Original Source: GBM Consulting
“Strategic sourcing has been an integral part of the most supply chain models for decades. The essence of strategic sourcing is to create an environment where multiple vendors competing for a company’s spend drive down prices and drive up performance and services. But what about products and services where there are only a few providers, or where the product itself is so unique or highly specified that only a few suppliers can make it? Perhaps the item in question is custom built, complex to manufacture and purchased in low volumes making it difficult to get comparable competing bids. In many businesses, these categories of spend can be a significant portion of the total. What do these companies do?
One solution to this problem is a technique known as should cost analysis, which allows a company to simulate the manufacturing process and cost structure of it’s suppliers providing valuable information for supplier price negotiation. In order to understand how and where to apply should cost, it is important to understand the limitations of traditional strategic sourcing
Background
Strategic sourcing generally consists of aggregating, categorizing and analyzing a company’s spend. Theresults are then used as leverage in price negotiations. Advancements in technology have repeatedly breathednew life into strategic sourcing by, for example enhancing the ability to gather information through datawarehouses / reporting or improving negotiating ability through on-line auctions. This model has worked extraordinarily well for a long time. The latest wave of sourcing has fueled a driveinto low cost countries where labor rate arbitrage, government policies and other factors have combined todrive further spend reductions. The reliance on supplier competition to drive down prices works best when the subject products are verycomparable. This is one reason why strategic sourcing is frequently applied to indirect spend. Even when thepricing is complex, for example telecom, shipping or information technology, the actual product or service isfairly comparable so it is relatively straightforward to compare opposing proposals….”
Contributors: Open SourceCategories: Industry Articles, SIG U Resource
SRC Type: Sourcing, Strategy