Recently, I introduced you to the Enchange Supply Chain House; the one stop shop for all of the elements you need to allow your supply chain to operate effectively. The all-encompassing Planning function was the focus of the most recent article and this time we look at Source or Sourcing and this discipline is not as straight-forward as the name may suggest.
Sourcing is an integral part of the extended supply chain yet the reporting line appears flexible in some companies. Admittedly, Sourcing is responsible for an enormous proportion of budget expenditure but tacking the department onto Finance is a mistake (as it is with IT but that is another story). In such situations, the financial and contractual aspects may well be water-tight but the lack of visibility and integration with Plan, Make and Deliver will produce a sub-optimal supply chain.
This approach can work for simple call-off organisations but it is not ideal for those seeking integration, collaboration and excellence. For example, decisions taken on keen pricing may back-fire when the 1 tonne bags of calcite arrive at a factory which can only handle 25kg sacks. You have to understand the implications and full cost of price-led negotiations.
Let us first look at some basic dictionary definitions of Source.
- A place, person, or thing from which something can be obtained, e.g. salmon is a good source of fish oils.
- A process by which a particular item enters a system, e.g. major sources exist for atmospheric oxygen.
- Obtain from a specific place, e.g. the best vanilla beans are sourced from one country.
This all sounds simple enough but the process of ensuring availability of all your required raw and packaging materials (possibly finished goods, if purchased) in the right place at the right time is a significant challenge. If you do not get this part of the supply chain right, you can essentially starve the downstream activities of products to make, move and sell at the right cost.
Dependant on the actual and desired level of supply chain maturity, your Source function may be that simple call-off process, a more sophisticated purchasing operation or a partnership driven procurement approach. Of course, these are not mutually exclusive and all 3 should be found in any Sourcing department but how do these 3 ways of working differ? It’s just buying stuff, isn’t it? Well, no it is not.
Call-off. The simplest of sourcing approaches. The customer places delivery orders with a supplier to book multiple delivery dates over a period of time. Negotiation sophistication is often restricted to agreement on predetermined pricing when there is a predictable and routine need for specific raw and packaging materials. The supplier-customer relationship is very loose and commitments on either side are minimal. In case of material shortage or force majeure, such customers have little or no priority.
Purchasing. A purchasing approach is a step up the maturity ladder and focuses on how products and services are acquired and ordered, e.g. raising purchase orders, managing invoices and arranging payment. In this case there is tighter control as contracts are in place, estimated consumption is communicated and prices are fixed.
The supplier-customer relationship is relatively hands-off but there is more formality and interaction as the respective teams facilitate the order to cash processes.
Procurement. A significant step up in importance and value to the business. Procurement is considered a “posh” word for buying or sourcing but in reality it focusses on the strategic processes of continuous market research, negotiation and planning. You have a mutually beneficial relationship where suppliers may run VMI, proactively develop alternatives, bespoke materials and may even lead to on-site, vertical integration in producers.
This is a partnership with long term collaboration as a prime objective.
Perhaps we can consider the retailer-shopper relationships where the retailer expends efforts on professional procurement whilst the shopper in the store is simply interested in a buying transaction. If you are shopping at home from an on-line app, you are simply calling-off.
Sourcing in the Enchange Supply Chain House
In terms of the Enchange Supply Chain House, each of the 3 approaches above is covered by numerous activities in varying degrees but including:
Global, Regional & National Sourcing. Do you have more than 1 entity involved in the production of finished goods? Do those entities accumulate their raw and packaging material demand to maximise the price and trading terms benefits of bulk buying? Is this managed centrally?
Supplier Development. Should you get close to your suppliers? If you become more important to your supplier you can start to influence their R&D efforts in your favour for mutual benefit. Do you expose yourself to risky, single supplier situations? Proactive producer teams can seek alternative substitutes from smaller or new suppliers.
Supplier Management. Are decisions regarding suppliers and supply taken at the appropriate level within the organisation? Is there a concise written Sourcing Policy covering the purpose, process and participants in the function? Relationships never manage themselves and you need a formal structure in place to develop the business partnership.
Service Level Agreements. Do you have SLAs, at least with your key suppliers? Do both parties know what to expect from each other and the ramifications should one party fall short? This is not being overly officious. If you want transparent and trusting relationships in good and bad times then SLAs are similar to a pre-nuptial marriage agreement.
This article provides only an outline understanding of what you should expect from your Source function and in subsequent articles we will look in more detail at what specifics you need in place to support and fuel the remainder of the extended supply chain.
Read all posts in my series on the Supply Chain Excellence page of our blog where you can also subscribe to our updates.