Strategic Sourcing: Building a foundation for success

1 UPS Supply Chain SolutionsSMStrategic sourcing : Building afoundation for success understanding the difference betweensourcing and Strategic sourcing and its impactOur UPS Supply Chain Solutions White PaperCopyright 2005 United Parcel Service of America, Inc. All Rights part of this publication may be reproduced without the prior written permission of UPS Supply Chain Solutions. 1 With the increase of on line buying and sourcingof goods and services, educators, consultants,writers, and industry leaders have spent a greatdeal of time and resources attempting to improvethe identification and selection of suppliers andthe associated purchasing , some of the most commonly heard terms for buying include: sourcing Strategic sourcing e- sourcing Purchasing Procurement e-Procurement Supplier Management Supplier Relationship Management Supply Base ManagementSourcing by identifying and locating suppliers is relatively simple,but it becomes more complex as the amount of unique rawmaterials, ingredients, parts, components, connectors, apparatus,products, equipment, supplies, and services increase and thenumbers of buyers involved in the decisions expand.

2 In a globalenterprise, it is possible for one purchasing decision to impactnumerous business processes or departments includingmanufacturing, receiving, distribution, marketing, sales or customer risks of buying the wrong items, services or from the wrongsupplier can have major impacts and ripple throughout a can range from late delivery to total service failureliability and can even affect market competitiveness. In addition, ifthe selected suppliers cannot provide opportunities to reduce costs,improve and upgrade product/service offerings or provide othermarket-facing advantages, then an organization can quickly finditself losing market help clarify the confusion, UPS Supply Chain Solutions is offeringinsights into the optimum approach to buying. Often known asStrategic sourcing , it begins the critical process and lays thefoundation for creating value through the purchasing is possible for onepurchasing decision toimpact numerous businessprocesses or Supply Chain Solutions2 Figure 1: The required foundationSourcing and Strategic sourcing are critical steps in buying goodsand services (see Figure 1).

3 In this stage, individuals or groupsanalyze, assess, and select vendors and their goods and servicesbased on certain specifications and requirements. This relationship istypically documented in a contract with terms and conditionsregarding products, services, prices, and service next steps are Purchasing and Procurement Management whichare established after sourcing and Strategic sourcing to executeupon the contract and to supply the enterprise with required goodsand services at the negotiated price and agreed-upon times. Theseactions are typically represented in purchase orders (POs) or releaseorders/instructions on master POs. POs are communicated viaphone, fax, mail, EDI, Internet has proven to be a highly effective tool for sourcingand procurement. Strategic sourcing has been e-enabled throughweb applications, marketplaces and portals that support auctions,reverse auctions, etc.

4 Procurement has also been e-enabled throughweb applications, marketplaces, and portals that support requestsfor information (RFIs), requests for quotes (RFQs), purchase orders, logistics arrangements, payment, final Building block is Supplier Relationship Management(SRM). Managing and partnering with suppliers is important from sourcing through procurement. Integrating operations andestablishing mutually beneficial programs are essential to asuccessful Internet has proven tobe a highly effective tool forsourcing and &ProcurementTransact With SuppliersSourcing & Strategic SourcingEstablish SuppliersSupplier Relationship ManagementSupplier ManagementSupply Base ManagementManaging & Partnering With Supplierse-Enabled -- e- sourcing & e-ProcurementEfficiently Transact With SuppliersUPS Supply Chain SolutionsWhy sourcing and Strategic sourcing are importantWhat is Strategic sourcing ?

5 Defining Strategic sourcing should be fairly simple. Most companiesare already involved with some form of Strategic sourcing , when professionals define Strategic sourcing they limit thescope and therefore the impact of a Strategic sourcing , Strategic sourcing can go well beyond cutting costs. It canhave a profound impact on a company s financials and can stronglyinfluence the purchasing and procurement processes. For purposes of this paper, Strategic sourcing will be defined as theprocess of evaluating, selecting and aligning with suppliers orconsortiums of suppliers to achieve operational improvements insupport of an organization s Strategic objectives. The phraseStrategic sourcing was coined and is used when the activities ofsourcing are directly tied to a sourcing strategy. Figure 2: Strategic sourcing platformWhat does it mean to have a sourcing strategy and why does anorganization need it?

