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Companies rely on the revenue streams generated by their product lines. Equally important, a company’s profit margin reflects management’s ability to control its top line costs.

The expectation of better than market pricing for these products and services can depend heavily on the development and execution of the company’s supplier sourcing strategies.

The question is, what are you doing to gain a competitive advantage, and differentiate yourself from your competition when conducting your supplier sourcing strategy?

Developing the Sourcing Objectives

Executive management formulates its business plans from the top down. Therefore, the company’s sales and business plans provide the basis for developing a starting point.

Also, the supplier strategies should consider the company’s production needs. One aspect, of a supplier’s value, is providing expertise about their products or services. This aspect can result in a reduction of manufacturing’s lost time thereby increasing productivity.

Where to Start: The Analysis

When developing the supplier sourcing strategies, procurement is supporting the company’s existing and future product sales. Therefore, because of limited resources, it necessary to choose what products or services to review and in what order.

Procurement should evaluate the company’s product lines using value and risk. Procurement should rank each of the products by value or importance, highest to lowest, to conduct the evaluation.

Next, choosing the products with the highest risk, procurement breaks these down into their elemental parts again the same way, highest to lowest.

Deciding Priorities for Raw Materials – An Example

As an example, let’s assume that you researched two product lines and that two materials – steel bars and tungsten powder – were found to be in the company’s products. Next, the products were assigned value and importance, using their intrinsic value and risk, and then placed them in the graph below.

The company, realizing limited resources and how important the sales of products are that use tungsten powder, will first tackle sourcing of tungsten powder. With any remaining time, after working on that commodity, they will begin work on the steel bar commodity.

There can be many criteria when developing supplier sourcing priorities. Naturally, the more details used, the more information is derived from the model. However, the priorities will usually show themselves once the value and risk are assigned. In some cases, you may have to decide between competing but equivalent assignments of value and risk.

Plan Review and Approval

After a determination like this, and documenting the process, the next step involves soliciting and securing management approval of the plan. There can be many variables known and unknown when completing the research. If management desires, adjustments can occur before continuing.

The Bottom Line

The company should develop a sourcing strategy that support’s the company’s products and overall business objectives to ensure a competitive edge. The application of ‘contribution value and supply risk’ can assist in understanding the ‘value’ and ‘risk that each product presents to a company. This can be helpful when selecting commodities to review since it may be necessary to tackle one commodity at a time due to fixed resources. If there are competing interests, when working on the different commodities and company objectives, it may be prudent to ensure management agreement before proceeding.

Related Topics

Sourcing Strategies. The strategic sourcing process is a subset of procurement. It is procurement’s job to find and develop competent suppliers that are qualified to provide the firm with its needed materials. For more on this topic, please follow this link.

Procurement-Strategy. Companies today are seeing more and more strong competition. Executives are looking to procurement to add value across the business enterprise. The Procurement Strategy has a major effect on the department’s ability to help the company reach it’s business goals. For more on this topic, please follow this link.

Transforming Procurement Operations. Today, procurement is expected to bring value to the entire business enterprise. Some organizations have difficulty migrating their legacy processes to more advanced procurement models. For more on this topic, please follow this link.

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