7-Step Sourcing Process—Explained in Detail
The sourcing process can be a complicated one. Strategic sourcing is an enterprise-wide process. It needs inputs from all departments and teams across the enterprise. Enterprises should form a strategic sourcing team aligned with the business strategy. The sourcing team will then utilize the data that was gathered by the strategic sourcing process to create and execute a strategic sourcing plan.
In enterprises, purchasing and procurement managers follow a stringent strategic sourcing process that achieves the goals set by the enterprise. Now, these goals are defined based on the fundamental priorities of the enterprise.
In an extremely competitive field, the fundamental priority could be cost, whereas, in other industries, it could be shipping efficiency and speed to market. Based on their requirement, priorities, and goals, every enterprise will have a slightly different sourcing process.
However, the majority of enterprises follow the 7-step sourcing process that was first designed by A.T.Kearney in the year 2001. Ever since then, this 7-step sourcing process has stood the test of efficiency and time and has become the benchmark for the sourcing process.
What is the 7-step sourcing process?
Keeping aside the number which is 7, the sourcing process is typically a process that is used by the purchasing managers or procurement managers to purchase vital goods and or services an enterprise needs in order to achieve its goals.
Coming back to the 7-step in the sourcing process, not every business and industry necessarily uses the 7-step sourcing process. Depending on their priorities, requirements, and goals, the sourcing process could slightly vary. Whether it is unprocessed raw materials or finished products, procurement managers will have to utilize the same general sourcing process steps.
Who utilizes the 7-step sourcing process?
Procurement managers will have to use the 7-step strategic sourcing process. Albeit purchasing and supply chain managers are the ones who have the power to make the final call. Every single sourcing professional will play an important part in achieving each of these 7 steps within the enterprise.
For a sourcing process to be successful, it should meet specific objectives.
The main objectives of a sourcing process
Objectives of a sourcing process will vary from business to business depending on the requirements and priorities of the enterprise, however, every enterprise aims to achieve specific goals via its strategic sourcing strategies.
The below-mentioned are the main objectives of a sourcing process:
- Boosts efficiency
- Improving speed to market
- Minimizing risk
- Solving business problems
- Restricts purchasing costs
- Ensuring industry compliance
- Driving constructive competition
What are the 7 steps in the sourcing process?
Here are the 7 steps that should be followed for an efficient and effective sourcing process.
1. Define the spend category
Before you plan anything else, make sure to clearly define the sourcing category or commodity. What size and precise type does the enterprise need? Who are the end customers to these goods or services, where are they located, what kind of logistics are being deployed, and who else is included in the supply chain? An efficient sourcing process begins with understanding the category and commodities that an enterprise needs in order to achieve its goals and spend visibility is the key to gain that understanding. Information should be stored, categorized, analyzed, and finally validated.
2. Supply Market Research
Research the price aspects that make up for the product or service that your enterprise needs. Analyze the essential raw material costs and other price aspects that are involved such as labor and logistics and utilize these factors later to evaluate proposed bids from vendors. Go the extra mile to research the marketplace to find potential vendors locally and globally along with the risk and opportunity factors.
3. Create a sourcing strategy
Choosing how and where to purchase the material while reducing risk and price is a huge challenge for procurement managers. If you already have an existing supplier, then re-negotiation could also be an option. The sourcing strategy you create should align with the enterprise’s requirements and goals along with capabilities and resources. It is recommended to have a cross-functional sourcing team that involves stakeholders, subject matter experts, and end customers.
4. Choose potential vendors
One of the common ways to find a potential supplier is by using RFPs (Request for Proposal) process for soliciting bids including, goods or service-related specifications, cost breakdown and analysis, delivery & service requirements, and financial terms and conditions. In some scenarios, evaluation criteria can also be mentioned.
Essential steps to researching and selecting potential vendors
- Find existing vendor base
- Research additional vendors
- Create vendor qualification criterion
5. Selecting a vendor and negotiating terms
The process of choosing a potential vendor involves talking to different vendors and conducting multiple rounds of meetings with short-listed vendors for negotiations. The selection of the vendor should be according to the pre-agreed criterion. The contract drafted should be read and signed by both parties.
6. Execute & integrate
Make sure that the vendor, internal end-customers, and everyone who is affected by the process is involved in the design and execution of the solution. Smooth execution is only possible with a transparent process and extensive communication across the departments.
7. Benchmark and track results
This step is essential to shape the success of any strategic sourcing project. Cutting-edge technological solutions applied to the tracking of cost savings can help in finding when and where the vendor is adding value. Automated reporting offers faster and precise feedback and optimizes vendor relation management (VDM).
The 7-step sourcing process undoubtedly plays a crucial part in assisting enterprises to meet their business goals and requirements. An ineffective sourcing process can delay your enterprise in achieving its goals. Most of the strategic sourcing processes can effortlessly be automated and optimized via efficient cloud-based solutions.
While enterprises can have a variety of procurement requirements and sourcing processes in place, the aforementioned steps in the blog can certainly be customized according to the enterprise’s specific goals and requirements.