Special thanks to Source One Management Services for this guest post
Nowadays, strategic sourcing has become an ingrained best practice for companies looking to effectively purchase. Indeed, strategic sourcing has proven for over 30 years to be an extremely efficient process for achieving savings on direct and indirect spend categories. That being said, sourcing initiatives may not always aim at realizing savings. For example, what if you’re looking to identify a supplier for the manufacturing of a revolutionary new product not yet introduced to the market?
The $1 million question now becomes “How do I make sure I select the most qualified AND the most cost competitive supplier?”. This can be achieved only if the right suppliers are thoroughly pre-selected prior to release any kind of request for proposal.
1. Definition of your scope of work
First things first, the scope of work needs to be clearly outlined. It must reflect the current state of your new product’s development phase, include your desired outcome of the sourcing initiative, and most importantly, cover your critical requirements for a best-fit supplier. Seems like a basic concept, but in practice can be difficult.
For example, on a recent project we aimed to identify a supplier with cast iron and cast steel capabilities for medium to large size components. The challenge with this project was that the parts we were sourcing had been originally designed to be forged/welded. Therefore, it was critical to first define the “ID card” of each part to identify criteria for supplier selection. In this situation, it was critical to define the material grades, the post machining processes, and the quality control level requirements to be considered for each part. Thereafter, we were able to identify criteria for supplier selection such as casting capabilities, experience in providing DFM services, and recommendations on how to convert a part designed to be welded into a part designed to be cast, material grades availability, alignment with our quality control requirements, capability to ship to our final assembly line in Europe, and what not. In other words, as many criteria as needed in order to define a complete scope of work from a sourcing perspective.
2. Data Collection
Once the perimeters of the sourcing initiative are defined, it is time to gather all the data available that can be used to communicate with potential suppliers. This step is not just about collecting data. Drawings and other relevant technical documentation must be gathered, and most importantly approved to be shared with suppliers. Keeping in mind that the sourcing initiative is for a new product that has not yet been introduced to the market yet, some documentation might not receive approval to be shared. Best case scenario, all documentation can be shared upon execution of a Non-Disclosure Agreement. Worst case scenario, the most relevant documents cannot be shared, even with a NDA. Then, alternative documents must be approved in order to make sure the suppliers invited to the sourcing initiative won’t drop due to the lack of available data.
3. Market Research
Once the scope of work is defined and the sharable documents gathered, it is time to look at what the market has to offer and pre-identify suppliers that could answer our needs. The challenge here is to identify suppliers equipped to deliver valuable information to help drive strategic decisions.
For a majority of the strategic sourcing initiatives I’ve supported, I’ve consistently managed to identify at least 30 suppliers and vet them through a prescreening RFI process in an effort to retain only the highest potential suppliers. While 30 suppliers might seems to be excessive, it is important to consider that some suppliers will not be interested in getting new business, some suppliers will not meet with critical requirements and therefore won’t pass the pre-screening process, and others might drop after actually receiving the RFP, etc. So, realistically 30 suppliers isn’t that many when the goal is to thoroughly explore the market from a services offering and pricing standpoint.
Another suggestion is to keep the supplier list diverse in terms of range of capabilities, geographical location (if it applies to a specific project), etc. For example, I always manage to have some suppliers with a wide range of capabilities and some suppliers with specialty capabilities. By doing so, I know I can have a better understanding of what the market has to offer, both in terms of pricing and service offerings. This will bring valuable comparison points during the RFP responses analysis and drive better decisions.
In summary, strategic sourcing principles can apply to many different types of projects, and can deliver extremely efficient results. The process described above will not only optimizes the entire RFP process as it ultimately limits the risk of suppliers dropping from the sourcing initiative due to a lack of interest or capabilities, it will also provide a better understanding of the market, driving strategic decision aligning with a defined Scope Of Work.