Foundations of the Strategic Sourcing Process

Billy A. Horne, C.P.M., Corporate Sourcing Manager

AT&T South
404 420 6029, billy.horne@bellsouth.com

92nd Annual International Supply Management Conference, May 2007

Abstract. Industry is awash with a plethora of acronyms, jargon, and other terms that tend to
become a major part of our communications. As Supply Managers, we are no exception.
Everyday we hear words such as sourcing, e-tizing , RFI, RFQ, RFP, bandwidth, bang for the
buck, banner year, bean counter, beat the bushes, beef up, behind the eight ball, bottom line,
best practices, deep dives, due diligence, game plan, low hanging fruit, operationalize,
optimize, think outside the box, partnering, price point, sacred cow, value add, etcetera.
However, what do all these words do to help us meet our company’s business goals? How do
we optimize our supplier base? How do we ensure that we are dynamically pursing
opportunities that ensure we are providing professional services that result in a definitive value
to the bottom-line of our business? The answer to these questions lies in the incorporation of
a thorough Strategic Sourcing process within our Supply Chain activities.

General. Sourcing initiatives can be conducted simply based on reaction to the needs of
internal clients. Goods or services can be immediately purchased to meet critical or on going
requirements. Contracts can be in effect that specify the delivery of goods or services and the
rates that are to be paid so purchases can be made on an as needed basis. Supply Managers
can be certain that we immediately respond to our clients needs. However, do these
reactionary efforts actually result in a value for the business needs of the company?

In some instances, certainly there are times where specific needs dictate a reactionary
response. More often than not, reactionary approaches tend to result in false premises and
negative financial impacts on the business. As Supply Managers come to source various
commodities or services, the term “strategic” sourcing can be used anytime we engage in
procurement activities. However, simply using the term without incorporating a foundational
Strategic Sourcing process renders the term as just another bid of business jargon. While we
may be effective in the use of this business jargon, we may be equally ineffective in
extrapolating results that are truly effective to our business direction and profits.

For every valued commodity, there is a need to determine foundational requirements for
success.

Example. For instance, we have all seen multi story buildings rising majestically out of the
ground. The aesthetics of these buildings can come across in many ways as visually pleasing
or not, orderly, ostentatious, frugal, controversial, functional, or insignificant as we pass them
by. However, the critical and most important part of the skyscraper is never actually seen in
full once the building is completed. This includes the planning done by surveyors, testing
laboratories, design architects and engineers, including a myriad of professional and trained
consultants that work with their client to establish the goals and requirements of the building.
Massive foundations of reinforced steel and concrete have to be thoroughly designed to
account for all aspects of the building. The number of floors, movement of the various
materials in the building, number of people and equipment in the building, intended use; all
have affects on the foundational basis of the building. Without a thorough study and design of
the foundation by qualified individuals and groups, the building just could not stand.

How does this scenario equate to our profession as Supply Managers and the formulation of a
foundational Strategic Sourcing process that is integral and dynamic? In order for sourcing to
be “strategic”, certain foundational factors must be inherent within the Strategic Sourcing
process.

Foundations of Strategic Sourcing. Just like the skyscraper example above, these factors
build on the foundation of the Strategic Sourcing process. They are integral building blocks
that make a sourcing effort – Strategic.

The Strategic Sourcing process can be summarized as follows:

1. Profile the supply stream.

a. Identify internal stakeholders.
b. Alignment of objectives between Supply Chain and stakeholders.
c. Development of understanding of the commodity and how it fits into the overall goals
of the business.
d. Research of market trends, industry, and supply markets.
e. Delivery requirements.
f. Evaluation of spend history and projected spends.
g. Service level and performance measures required.
h. Composite specification of requirements for commodity.
i. Continuing and collaborative efforts with internal clients including applicable
departments (such as engineering, marketing, accounting, etc.).

2. Select the sourcing strategy.

a. Assessment of your company’s bargaining position.
b. Evaluation of your supplier’s bargaining position.
c. Establish benchmarks for appropriate factors such as risk mitigation, service,
performance, delivery, cost, etc.
d. Evaluate appropriate sourcing strategies.
e. Select the appropriate sourcing strategy.

3. Develop the supplier profiles and capabilities.

a. Identify supplier profile and criteria required.
b. Research and identify potential, qualified suppliers.
c. Develop listing of potential suppliers.
d. Conduct Request for Information (RFI) to further refine supplier profiles.
e. Evaluate RFI and further screen the supplier base to identify suppliers that meet the
predetermined profile and criteria for the initiative.
4. Select the implementation path.
a. Profile schedule of required events.
b. Evaluate sourcing strategy – such as competitive RFX or single source negotiations.
c. Review the supplier’s bargaining position based on the selected sourcing strategy.
d. Evaluate steps that may be required if adjustments to the sourcing strategy are
required.
e. Review and finalize the business position on pricing, contract terms, risk mitigation,
warranty, etc.
f. Collaborate with stakeholder to identify elements for transition once a supplier has
been selected.
g. Establish the composition of a transition team and develop a written supplier
transition plan.

5. Negotiate and select suppliers.

a. Develop specific negotiating plans and strategies that will be evaluated in the
selection process including, but not limited to, the following:
i. Issues.
ii. Objectives (pricing, warranty, delivery, risk, etc.).
iii. Negotiating team composition.
iv. Negotiations strategies.
b. Collaboratively develop the required proposal documents (RFX) including scope,
pricing, and contract terms and conditions for the specific initiative.
c. Conduct the RFX or, if sole sourced, enter into negotiations.
d. Provide stakeholders with overview of agreement negotiations to ensure consensus.
e. Evaluate proposals until agreement is reached.
f. Finalize the formal agreement with the supplier.
g. Document lessons learned.

6. Transition the supplier.

a. Transition team collaborates with supplier to review the supplier transition plan.
b. Incorporate adjustments to the transition plan as required.
c. Establish benchmarks with supplier and monitor the transition process.

7. Manage and improve the supply stream.

a. Periodically review supplier’s performance with stakeholders.
b. Review benchmark and spend data.
c. Assess any changes in technology or market conditions that affect the commodity.
d. Consider conditions that could lead to another evaluation of the commodity.

Summary. These steps, while listed in a linear fashion, are not independent in value but are
collaborative in nature to form a complete and thorough Strategic Sourcing process.
Incorporation of Strategic Sourcing as a basis of your procurement activities will, by its nature,
lead to increased and tangible corporate value of your Supply Chain.

Acknowledgements:
Co Author: Gary Craft, Business Analyst
AT&T South
404 420 8530 Gary.Craft@bellsouth.com