Sourcing Approaches and Activities

Sourcing Approaches and Activities

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Sourcing Approaches and Activities

Sourcing is an integral function of supply chain management in business organizations. Sourcing helps identify the right products and services that are needed to operationalize a business enterprise. As such, sourcing is a component procurement process that supplements purchasing (Monczka, Handfield, Giunipero, & Patterson, 2015). Sourcing can be a valuable component of the overall business strategy if it contributes to the competitive advantage of the business organization. In the contemporary, highly-competitive business environment, comparative advantage guarantees firms of profitability and sustainable existence. Therefore, sourcing can contribute to the competitive advantage of a firm if it identifies supplies that are cheap enough but of sufficient quality to enhance the cost-effectiveness of the business processes in the organization. However, sourcing is now a complex process due to globalization and technological advancements, which have occasioned the increase in international trade and the delineation of supplier geographical boundaries (Monczka, Handfield, Giunipero, & Patterson, 2015). With improved access to international suppliers, firms now have to take a strategic perspective in their sourcing processes. This shift in the supplier environment has necessitated strategic sourcing in which firms seek out the best possible supply values in the global marketplace that help align the purchasing strategies to business goals and objectives.

This discussion delves into the sourcing and procurement process used by firms and the role played by suppliers in guaranteeing the competitive advantage of firms. Supplier selection is also discussed against the backdrop of globalized trade and advancements in technology. Strategic sourcing and procurement is also discussed to identify what makes these processes effective. As such, the discussion begins with the structure, strategies and selection of sourcing strategies before explaining the role, importance and selection of suppliers. Lastly, the paper discusses the factors contributing to the effectiveness of strategic sourcing and procurement programs.

Sourcing Process

The sourcing process has evolved tremendously from the days when the supply chain paradigm was premised on purchasing agents to becoming strategic with the advent of strategic supply chain management. The purchasing agent approach was abandoned because of its silo configuration that saw the sourcing of suppliers being handled as a separate function of the procurement department in an organization. Nowadays, the strategic supply management paradigm is an integral part of strategic management, with sourcing adopting a collaborative approach in the decision-making process. Current sourcing initiatives address the limitations associated with traditional processes, such as high fees, stakeholder resistance and apathy due to lack of buy-in, limited knowledge transfer that stifles buyer and supplier development, lack of scalability, and inefficiencies in the execution of the process (Burt, Dobler, & Starling, 2003). Moreover, they incorporate the internet and digital technologies to improve process efficiencies. Therefore, strategic sourcing not only identifies suppliers that provide the cheapest good and services, as is the case in traditional tactical sourcing, but focuses on pinpointing the best suppliers that can fit into the strategic goals and objectives of the firm. As such, the supplier-organization strategic fit and continuous evaluation are central to the sourcing process. More importantly, strategic sourcing, unlike tactical sourcing, is a long-term process that creates a win-win for the firm and suppliers using model technological tools and skilled personnel. Strategic sourcing has structures and strategies that ensure that organizations engage suppliers that support the organizational strategy and support the competitive advantage of the firm.

Although numerous sourcing process models exist today, the strategic sourcing model proposed by Robert J. Engel is particularly useful in contemporary firms because it outlines a stepwise procedural approach.

Structure of the Sourcing Process

The structure of the sourcing process outlines the stages and activities involved in the sourcing process. Various sourcing process structures have been documented. In this case, the two models that are discussed are the three-component structure (Lee, Bichler, Verma & Lee, 2001) and the step-by-step practical model (Engel, 2004). Lee, Bichler, Verma and Lee (2001) came up with a three-component structure of the strategic sourcing process. The three components are a) requirements, b) negotiation and c) selection, as illustrated in figure 1. The structure is laid out like a flowing process to demostrate the interdependence of the three stages of the sourcing process.

Figure 1. Structure of the sourcing process

Source: Lee, Bichler, Verma and Lee (2001, p. 14)

In the requirement stage, the buyer gathers information related to the required goods and services, and the possible suppliers. Each of these sets of information influences the sourcing process and especially, the decision on the suppliers that will be engaged ultimately by the organization. The items to be procured are identified internally from the various business units in the firm. These items comprise the spend category because company finances are required for their procurement. Information of spend items includes the types, sizes and quantities required and where the user of these items are located. The mode of supply chain and the location of business units influence the finances required for the spend items. For instance, whether a firm uses the just-in-time or just-in-case inventory management approaches influence the amount of supplies held in stock (Jia, Orzes, Sartor, & Nassimbeni, 2017). Specifically, just in time inventory management requires the maintenance of minimal or no inventory because supplies arrive as needed in their respective production processes. Contrastingly, the just-in-case approach requires that large inventories are maintained to forestall unforeseen supply interruptions (Meena, Sarmah, & Sarkar, 2011). The kind of inventory management used in a firm influences the volumes of stock and hence the finances needed to maintain such stocks. The accuracy of supply forecasting is also influenced, considering that the just-in-time approach requires a higher forecasting accuracy compared to the just-in-case strategy. 