6 First, a sourcing strategy aligns anorganization s overall business strategy with the sourcing example, it does not benefit an organization to select a supplierfor a multiple- year agreement based on superior manufacturingcapabilities and local presence if the organization is evaluatingglobal outsourcing operations in support of business growth andcost competitive objectives. Second, when properly defined, asourcing strategy assists an organization by gaining a trueunderstanding of its requirements, knowing how it must map to theexisting supply market, and then develop a plan for both short sourcing can gowell beyond cutting Quality Cost Service Levels Cycle Time Inventory Turns Logistics (In/Outbound) Warranty / Returns Environmental / Disposal Transaction Reduction Asset Utilization Profitability Financial Stability Business Growth Brand Image Competitive Positioning Outsourcing New Products New ServicesUPS Supply Chain Solutionslong-term sourcing objectives.

7 Having a clearly defined sourcingstrategy will significantly improve both the quality of the results andthe speed required to achieve an organization s sourcing Strategic sourcing is so comprehensive, there is a highprobability that the criticality and scope of Strategic sourcing endsup involving much more. It can result in a cross-functional/cross-enterprise effort intended to optimize the concept-to-cash supplychain performance. It is an ongoing endeavor to evolve both internaland external processes to obtain the highest level of Strategic benefitfor a business. When done correctly, the results are immense andultimately position an organization to achieve a competitiveadvantage in the marketplace through its that can be achievedKnow thyselfOne advantage attributed to a well-coordinated Strategic Sourcinginitiative is gaining an understanding of how competencies andprocesses support a clearly defined business strategy.

8 Obviously, it simpractical to meet the requirements of a business without firstunderstanding them. A Strategic sourcing initiative presents theopportunity to clarify and communicate corporate goals andobjectives. It also is a means to define and document what anorganization s competencies are and what they should be. Non-value-add functions that waste critical time, resources and requirefinancial support can be identified and outsourced or eliminated. As companies grow, many redundancies tend to occur. Theseredundancies can be in the form of distributed activities that mirroreach other, or they may take the form of similar products beingitemized and purchased separately. After these redundancies areidentified, aggregation of similar products or consolidation ofactivities can occur. The processes and workflows can also beredesigned to eliminate the non-value-added , an organization will select its suppliers based on theirability to support and assist in improving a process, providing aproduct/service at a lower total cost, or offering a betterproduct/service that helps to differentiate.

9 For example, computermanufacturers differentiate their computers capabilities by usingspecific suppliers and noting the suppliers technology on theircomputers and marketing reduction is typicallythe primary goal of mostStrategic Supply Chain Solutions5 Realize the benefitsExecutives are beginning to understand that procurement is a keypart of the business or supply chain process. It is typical forbusinesses to spend more than 60 percent of revenue purchasinggoods and services; and it is estimated that approximately 70percent of all potential savings from purchasing can only beachieved through the Strategic sourcing process. The results of awell-managed Strategic sourcing initiative can be impressive and thebenefits can be extended well beyond cost reduction. Impact the Bottom-lineCost reduction is typically the primary goal of most StrategicSourcing initiatives, because savings in cost of goods sold (COGS)fall directly to the bottom-line.

10 For example, let s assume that abusiness reduces COGS by $1 million. If that business has a 10%margin on sales, it must sell $10 million worth of products toachieve the same $1 million in reductions or savings. Again, everydollar from reducing COGS comes directly off of the is critical in a business environment where it is more difficult toincrease revenues. When properly executed, Strategic sourcing focuses on total costsand not just the purchase price. Often, procurement professionalsconsider the sticker price versus the price of the complete , other costs should also be taken into account such ascarrying costs, service and repair expenses, and end-of-life/disposalcosts. Best Practice Case Study Dial Corporation1 Recently Dial Corp., the Scottsdale, AZ, based manufacturer ofsoaps and detergent products and consumer goods, split from ViadCorp.