Eight Essential Steps for an Effective Global Sourcing Strategy

Written by Lau Chee Leng, MSIPMM

by Lau Chee Leng, MSIPMM

Eight Essential Steps for an Effective Global Sourcing Strategy

Written by Lau Chee Leng, MSIPMM

by Lau Chee Leng, MSIPMM

by Lau Chee Leng, MSIPMM

Over the years, the increasingly global marketplace and upsurge in consumer awareness and demand have forced industry into a constant balancing act. At the same time, companies across the world strive to offer quality products and services to their clients to earn considerable amount of profits. The main objective of strategic sourcing including to save money, improving the acquisition process, manage supplier performance and minimizing risk.

global source

The following highlights 8 essential steps for developing an effective global sourcing strategy that will help companies to select and evaluate suppliers on costs, quality and services provided.

• Profile the category

• Supply market analysis

• Develop the strategy

• Availability of need resources

• Select the sourcing process

• Supplier selection and negotiation

• Implementation

• Measuring and monitoring performance

1. Profile the category

Ensure and understands everything about the spend category as the first step in the strategic sourcing. The team will need to identify and define what is the current quantity used, types, sizes, specification, grade and etc. Who are the users, where the process activities located is and who else is involved.

Following the category selection, it’s time to measure the costs impact including who provides the resource or service, total costs involved, contract length and terms, transportation considerations, and anything else that impacts present or future spend. All the data must be documented in as much details as possible.

2. Supply market analysis

Concurrently seeking potential alternative suppliers to existing incumbents. Analyze the suppliers’ marketplace dynamics and current trends for risks assessment. Depending upon the findings from the market evaluation, the economic operational advantages are considered and calculated.

The ‘Five Forces’ are created and forces that shape an industry.

• Competitive rivalry

• Threats of new entrants

• Threat of substitutes

• Bargaining power of buyers

• Bargaining power of suppliers

‘Five Forces’ analysis requires a review all the data collected from the different sources. The tool helps predict supplier and buyer behaviour in the marketplace and is a critical element in shaping supply strategy.

3. Develop the strategy

They are many different ways to acquire a product or service, and different relationships might have with suppliers. Deciding on a purchase whilst minimizing risk and costs will depend on how the sourcing strategy is developed. Managers often have an underlying philosophy that influences their choices.The strategy will depend on how competitive the supplier marketplace is.

The six-step plan to select and evaluate global suppliers:

a) Enumerate the “things” you need to source (functions, services, etc.).

b) Document the current sourcing model.

c) Determine the desired sourcing model.

d) Create a visualization.

e) Evaluate supplier

f) Make an action plan

4. Availability of need resources

Various resources interfere with the translation of a global vision into effective practices. The availability of needed resources has the potential to separate marginally performing global sourcing organizations and make them available before global initiatives.

The knowledge and skills required for global sourcing differ from those required for site-based sourcing. However, requires who can supply markets from a worldwide perspective while collaborating across functional boundaries.

5. Select the sourcing process

Where a competitive approach is used, a request for proposal process for bids. It is includes product or service specification, delivery and service requirements, evaluation criteria, pricing breakdown and legal and financial terms and conditions.Ensure that every supplier ia aware they are competing on a level playing field. Once the RFP is send out to all selective supplier, make sure they are given enough time to respond.

6. Supplier selection and negotiation

Create specific criteria for tracking and evaluating suppliers and vendors on a regular basis – monthly, quarterly, and/or annually. Making sure that this is a mutually beneficial partnership will impact the price you are negotiating today and quality of service you get in future.

Communications with many suppliers for clarifications and details where needed and conduct with multiple round of negotiations to find out which suppliers offer the most value and benefit. The final selection will send for approval before award to the selected supplier.

7. Implementation

Draw up a contract for the winning suppliers and notify them to ensure that they are involved in the implementation process. In this stage, a performance analysis is created where the sourcing agents all activities performed as per implementation schedule.Compare outcomes in terms of total value or implementation cost differences.

The communication plan will include any improvement to specification or process, changing in delivery, changing in pricing or service requirements. Having a strong relationship with supplier often leads the lower rate, increased speed-to-market times and improve service quality.

8. Measuring and monitoring performance

Performance of suppliers is measured in response to the procedures and resources that are applied by supply partners and independently. This performance should be routinely carried out and documented on a regular basis. Additionally, some companies incorporate current and expected global sourcing will develop measurement systems that look beyond unit cost. The objective of performance monitoring is to maintain the most efficient procurement process. Conducting value analysis and competitor benchmarking are the way to ensure stay on the path to improvement.

Conclusion

A good global sourcing strategy addresses the following areas:

• Cost – the main purpose of product sourcing strategy is to take advantages of lower costs in foreign country. However, the procuring organization will face additional hidden costs such as taxes, insurance, cargo damaged and etc.

global sourcing strategy

• Laws – the sourcing team together with supplier should consider what body of law shall be applied to their contractual agreement, i.e, the either buyer’s or supplier’s country law or the law applicable through a signed treaty between the two countries

• Currency – a prudent buyer shall consider the possibility of using the supplier’s currency where the buying country’s currency may become stronger in the period between agreement and supply and eventual payment.

• Lead time – global purchases have a significantly longer lead time than domestic sources. Oversea travel is slower and in addition, there is time taken for custom clearance process.

• Culture and language – the risk of misunderstanding and miscommunication will increase when the procurement agent is unfamiliar with the culture and language.

• Transportation – global sourcing frequently use multiple modes of transport, e.g., combines air or sea freight and transport the goods from warehouse and finally to end user.

• Method of payment – a letter of credit is used for payment in global sourcing, which need necessitates the cooperation of the banks between supplier and buyer.


References:

Guest contributor (2015) “Stages of a Global Sourcing Strategy”
Retrieved from http://spendmatters.com/2015/09/15/stages-of-a-global-sourcing-strategy/ (accessed 16 Dec 2017)

Kearney A.T. (2001) “7 Step Strategic Sourcing Process”
Retrieved from https://www.purchasing-procurement-center.com/strategic-sourcing-process.html (accessed 16 Dec 2017)

Smith, G. (2014) “Seven Steps to Strategic Sourcing in the Supply Chain”.
Retrieved from https://www.linkedin.com/pulse/20140709091731-3050849-seven-steps-to-strategic-sourcing-in-the-supply-chain (accessed 14 Dec 2017)

Trax Technology (2017) “7 Essential Steps of Strategic Sourcing”
Retrieved from https://www.traxtech.com/blog/7-essential-steps-strategic-sourcing/ (accessed 13 Dec 2017)

Trent R.J. and Monczka R.M. (2005)”Achieving Excellence in Global Sourcing”
Retrieved from https://sloanreview.mit.edu/article/achieving-excellence-in-global-sourcing/ (accessed 16 Dec 2017)

Tuteja P. (2016) “7 Essential Stages of Strategic Global Sourcing”
Retrieved from https://www.linkedin.com/pulse/7-essential-stages-strategic-global-sourcing-pankaj-tuteja (accessed 14 Dec 2017)

Wawasan Open University. (2017) “Tools for Supply Market Analysis”
Retrieved from https://procurementmanagement.pressbooks.com/chapter/tools-for-supply-market-analysis/ (accessed 16 Dec 2017)

About the Author: Lau Chee Leng has substantive years of procurement experience, specifically in the construction sector. She is a qualified member of the Singapore Institute of Purchasing and Materials Management (MSIPMM). She completed the Diploma in Procurement and Supply Management (DPSM) at SIPMM Academy in December 2017.

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