Supplier information is obtained from internal supplier histories and supplier self-declaration upon being presented with various types of requests. Request for information (RFI), registration of interest (ROI), request for proposal (RFP), request for tender (RFT), and request for quotation (ROQ) are the various options that organizations have, to gather information from suppliers that will facilitate the decision-making process. The information collected these request options include supplier production capacity, financial health, flexibility, responsiveness and long-term strategy, among other details.  

Robert Engel (2004) advanced the step-by-step practical model of strategic sourcing that comprises 8 elements. He observed that these components were crosscutting across all strategic sourcing models. The 8 elements are i) identification of the spend area, ii) creation of the sourcing team, iii) development of a team strategy and communication plan, iv) gathering of supplier market, v) development of a supplier portfolio, vi) development of a future state, vii) negotiation, evaluation commitment and agreement, and viii) supplier relation management (Engel, 2004, p. 1).

This model has several similarities to the three-component structure discussed earlier. Notably, Engel’s model has identifiable requirements, negotiation and selection component in the strategic sourcing process. For instance, the first 6 elements of Engel’s model fit into the requirements component in Lee, Bichler, Verma and Lee’s model. Likewise, the negotiation element is common in both models, while the evaluation, commitment and agreement elements in Engel’s model fit into the selection component in Lee, Bichler, Verma and Lee’s model. However, the two models differ conspicuously in the level of detain their structures, with Engel’s model being more detailed than the three-component structure. Moreover, Engel’s model terminates with the supplier relationship management element, which is missing in Lee, Bichler, Verma and Lee’s model. In this regard, angel’s 8-element model reflects the strategic supply chain management approach in application in the contemporary world. Besides, it rightfully emphasizes the supplier relationship management component of strategic sourcing process, which is often overlooked by many supply chain management approaches, yet it is evidenced as a critical source of competitive advantage for the buyer and the suppliers alike.

Sourcing Strategies

Sourcing strategies are the sourcing approaches used by firms following a rigorous decision-making process. In the competitive business world that is pervaded by uncertainty, technological complexity and rapidly-changing business conditions, a decision-making process that draws from diverse information sources, is collaborative and delivers flexibility to the operations of a firm, is pertinent. Sourcing decisions are undertaken at the highest management levels in the organizational hierarchy because of their importance to the overall strategy and performance of a firm. Before supply chain partners are engaged by a firm, fundamental sourcing decisions and activities need to be undertaken if the firm is to gain and maintain a competitive advantage, while achieving a successful triple bottom line.   

Strategic sourcing decision-making in strategic supply chain management should focus on diverse issues to deliver a sustainable supply chain. The advantages of strategic decision-making that focuses on value creation and the realization of long-term goals over the tactical approach that emphasizes cost saving is well documented. Strategic decision-making in the sourcing process focuses on leveraging the competencies and capabilities of the firm, fostering strategic partnerships with suppliers and aligning the company, sourcing and supplier goals. Moreover, value-driven decision-making a) enhances value creation from the sourcing process and value co-creation for the firm and its suppliers, b) increases the quality of supplies, c) mitigates supply risks, d) drives innovation in the firm and suppliers, and d) fosters long-term partnerships between the firm and its suppliers.  Moreover, as noted earlier, the inventory management model used by the firm, whether it is the just-in-time or the just-in-case approach, influences the strategic sourcing decisions. Now, company executives are increasingly seeking sourcing opportunities that can deliver a competitive advantage to their firms.

For different strategic sourcing decision-making viewpoints are applicable and include having a focus on learning, relationships, planning and performance. These perspectives focus on discovering different strategic sourcing opportunities and involve diverse sourcing decision makers, as summarized in table 1.

