The most frequently used and standard guideline for the development and execution of sourcing strategies.
The application of the 7-step Sourcing Process enables buyers, sourcing and category managers to make effective and cost efficient sourcing decisions whether for new buys or for renegotiating existing contracts.
Understanding each of the steps in the process and recognising when to apply them will enable buyers to avoid emotional or “gut based” decisions and so drive a fact based, disciplined approach to decision making. This process based approach to sourcing has been adopted by many organisations across the globe and although their application may involve a small increase or decrease in the number of steps, the underlying logic of following the process remains. It is that Sourcing Buyers employ a fact based and structured approach to the execution of sourcing decisions.
In 1983, Peter Kraljic proposed that Purchasing or Procurement should become Supply Management. Procurement was, and was seen to be, a tactical, operationally focused discipline with almost no attention paid to strategic thinking. At this time, if there was any thought given to sourcing strategy, it was completely unstructured and essentially an ad hoc approach. In many, if not most cases, sourcing decisions by-passed the Procurement function entirely!
A standard structured approach simply did not exist. It took almost 20 years from Kraljic’s initial proposal for the Management Consultants, AT Kearney to develop their 7-step strategic sourcing methodology in 2001. The process aims to help companies evaluate suppliers on costs, quality and services provision. Since that time, many companies have adopted and implemented the 7-step Sourcing Process and it has become one of the very few global standards in Procurement and Supply Management.
Step 1 in this process is to create a profile of the category; understanding everything about the category. Typical questions for the analysis are:
1. What is the current quantity used, types and sizes?
2. Who are the users, where are they located?
3. From whom are we buying currently?
4. What price are we paying and under what terms and conditions?
Step 2 involves understanding the supply market. Who participates? What does their supply chain look like? What are the cost drivers? Are there critical risks? Step 3 addresses the sourcing strategy and must involve the users. What new suppliers might there be and how competitive is the marketplace? Where does the power lie; with buyer or supplier? With steps 1, 2 and 3 complete and with the users agreeing with your target suppliers, then comes implementation of the sourcing plan. Remember to document all the facts and decision logic. You might need to change the approach!
Step 4 focuses on the development and execution of the RfP process, while step 5 deals with the analysis of submitted tenders and the negotiations with the most suitable suppliers. Step 6 focuses on the on-boarding of the chosen suppliers. Finally step 7 addresses the tracking of supplier performance and the incorporation of lessons learned for future sourcing strategies.
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