In Part I we recapped sourcing today, a multi-step process where each step had multiple sub-steps that were typically done sequentially in a long, manual, process that typically took too long, delivered too little, and still kept steps. Why?
Let’s take our seven-step sourcing project step by step:
In this step, the sourcing team reviews the product requirements, which hopefully were developed in consultation with marketing, sales, and other affected organizational units, in order to determine what needs to be considered when identifying a supply base, assessing baseline pricing, and determining if there are alternative options.
Supply base identification will typically involve analyzing the current suppliers, other organizational suppliers that may be able to provide the product, and searching externally for new suppliers (which could involve asking peers, going to trade shows, searching networks, etc.), and then creating a short-list to vet in a multi-stage RFX process.
Baseline pricing will be based off of historical pricing, adjusted for any perceived market factors, cross-checked with public pricing if the product is a commodity, and compared to should-cost models if the organization understands the cost-breakdown and relevant material and overhead costs where the product is being produced.
Identifying alternative options will involve diving into the product specifications, working with engineering to determine which are absolute and which are malleable, and whether the requirements are design driven, reliability driven, or customer driven. Then the sourcing team can determine if alternative options are reasonable to pursue or not.
This will often take a long time. Chances are that the sourcing team:
- will not be product experts, and it will take time for them to understand the product(s) and/or
- will not have easy access to a deep qualified supplier network enriched database and will have to manually spend a lot of time searching for a supplier list and/or
- will not have easy access to integrated market feeds or detailed should-cost models or the knowledge of how to build them and/or
- have the deep knowledge of product and design to identify reasonable alternative options and how to source them, or design a sourcing event that considers both but chooses the best
And sometimes, all four of these options will be true. And in these situations, the buyer will take too long identifying suppliers and product options and continue without enough knowledge of baseline market pricing or alternative options. This means that they will likely miss potentially good suppliers, accept a baseline higher than it should be, and not include the absolute best products for their organization and customers in the mix. And this is just step 1.