Table 1. Strategic sourcing decision making perspectives, discovered opportunities, analysis approaches and decision makers

Perspective	Decision type	Opportunities discovered	Analysis tool/methods	Decision makers
Learning	Make-or-buy for activities, spend categories and components	New productsNew servicesNew capabilities	Kraljic purchasing analysisTotal cost analysis	Strategic sourcing managersCapability sourcing analysts
Relationship	Buyer-basedCustomer-basedSupplier-based	Selection of appropriate suppliers Evaluation of supplier strategy and performance for short and long-term partnerships New clients for value creation and innovation	Cox Power AnalysisPorter’s five forces modelIndustry customer analysisExperience curve	Contract managersChief procurement officers
Planning	General management-basedProcurement-based	Identification of sourcing goalsAlignment of sourcing goals for the realization of long-term strategic goals	SWOT analysisPurchase Chessboard	Chief strategy officersPurchasing managers
Performance	Benefit-basedCost-based	Cost savingsValue creation	Cost-benefit analysisSpend analysis	Category managersProduct managers

Source: Adapted from Van den Bossche (2017)

The strategic sourcing decision process produces various sourcing strategies that are based on the firm’s unique context and circumstances. Firms have a choice between insourcing and outsourcing after making the make-or-buy decision. Insourcing is favored if a firm has adequate and sufficient capacity, capability and resources to cater of produce all the products and services that it needs. Contrastingly, outsourcing is preferred when the firm lacks sufficient internal resources, when supply chain partners deliver more value and insourcing or when the products/services conflict with the core competencies of the buying firm. Notably, uncertainty in the business environment, competition in the supplier market and proficiency in monitoring supplier performance, favor outsourcing. However, insourcing emboldens the relationship between the products/services and the core competencies of the buying firm. The transaction cost theory that posits that wrong governance structures lead to higher costs due to inefficiencies can drive firms out of the market (Mols, 2017). From this perspective, the sourcing strategies should be structured to deliver cost advantages.   

Once a firm opts for outsourcing, thus engaging supply chain partners, the firm makes a choice on the number of sources to engage. Single, multiple and dual sourcing are the options presented to a firm that decides to outsource its supplies. The firm can engage a simple supplier for all its supplies, engage multiple suppliers or settle for two suppliers. Firms also decide on where their suppliers would be located depending on their competencies and capabilities. In this regard, the choice between engaging domestic or foreign-based suppliers is dependent on the value created and delivered against the logistical costs. If the value derived overweighs the geographical and logistical constraints, then foreign-based suppliers would be preferred. Asian countries like China and India have developed comparative advantages as suppliers to many businesses in Europe and North America (Kim & Chai, 2017). This competitive advantage has caused come industries to relocate to the East where proximity to suppliers along with low production costs delivers the desired profitability and competitive advantage to the buying firms. Moreover, the capacity and competencies of the supplier alongside the needs of the buyer inform the buyer’s decision in whether to engage full-services or non-full-service suppliers. Full service suppliers address the needs of a buyer that are not core to the buyer’s competencies.

Firms may also choose the kind of relationship they want to maintain with their suppliers, be it a collaborative or a detached relationship. The level of autonomy and sovereignty desired by the buying firm and the supplier dictates the closeness of the relationship forged between them. Alternatively, the nature of support provided by the buying firm to the supplier is an indicator of the buyer-supplier relationship. Considering that the buyer-supplier interaction should deliver value to buying company as well as the suppliers, strategic alignment between the two entities is pertinent, as evidenced by the planning perspective of strategic decision making. In this regard, the buyer can decide to enter into a short-term or long-term sourcing contract. Similarly, the buyer may decide to support the supplier with design or operational competencies. All in all, the best sourcing strategy should result from considering the learning, relationships, planning and performance perspectives.      

Selection of Sourcing Strategies

Selecting sourcing strategies is another decision-making process that utilizes the strategic rather than the tactical approach. When presented by the sourcing strategy alternatives, the decision makers in the buying company have to choose the sourcing strategy that best fits the short and long-term organizational goals of the firm and delivers the greatest value and competitive advantage, while minimizing the sourcing risks.

The selection process requires criteria that identify the various aspects about the sourcing strategies that should be considered and compared. Each criteria element is important to the selection decision-making process, but may not have the same importance, urgency, and risks as the others. As such, a weighting mechanism is needed to enhance the objectiveness of the decisions. Various selection approaches that are based on human judgement and mathematical methodologies exist. The mathematical procedures are more objective than human judgement methodologies because they are free from biases. Selection methods that rely on human intuition include the linear weighted point method and the categorical method. Mathematical methods rely on algorithms in which factors can be inserted to yield a ranked hierarchy of sourcing options. Common mathematical approaches used in sourcing strategy choices include the analytic hierarchy process (AHP), cluster analysis (CA) multi-attribute utility theory (MAUT) and neural network (NN) among others (Mukherjee, 2014).  

