Introduction to Strategic Procurement
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Common themes of strategic supplier management
Many organizations find themselves with large numbers of suppliers where there has been an absence of appropriate management or commoditization this is especially true where the procurement function is fragmented throughout an organization and the controls of which suppliers should be used are loose or absent.
Strategic supplier management is an important tool in getting to grips with this situation with it’s use delivering not only cost savings on products but also efficiencies for the procurement department.
One of the first steps of strategic supplier management is an assessment of the products it procures and the suppliers that it procures from. This requires data and one of the first problems’ you may come across is the lack of purchase order data for all transactions – this is often as a result of poor processes and fragmented purchasing. In most cases its best to get spend and supplier data from your finance team. You’ll want to take this data over a year or so depending on your business to give you adequate understanding of trends or buying cycles.
Once armed with your list of suppliers and spend you’ll need to group them – consider placing them into commodities (types of products) this might be over a number of levels e.g Raw material – Metals – Steel in order to give you appropriate granularity for decision making purposes.
Once’ you’ve grouped your suppliers you’ll have a view of spend by commodity – you’ll probably find significant numbers of suppliers in some categories – there may be appropriate rationale for this – but you’ll need to question this to ensure your not fragmenting your supplier base unnecessarily.
An important variable you’ll need to include in your analysis is the type of product and it’s availability – for example inexpensive COTS products (Commerically available off the shelf) may present a plethora of suppliers and provide a number of options – more complex high value parts may have a small number of providers where more attributes that price and lead-time come into play.
You may also want to include supplier performance data in your assessment – at this stage focus simply on QCD (Quality, Cost and Delivery) performance.
Once you’ve got your suppliers you’ll need a plan – your supplier strategy will probably fall into 1 of 3 options
1/ Exit – this strategy means you’ll stop using the supplier – this could be done immediately or over a period of time
2/ Maintain – This means that you’ll maintain your business with this supplier- you won’t look to exit – neither will you look to vastly increase the level of business you give them either
3/ Develop – These suppliers are often strategically important (partners) who require a close working relationship – the supplier may show the appetite and capacity for more business or supply complex and vital products bringing crucial value to your organization.
An optimum supplier base is a crucial step in business success – it isn’t a one off exercise but a continual process requiring appropriate resources to avoid failure – supplier rationalization is one part – but perhaps more important is the need to have the right supplier – that mix of price, lead-time and value that can not only provide products but enhance what you can offer to your own customer.
Request for quote process
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The purpose for using the Request for Quote (RFQ) Process is to obtain price and availability information of product from either a single or range of suppliers. The RFQ process typically targets two activities
* Establishing a part – supplier – price – relationship
* Obtaining Value for Money through running RFQ through multiple vendors.
The RFQ process however is often bureaucratic – a typically non-automated process it can attract substantial overhead in its administration coupled with the evaluation of responses. This is especially true for organizations which manage substantial volumes of parts. If the market lacks price and availability instability the value add for the process is often questionable.
A common issue is that the RFQ process is utilized on established (and long term) runner repeater product where there is no need (i.e. supplier relationships and price/lead-time criteria is already well established) and the costs of the RFQ process outweigh the benefits found by competing the part. It’s not uncommon to find that despite numerous suppliers being tendered the part is always procured from the same one at the same price.
So why is the RFQ process used in these cases? The RFQ process is utilized in these processes because
• The previous quotation validity has expired
• Perceived variability in price and lead-time
Example Request for Quotation (RFQ) Process
A Typical RFQ process will include a variety of steps such as:
• Obtaining a Specification of the product to be bought
• Sourcing suppliers
• Producing and communicating a RFQ document which is typically built up of a
o Statement of requirement
o Applicable Terms and Conditions of Purchase
• Expediting suppliers for return of information
• Evaluation of responses and selection of source of supply
• Approvals
The Criteria for evaluating the responses is typically defined through analysis of price, lead-time and compliance against specification – different organizations may place particular weighting on an individual facet (often price!). Other aspects may also come into play such as payment terms and quality releases.
Given that the process can attract administrative cost there is a need to ensure the process is both efficient and only used as required (such as for stranger product or where supplier relationships are not established). This can be supported by a methodology deployed with the buyer and a focus on developing a long term supplier strategy when known.
Establishing long term agreements with suppliers with fixed pricing can often negate the need for an RFQ process – this establishes a long term pricing model and dictates terms and conditions – the downside of this approach is that it does reduce flexibility and can miss out on beneficial pricing adjustments in the market.
In order to mitigate the administrative overhead many organizations automate the process relying on e-procurement software and enabling workflow – this can provide all the benefits of a RFQ process but with much reduced overhead (although there is a reliance on technology which may or may not be present). The downside for this is that it relies on established rules (i.e. commodity structures) and again can’t cope with stranger product.
In most organizations the RFQ process is a necessary evil – commodity led organizations that procure raw material often have a requirement to verify pricing and or lead-time and despite common methods to move towards longer term agreements the RFQ process usually remains in some guise – it’s therefore necessary to ensure that the process is efficient and human intervention is minimized.