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A sourcing strategy establishes your proposal for how you will proceed to acquire goods or services that meet a defined need of your organization. It is a roadmap of how you intend to get to market in a different way than what is currently used. The result should be a change that brings value to your organization. This means that your sourcing proposal is also a tool for selling your ideas to the rest of your organization and therefore needs to be crafted with care. There are five key elements to an effective sourcing proposal.
1. Assess how your organization currently purchases the items you are looking at. Ask “who buys what, from whom, and for how much.” Knowing who is currently shopping allows you to assess whether they have the right purchasing skills to do the job well. Knowing who you buy from will tell you if there is an opportunity to reduce the number of suppliers and get lower prices from volume discounts. Knowing what prices are currently being paid allows you to find the differences that will allow you to realize short-term price savings. It also helps you compare your prices with the price paid elsewhere.
2. Assess the supply market. You can use analytical tools like Porter’s Five Forces to do this. Understanding the relative power of companies in your supply market, those that sell to your supply market, and those that are buyers in your supply market will help you establish who owns the most profit from the supply chain, which in turn, it will show you the way to the future. the best strategy to deal with it. For example, if your suppliers have bargaining power over your customers (including you), can you form a consortium of other buyers to rebalance this power?
Other things to consider when evaluating the supply market is whether or not you can attract new entrants to increase competition; whether technological changes will change the nature of the supply market; the key capabilities required to be successful in this market and which vendors have these capabilities; how capacity is defined in the industry and how well it is used. All of this information is helpful when negotiating or will guide you to suitable alternative suppliers.
3. Price and cost analysis. Price analysis tells you if the price you are paying is fair or not. Basically, you test the price against a benchmark to judge if it is reasonable. You can use the price paid last time as a reference if you adjust it for inflation or deflation since the last time you bought it, or you can use external references, if any (for example, catalog prices for stationery).
Price analysis will only tell you that the price is fair if there are comparable benchmarks. If not, you will need to analyze the cost of the item. One way to do this is to send a request for information to several potential vendors (say five) and ask for a breakdown of costs plus price. This will allow you to calculate the profit element (something the provider may not give you if you request it directly). You will then be in a position to compare the individual cost elements of the five providers, as well as the profit element. In turn, this will allow you to judge what is a fair cost and profit and, adding the two, the fair price.
4. Armed with your information on what you are currently buying, the price to pay based on cost analysis and an understanding of the supply market, you are in a position to decide your strategy to go to market; in other words, your sourcing strategy and how it will create value for your organization.
5. The final element is to go to market with a tender and possible negotiations around the range of products, prices and service levels.