Suppliers and the Procurement Process

Role and Importance of Suppliers

The purpose of engaging suppliers is to deliver cost and value advantages that cannot be obtained internally in a firm. Therefore, suppliers play the pertinent role of supporting the buyers’ production processes by provided the needed components and services. The suppliers perform their role by mediating between the component manufacturer or raw material source and the buyer. Suppliers should provide high quality products at a good price and maintain these characteristics for the lifecycle of the supplier contract.

Suppliers are also expected to be good corporate citizens by complying with the existing laws in the countries of operation. Although the laws and regulations may vary for international suppliers operation in diverse countries, the suppliers are expected to comply with international laws on human rights, intellectual property, and child labor together with the local and foreign laws. It is good practice that suppliers do not have conflicts of interest by doing business with their family members or with companies in which they have controlling interests.

Suppliers are important to businesses because ensure that business operations are not interrupted due to lack or delay of inventory. Moreover, suppliers support the expansion and growth strategies of firms by delivering suppliers that match the enhanced production. They also provide buyers with options that improve the quality of the products or services and facilitate innovation in the buying forms as part of mutual growth and development. Since suppliers are significant business partners with a huge influence in the production processes, their selection should be done meticulously to ensure that they deliver the intended value mutually.   

Selection of Suppliers

Supplier selection is a rigorous decision-making process that is undertaken like any other strategic decision by the top management of a business organization. Supplier selection is a pivotal activity in the strategic sourcing process because it involves the evaluation of the suppliers’ fit into the buyer’s organizational strategy. Like the selection of the sourcing strategy, strategic supplier selection focuses of the delivery of value alongside cost effectiveness.

The procedure for selecting the right suppliers is a constituent of the strategic sourcing selection process discussed earlier. Precisely, it fits into the negotiation and selection components of the three-component structure (Lee, Bichler, Verma & Lee, 2001) and seventh step in the step-by-step practical model (Engel, 2004). These models provide the evaluation processes for identifying prospective suppliers from the information available in the organization and that disclosed by the suppliers, as the first step in the supplier selection process. Essentially, supplier selection falls in between the choosing of a sourcing strategy and engaging into relationship management.

While the supplier selection process aims at reducing sourcing risk and maximizing value to the procuring company, it should focus on selecting suppliers that would be engaged for the long-term. Long supplier relationships deliver value for the buyer and supplier as they have time to align their processes and activities into a strategic fit (Wagner, Grosse-Ruyken, & Erhun, 2012). Moreover, supplier selection is necessitated by changes in the procuring company, such as a) replacing existing poor-performing suppliers, b) procuring of new equipment, c) developing new products, d) responding to new internal requisitions, e) expiration of existing supplier contracts, f) expanding into new markets, and g) diversifying business by increasing the product lines (Lidegaard, Boer, & Møller, 2015). These changes are occasioned by business growth and marketplace dynamics.  

The supplier selection process has an offer evaluation step, an operational analysis step, a technical capability determination step and finally, a financial analysis step, before arriving at the final suppliers. Each of the steps is guided by a set of criteria that is chosen beforehand based on the needs of the procuring firm. Besides, each step shortlists a set of suitable suppliers until ultimately, the best supplier(s) is selected based on the sourcing strategy to be used by the procuring firm. More importantly, the information about prospective suppliers is obtained from the buyer’s experiences with past suppliers and from requests through RFIs, ROIs, RFPs, RFTs, and ROQs. Moreover, a supplier market research through supplier premises visits, supplier-related publications like annual reports, and supplier reviews by other buyers provides valuable information to aid the selection decision-making.

