Strategic Sourcing: How Will You Award Your Business?
The size, scope and complexity of strategic sourcing projects today means it can be difficult to know where to start the process. However, as is often the case in all planning, it’s best to begin with the end in mind. For buyers, this means “How will I award my business?” should be the first question asked when designing a sourcing process and is at the top of the list of strategic sourcing best practices.
It may appear counter-intuitive but identifying award criteria from the outset forces buyers to define not only the ultimate objectives but also any constraints that need to be met. And, it may appear to be a simple question, but identifying award criteria can be more complicated than first expected - even when the objective looks clear. Even if your objective is finding the lowest cost solution, a seemingly straightforward proposition, there are still many things to consider.
In reality, when buyers identify the ultimate objective as the lowest cost solution, it generally includes certain constraints they are taking for granted--for example service and quality levels that need to be met, or compliance with specific regulatory requirements, such as being certified to handle hazardous chemicals. Asking the question “How will I award my business?” helps draw those hidden assumptions out.
Buyers also know that there’s a cost to changing suppliers. That means there are only tangible savings if a potential new supplier is offering a price that is a certain percentage below what they are currently paying. They may also want to limit the number of new suppliers that can win business, so they don’t change too many suppliers at one time and thus disrupt their operations. Buyers will also know how much time and effort is required to manage suppliers, so they may want to only ever work with a maximum number of suppliers.
Therefore, even in this very simple case, achieving the lowest cost solution could really mean achieving the lowest cost solution based on working with a maximum of five pre-qualified suppliers, one of which may be new on condition that the overall cost is 10 percent less than the previous year, for example.
In a real-world strategic sourcing project, the complexity is increased further as projects involve thousands of items, hundreds of suppliers, numerous countries and various internal stakeholders, all with their own requirements. In these situations, taking the time to decide how the business will ultimately be awarded means operational constraints are not overlooked and the information that allows these constraints to be met is collected during the RFI and RFQ stages.
Once the data has been collected, the sourcing and optimisation tools available today allow buyers to take it one step further and model various scenarios that meet all constraints identified. With this scenario planning, buyers are able to “play” with the data and answer unlimited “what if?” questions. Often these are questions that only become apparent during the analysis phase, leading to a final award scenario that buyers would never have previously considered.
These advance sourcing and optimisation tools use mathematics to help identify the chosen solution, but that’s only possible when you’ve collected the correct information. The best way to do that is is when you are planning your next sourcing project, make sure you begin by asking yourself “How will I award my business?”