STRATEGIC SOURCING & VENDOR MANAGEMENT

BY RAGHAV GANDOTRA

STRATEGIC SOURCING

Strategic Sourcing refers to a set of activities to

DISCOVER
EVALUATE SELECT DEVELOP MANAGE a viable supply base.

Some major activities typically associated with the strategic sourcing & vendor management are :

Leveraging Sourcing
Vendor Identification Vendor Evaluation & Selection Vendor Development & Improvement Vendor Integration into processes

The strategic focus of sourcing management involves integration of vendor capabilities into organizational processes to achieve a competitive advantage through cost reduction, technology development, quality improvement, cycle time, and delivery capabilities to meet customer requirement.

Strategic Issues in Sourcing

Vendor Involvement in Product Development

Vendor Base Rationalization Single Vs Multiple Sourcing Vendor Location

Quality Sensitive Vendors

Creating and Maintaining Vendor Relationship

Vendor Risk Portfolio

Vendor risk portfolio is a strategic framework for the assessment of dependency of the firm on vendors based on two factors, namely,
1. Vendors contribution on financial results.

2. Supply risk associated with each vendor.

 Vendors contribution on financial results deals with the measurement of the profit impact of contribution of a given vendor. This impact can be measured in terms of unit cost of material, procurement cost, quantity purchased, percentage of procurement costs, quality inspection costs, replenishment cycle time, inventory carrying cost, payment terms and conditions, etc. Higher the amount involved, higher is the vendors contribution on financial results.

 Supply risk associated with each vendor refers to measurement of risk of supply associated with each vendor.
When one firm sources an item from only one vendor with any alternative arrangement, then the firm undertakes a high degree of supply risk.

Supply risk associated with each vendor HIGH Vendors HIGH contribution on financial LOW Results Strategic Vendors LOW Leverage Vendors

Bottleneck Vendors

Routine Vendors

Vendor Risk Portfolio

Strategic Vendors
o HIGH Contributions on financial results HIGH supply risk associated. o Very important & crucial for the success of firms.

o Difficult to find their substitutes.

o They take most of the time, energy, efforts and resources of supply chain professionals of a firm. o Firms need to built & maintain healthy relations in order to enhance competitive capabilities.

Bottleneck Vendors
LOW contributions on financial results

HIGH supply risk associated.

o Normally, these are technology leaders or are even dominant market leaders with a lot of bargaining power. o PRIMARY FOCUS of the firms should be to minimize the negative impact of such vendors. o Extensive use of information technology will further reduce the cost of procurement.

Leverage Vendors
HIGH contribution in financial results

LOW supply risk.

o This time firm has the bargaining power because of the availability of large number of substitutes. o In this case, firms maintain a rigorous system of management for such vendors in terms of involvement, screening, exploration of alternative supply sources, etc. o Firms may have competitive bidding system while procuring such vendors.

Routine Vendors
LOW financial contribution LOW supply risk. o Firms may have large number of alternate vendors.

o The strategic focus of the firms here is to minimize number of such vendors in order to minimize the spent of time, energy, efforts and resources. o Emphasis should be given on automating the vendor management process & concentrate on other categories of vendor.

Vendor Selection Process

Business Need Assessment

Source Discovery

Business Proposal Invitation

Evaluation & Negotiation

Selection of Vendor

Vendor Rating
Vendor Rating systems are used to evaluate vendor performance like in terms of delivery, lead time, quality, etc. For some firms, Vendor Rating may come in the form of some award system or as some variation of certification. For e.g.. Intel awards their best suppliers the Supplier Continuous Quality Improvement Award (SCQI). Daimler-Chrysler awards its best suppliers the Gold Pentastar Award.

"Measure for Measure." Supply Management, 1 February 2001, 39.

Benefits of Vendor Rating Systems :

1. Helps to provide feedback from all areas in one package. 2. Facilitates better communication with vendors. 3. Provides overall control of the vendor base. 4. A specific action to correct identified performance weaknesses.

5. Establishes continuous review standards for vendors, ensuring continuous improvement of vendor performance.
6. Develop a performance based culture.

7. Helps to build vendor partnerships.

 Only QSP is not the sufficient criteria for the rating of vendors. In 2001, an article on supply chain notes that such a comprehensive research may consist of following 7 Cs framework Competency Commitment Cash resources Consistency Capacity Control Cost

7 Cs framework
Competency : managerial, technical, administrative & professional of the vendor.

Capacity : vendors ability to meet the requirement.

Commitment : vendors willingness. Control : effective management control & IS. Cash Resources : Resources and stability of vendor in terms of profit, ROI, asset-turnover ratio. Costtotal acquisition cost, not just price. Consistencysupplier's ability to exhibit quality and reliability over time.

Pricing factors : Competitive Pricing.

Quality factors : Comply with terms & conditions. Conformity to specifications. Reliability. Durability. Support.

Price Stability.
Price Accuracy. Advance notice of price change.

Sensitivity to costs (Must suggest cost savings)

Billing.

Warranty.
State-of-the-art product or service.

Delivery factors : Time Quantity Lead Time Packaging Documentation Emergency Delivery

Service factors : Good vendor representatives with sincere desire to serve

Information sharing
Technical support services Extending emergency support Providing problem resolution

Vendor Development
Any activity that a firm undertakes to improve a vendors performance and capabilities to meet the supply need in more efficient way. Activities like providing latest technology, training vendors people, information sharing, offering incentives for improved performance, encouraging innovativeness, developing sense of belongingness, etc.

VD requires a high degree of commitment.

e.g.. Motorola refers to this process as OPEN KIMONO approach. It often asks its vendors to value Motorola as a customer to work for.