In the offers evaluation stage, the potential risks and benefits of each supplier are assessed using criteria such as, competitive value, capability, and responsiveness. In the operational capacity analysis stage, the ability of the suppliers to meet the volumes with the desired quality and specifications is assessed. In addition, the stability of supplier operations is assessed using the ratio of current output to capacity to unearth the possible capacity constraints and conflicts. In the technical capacity determination stage, the technical ability and technology of the supplier is assessed. The evaluation criteria include the sufficiency of tools, equipment and skilled human capital. The track record of the suppliers in terms of innovation endeavors, introduction of new products into the market, market position, adherence to statutory requirements and ethical business conduct elucidates the technical preparedness of the supplier. Finally, the financial capacity of the suppliers is assessed using a financial performance analysis. This step identifies the financial strength and competitive advantage using financial ratios calculated from the financial information disclosed by the suppliers. At every step, the suppliers shortlisted should be compared with others in the similar industries in the market to unearth the supplier marketplace position. Subsequently, a ranked suppliers list is the output of the selection process. The ranking should be based on objective decision-making methodologies identified earlier. Chai, Liu and Ngai (2013, p. 3972) summarized the supplier selection decision-making techniques as, i) artificial intelligence (AI) methods, ii) mathematical programing (MP) methods and iii) multicriteria decision-making (MCDM) methods. Genetic algorithm (GA) was the most commonly used AI technique, while multi-objective programming (MOP) was a popular MP technique and analytic hierarchy process, technique for order performance by similarity to ideal solution (TOPSIS) and analytic network process (ANP) were the most popular MCDM techniques. Currently, software solutions that automate the supplier selection process are available in the market to simplify the complicated mathematical procedures, while providing an objective assessment of suppliers.

Ultimately, firms should seek to engage a lean supplier group with which they can forge a long-term relationship that goes beyond transactional engagements. The optimization of the supply base yields a lean supply base that is not only better integrated into the production processes of the firm but also minimizes total operational costs and improves the competitive advantage of the firm. Cost effectiveness, risks, innovation and responsiveness are the four criteria that should inform the optimization process. Consequently, the firm should decide on the mechanism of reducing the number its suppliers, by choosing between tiered suppliers, standardized reduction and systematic elimination. Likewise, the decision-making techniques discussed previously can be applied in the supplier optimization process as well. The retained suppliers should have unique competencies that are inimitable to deliver a competitive advantage as envisioned in the resource-based view (Wetzstein, Hartmann, Benton Jr, & Hohenstein, 2016). The sustainable competitive advantage that is delivered by a lean group of suppliers is shared between the buyer and suppliers.  

Strategic Sourcing and Procurement

Strategic sourcing and procurement programs in business organizations are effective when meet specific key performance indicators that are predetermined by the procuring company in collaboration with the suppliers. Key performance indicators (KPIs) are performance benchmarks that help assess the effectiveness and efficiency of the strategic sourcing and procurement processes in the supply chain. Similarly, critical success factors (CSFs) are the elements that influence the success of organizational processes.

Strategic sourcing and procurement initiatives are successful if they are aligned to the short and long-term goals and objectives of the firm. In other words, the programs need to be aligned strategically to the overall strategy of the organization. Moreover, they must deliver the expected value and competitive advantage to both parties. As such, the protracted suppliers should be able to deliver uninterrupted supplies under the supplier contract underpinning the supplier engagement (Ataseven, & Nair, 2017). More specifically, various specific indicators contribute to the success of the strategic sourcing and procurement activities. Firstly, spend visibility is crucial because it exposes the sourcing areas that consume financial resources. Powerful analytical capabilities for assessing the spend areas contributes to the correct spend assessment. In the same vein, the use of automated enterprise solutions simplifies the analytical processes that use complicated mathematical models, hence making the objective decision-making approaches practicable in firms. Secondly, the composition multiplicity and collaboration of the sourcing team indicate the application of intellectual and talent diversity in the sourcing and procurement processes. The cross-functional composition of the strategic sourcing team fosters buy-in from the entire organization and is likely to select suppliers that deliver value and manage costs, thus improving the profitability and competitive advantage of the firm. Thirdly, the level of cultural adaptation between the buyer and suppliers is reflective of the success of sourcing and procuring initiatives. Finally, sound contract management that is devoid of conflicts and compliance breaches is indicative of an effective and efficient sourcing and procurement process. 

Conclusion

Strategic sourcing is a pivotal supply chain activity that demands modern approaches. This analysis has revealed the pertinence of ensuring that suppliers deliver value and cost-effectiveness to enhance the triple bottom line performance of firms. As such, the strategic approaches of identifying, evaluating and selecting a lean group of suppliers using objective and technology-based decision-making processes is critical. Ultimately, the aim of sourcing and procurement activities should be to forge long-lasting buyer-supplier relationships that develop the strategic fit between the actors.   

References

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