Wednesday, April 6, 2011

Strategic Sourcing: Building a Foundation for Success

“Strategic Sourcing: Building a Foundation for Success” is a UPS Supply Chain Solutions publication written by Tim Duffie, a Principal at UPS Supply Chain Solutions and Larry Koester, a supply chain consultant. In this article, the authors give a detailed overview of what strategic sourcing entails while at the same time clarifying some basic misunderstandings about the concept. Strategic sourcing is defined as the process of evaluating, selecting and aligning with suppliers or consortiums of suppliers to achieve operational improvements in support of an organization’s strategic objectives.

According to the authors, a frequent problem when defining strategic sourcing is that professionals limit its scope so they also limit the impact of strategic sourcing. This mistake is done simply by limiting strategic sourcing to the general objective of cutting costs. When done appropriately, strategic sourcing can impact not only costs but also the financials of the company and the purchasing and procurement processes. Hence, authentic strategic sourcing should take into account a broader plethora of issues such as: information availability, organizational commitment, supply market understanding, total cost evaluation, modifying approach towards suppliers, organizational role changes and culture/process for continuous improvement.

Strategic sourcing also presents a great opportunity for organizational alignment because in the process the overall business strategy of a company should be aligned with the business objectives of the company. Hence, this offers upper and middle management the opportunity to clarify and communicate corporate goals and objectives to employees.

The article offers three best practice case studies. The companies studied in these cases are Dial Corporation, Baker Hughes and Donnelly Corporation. I will comment on the Donnelly Corporation because it is the case that I enjoyed the most. Based in Holland, Michigan this corporation works manufacturing a plethora of products in the fields of hardware and software electronics. After studying it global organizational structure this company realized that it was beneficial for them to centralize their purchasing operations. As a result, it consolidated its three independent purchasing operations in the United States to leverage opportunities from the increase in sales in the industry.

This change was undertaken because the decentralized structure was actually leading to a rise of material costs. Labeled as the “Donnelly Procurement Plan,” this initiative allowed Donnelly Corporation to enjoy a 5.2 percent decrease in projected materials costs, a 25 percent improvement in supplier quality measures, and the corporation was on target for a 50 percent reduction in the size of its production supply base.

Though this article mentions that cutting cost should not be the sole incentive for strategic sourcing I think that in most cases this is the incentive for companies to embark in a strategic sourcing initiative. What do you think, is cutting costs generally the incentive to engage in strategic sourcing?

This article can be found at:

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