cost. Some advantages of global sourcing, beyond low cost, include: learning how to do
business in a potential market, tapping into skills or resources unavailable domestically,
developing alternate supplier/vendor sources to stimulate competition, and increasing total
supply capacity. Some key disadvantages of global sourcing can include: hidden costs associated
with different cultures and time zones, exposure to financial and political risks in countries with
(often) emerging economies, increased risk of the loss of intellectual property, and increased
monitoring costs relative to domestic supply. For manufactured goods, some key disadvantages
include long lead times, the risk of port shutdowns interrupting supply, and the difficulty of
monitoring product quality. (With regard to quality in the food industry, see Roth et al. (2008).
[2]
).

International procurement organizations (or IPOs) may be an element of the global sourcing
strategy for a firm. These procurement organizations take primary responsibility for identifying
and developing key suppliers across sourcing categories and help satisfy periodic sourcing
requirements of the parent organization. Such setups help provide focus in country-based
sourcing efforts. Particularly in the case of large and complex countries, such as China, where a
range of sub-markets exist and suppliers span the entire value chain of a product/commodity,
such IPOs provide essential on-the-ground information.

Over time, these IPOs may grow up to be complete procurement organizations in their own right,
with fully engaged category experts and quality assurance teams. It is therefore important for
firms to clearly define an integration and scale-up plan for the IPO.

SUPPLY CHAIN
A supply chain is a system of organizations, people, technology, activities, information and
resources involved in moving a product or service from supplier to customer. Supply chain
activities transform natural resources, raw materials and components into a finished product that
is delivered to the end customer. In sophisticated supply chain systems, used products may re-
enter the supply chain at any point where residual value is recyclable. Supply chains link value
chains.
SUPPLY NETWORK
A supply network is a pattern of temporal and spatial processes carried out at facility nodes and
over distribution links, which adds value for customers through the manufacturing and delivery
of products. It comprises the general state of business affairs in which all kinds of material
(work-in-process material as well as finished products) are transformed and moved between
various value-added points to maximize the value added for customers.

A supply chain is a special instance of a supply network in which raw materials, intermediate
materials and finished goods are procured exclusively as products through a chain of processes
that supply one another.

In the semiconductors industry, for example, work-in-process moves from fabrication to

assembly, and then to the test house. The term "supply network" refers to the high-tech
phenomenon of contract manufacturing where the brand owner does not touch the product.
Instead, she coordinates with contract manufacturers and component suppliers who ship
components to the brand owner. This business practice requires the brand owner to stay in touch
with multiple parties or "network" at once.