Developing a commodity sourcing strategy
Strategic sourcing involves taking a strategic approach to selecting suppliers – an approach that is more aligned with an organisation’s competitive strategy. Strategic sourcing can be described as reflecting the integration of a procurement or sourcing strategy with the corporate strategy.
One example of strategic sourcing is a commodity sourcing strategy. A commodity strategy, sometimes referred to as a “commodity sourcing strategy”, is simply a purchasing strategy to procure quality supplies and services at the lowest commodity prices. It should be noted that in this case, “commodities” do not refer to traditional commodities such as copper, ore, cotton, or barley. The term “commodity” in this case refers to categories or groups of suppliers or services, which of course include traditional commodities.
Due to the highly competitive nature of today’s global market, it’s often a requirement to have your purchase/SCM (Supply Chain Management) team develop focused concepts and methods and apply them to your purchasing behaviour. A commodity sourcing strategy is based on the CSSP (Category Sourcing Strategy Plans) that ensures the use of systematic processes for developing the sourcing strategies to achieve your SCM goals, supporting your company objectives.
In this blog, we’ll guide you through the 7-step process of developing a generic commodity sourcing strategy.
Process of developing a commodity sourcing strategy
The success of your commodity sourcing strategy relies on maximizing the cost-reduction advantages of leveraging combined buying power for volume discounts, using market experts, utilizing existing commodity price indexes, observing commodity price trends, and forming strong, long-lasting relationships with preferred suppliers.
Commodity sourcing strategies require a distinct strategy planning developed for each specific group of supplies or services. It’s important to always stay updated around everything regarding the specific category or group. The information consists of, among other things, commodity index and commodity price developments/trends, and can be gathered in different ways. The most important thing is that the information is shared and used internally to continuously evaluate and improve the commodity sourcing strategy.
Step 1: Spend analysis
Performing a spend analysis is the first step towards integrating your organisation’s sourcing commodity strategy with your competitive strategy. It forces your organization to analyze all the goods and services that are being purchased and are forecasted to be purchased in the near future. The spend analysis should cover the total purchases across all divisions within your organization for both supplies and services. It should reflect the total cost of ownership and not just the purchase price.
The output will be a complete, documented understanding of your organization’s past, present, and future purchases for supplies and services.
Step 2: Industry analysis
Examine the supply industry to determine major suppliers of the specific supply or service by market share or geographical region. Your industry analysis should consider all various competition dynamics. We recommend using Porter’s Five Forces of Competition – customer power, supplier power, inter-company competition, the threat of substitution, and new market entrants.
The output of the industry analysis should reflect a diagram of the supply industry for the specific product or service which highlights the flow of product from key suppliers to major customers, as well as what role each company plays in the supply chain, such as assembler, manufacturer, or distributor.
Step 3: Identifying and documenting cost and performance drivers
You need a thorough understanding of relevant cost drivers and other important performance metrics such as quality, level of technology, flexibility, and timelines. We suggest mapping the manufacturing process and document all available technology options at each stage of the process to get a better insight into the different cost and performance drivers using different commodity price indexes, graphs, and other information and data sources regarding commodity price trends and similar factors.
Step 4: Supplier role analysis
Segment the supplies or services across a set of supplier roles to determine the type of required suppliers and the roles each supplier should play in the supply chain. This step may involve thinking in terms of sub-commodities or end-users, or by stages of the product life cycle. Whichever method you chose, the most important thing is to segment the spending by suppliers reflecting the cost drivers you identified in the previous step. The different cost drivers, sub-commodities, or life cycle may indicate the need for a separate sourcing strategy for each sub-commodity or life-cycle segment.
Step 5: Confirm the alignment of business processes
Once the supply or service cost drivers and performance metrics have been identified, and the supplier types and roles are determined, the next step is to confirm if your organization’s business processes are properly aligned, prioritized, and integrated. The focus is to use the analysis of cost drivers and supplier roles to realign the business process priorities to correctly reflect the desired degree of integration with your selected suppliers.
The output will be a determination of which business processes should be realigned to be able to integrate better with suppliers, thus committing to a cooperative, long-lasting relationship and creating a competitive advantage.
Step 6: Savings quantification
Quantify potential savings to ensure that the commodity sourcing strategy results in measurable saving. Use those saving targets as a metric for measuring the process of the strategy, and for “selling” the resulting commodity strategy to senior organizational management.
Step 7: Implementing the strategy
Implementing the commodity strategy should be approached in the same way as any other major project. Using a formal project management methodology and associated tools will ensure a successful implementation. This usually entails dividing the planned strategy into a set of tasks that will result in the targeted savings. The tasks need to reflect activities, resources, and milestones for achieving your savings targets.
How can Prognos help me develop a commodity sourcing strategy?
Strategic commodity sourcing relies heavily on data to identify the most profitable areas as well as compare between commodities within the industry to find the ideal partners for your organisation. Data which we possess.
The same data can also be leveraged in vendor negotiations to push the price as low as possible to allow you to reach your saving targets.
But manually having to search, extract and compile this cost data takes time. By leveraging Prognos platforms Prognos Tailored and Prognos Online you get easy access to thousands of commodity price indexes where you can see current commodity prices and commodity price developments/trends to be able to successfully evaluate and improve your channels of supply, while simultaneously giving you the upper hand in supplier negotiations.
Contact us for more information about how we can help you develop your commodity sourcing strategy, to learn more about strategic sourcing, or to book a demo of our solutions.