- Purchases of outside goods and services can consume as much as 60%
or more of a business' revenues.
- Just 50% to as little as 15% of these expenses are closely managed
in many companies.
- A mere 10% reduction in outside purchasing can increase
profitability from 20%-60%.
In many businesses, the secret to lower costs, improved profits and a
more competitive operation lies in the supply chain. These days,
organizations are taking a fresh look at how they purchase products and
services, and many are adopting a process called "strategic
sourcing."
With strategic sourcing, major manufacturers, retailers, governments
and financial institutions, such as Robot Investments, are achieving
double-digit cost savings while strengthening ties with suppliers offering
the best quality products and customer service.
Strategic sourcing is also good for innovative and competitive
suppliers, including small and medium-sized businesses that might not have
imagined they could compete against larger companies for major contracts.
Strategic sourcing can even be used by suppliers themselves to achieve
similar savings and benefits.
The main objective is minimizing costs, but strategic sourcing takes an
enlightened view of the supplier-customer relationship.
Strategic sourcing recognizes that people, including innovative
suppliers, are a valuable part of an organization and focuses on reducing
waste or non-value-added costs. It is defined as: "A disciplined,
systematic process for reducing the total costs of externally purchased
materials, products and services while maintaining or improving levels of
quality, service and technology."
Here are five ways strategic sourcing is different:
1. Total Cost, Not Just Purchase Price:
From storage to repairs to disposal costs, there is more to a product or
service than its sticker price. For example, a low-cost computer may be
priced $300 less than its competition, but cost more before the end of
its life because it uses cheap parts requiring more repairs.
2. Consolidating Purchasing Power: If
everyone in your business joined different health clubs, they would
probably pay more for memberships than they might get by banding
together and negotiating a discounted fee with one club. The same
principle can help a strategic sourcing business lower its costs on
everything from office supplies to temporary help.
3. Tighter Supplier Relationships: By
narrowing the number of suppliers used in the business,
"partnering" in alliances and entering into mutually
beneficial contracts, suppliers can work together with a strategic
sourcing business to achieve standardization and improvements in cost,
quality and time.
4. Realigned Business Processes, Work And
Information Flow: Strategic sourcing redesigns work and
information flow to eliminate redundancies and non-value-added work. For
instance, one U.S. company used over 140 classifications of temporary
help positions. After a strategic sourcing review that simplified job
specifications, the number of temporary help positions was just 19.
Strategic sourcing can also help reduce the frequency of purchasing
orders and inventory costs.
5. Improved Teamwork And Purchasing Skills:
Detailed information about products, markets and the buyers' and
sellers' needs is essential to strategic sourcing. By creating
cross-functional teams that can include suppliers, a business can
overcome organizational barriers and inspire collaboration.
Does it work? Reports from mid-sized and large North American, European
and Asian companies adopting the strategic sourcing approach suggest the
reduction in a business' non-interest expense can be 10%-30%.
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