Adopt strategic sourcing

- When it comes to procurement, many companies focus entirely on measuring materials' costs, in other words they simply look at the price that they pay for their ingredients, the materials that they buy, but reducing material costs can also lead to a reduction in quality, reliability, and responsiveness, and that can end up costing you more money in the long run, that's why it's important to use strategic sourcing, an approach that looks beyond just material costs and maximizes the value of procurement for your supply chain. Let's look at an example. Say your supplier's agreed to reduce their price if you'll let them switch to cheaper raw materials and a less reliable mode of transportation, of course saving money is good, but depending on your business, these changes can actually lead to an overall increase in your total costs because you'll need to do more inspections, carry more inventory, and pay to expedite the late shipments. Strategic sourcing involves having a broader perspective on procurement decisions, it can reveal ways to reduce your materials' costs but it can also help reduce risk in your supply chain and build stronger, more sustainable relationships with your key suppliers. Here are eight specific actions that you can take to implement strategic sourcing in your company. The first is to analyze your past purchases, look for patters and trends to help you understand your company's purchasing behavior, are you an easy customer to work with? Or is it difficult for your suppliers to support you? You could look at your forecast for future production and sales. Comparing your forecasts to historical data can help you understand what your future procurement needs will be and what challenges you're likely to face. Review your suppliers by creating scorecards that show how each supplier performs on service and quality as well as on cost. Look at whether they're charging extra fees for changes or for special requests, and make sure you give your suppliers credit for being innovative and responsive. Go looking for suppliers that can provide the products and services that you expect to buy in the future, compare their prices and capabilities to your current suppliers. Look for opportunities to outsource your processes and look at all of your outsource processes to determine whether it may be time to bring them back in-house. Segment the materials you buy based upon financial impact and risk. Look at how payment terms are impacting the working capital requirements for your supply chain. Are you wasting money by paying your suppliers too soon? Or do you need to pay suppliers sooner in order to improve your relationship? And last but not least, identify and evaluate the risks associated with each product you buy and each supplier that you buy from. My video on supply chain risk management will show you how to build a risk register, it's part of the leading projects course that you can find on this site. Procurement plays a key role in determining how a supply chain will perform. Focusing on material costs often leads to adversarial relationships and lower overall performance. By implementing strategic sourcing, you can help to ensure that you're maximizing the value that you deliver with every dollar you spend in your supply chain and that will make you a better customer and a more successful business leader.