Strategic Sourcing &

Category Management

Krishan K. Batra
President & CEO
ISM-INDIA
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Introducing the Presenter...
Krishan K. Batra has diverse experience of 4 decades in the field of
Technology & SCM. He enjoys engaging people in sustainable transformation
and inspiring business excellence. In his last assignment with UN organization as
Chairperson of the supply chain, he was instrumental in re-engineering business
processes and implementing ERP worldwide.

He started his career with TATA Group after completing M.Tech from IIT Delhi.
Later he completed MBA from Syracuse University in USA. Krishan has worked in
Switzerland, Denmark and USA in different capacity. He is the founder of
UNSPSC which is global standard for coding goods and services. He has worked
with many organizations to optimize supply chain and build their professional
capacity.

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Today’ Agenda
• Overview of Strategic Sourcing & Category Management
• Understand the value of Strategic Sourcing.
• Key Elements of Strategic Sourcing Solution
– Data Collection & Analysis
– Supply Market Analysis
– Sourcing strategy
– Vendor Selection
– Supplier Performance Management.
– Supplier Management
• Challenges to Implement SS
• Best Practices for successful adaptation of SS
• Your Roadmap Forward.

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Key Trends in Supply Management

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Category Mgmt. Vs. Strategic
Sourcing
 Category management is not just a new name for strategic sourcing.
 Rather, strategic sourcing is one of the tools used by category teams to
manage procurement expenditure to achieve mission value.

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Strategy to Tool

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 Category Management
Category Management Is Broader Than Strategic Sourcing.

• The strategic sourcing process is typified by a set of periodic processes

that seek to reduce purchased costs by aggregating demand and
rationalizing the supply base in selected commodities.
• SS starts with procurement-led analysis to identify target commodities
and opportunities – and then culminates in a preferred-supplier contract.
• Category management, on the other hand, evaluates not only the full
cycle of a contract or supplier life cycle, but also looks holistically at the
life cycle of the value chains which consume the goods and
services in the spend categories.

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Overview of Strategic Sourcing
 What differentiates strategic sourcing as a tool of
category management is that it becomes part of a
holistic and strategic approach combining a broad range
of tools, processes and policies.
 Strategic sourcing thus becomes a critical operational
component of a method for improving efficiency and
outcomes.
 It aligns the procurement function with the organization’s
business, policy and mission goals.

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Overview of Strategic Sourcing
• Traditional Sourcing: Traditionally Procurement has been a
reactive function i.e. responding to requisitions or requirements as
they come up.
• As procurement becomes more proactive, reactive sourcing
becomes TACTICAL SOURCING. It involves creating strategy to
anticipate the needs. It still deals with them as they arise.

• Strategic Sourcing: It is well planned ongoing process of

proactive actions. A systematic and fact‐based approach for
optimizing an organization's supply base and improving the overall
value proposition.

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STRATEGIC TRANSFORMATION

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Strategic Sourcing &SRM

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What is Strategic Sourcing?

• The organized, collaborative and structured process of critically analyzing

an organization’s spending and using this information to make business
decisions for acquisition.

• Organized means that sourcing is part of an ongoing enterprise

process. It covers all spend categories for materials and services.
Sourcing strategies are reviewed and updated periodically.
• Systematic means that the firm has an agreed-upon process for
pursuing strategic sourcing.
• Collaborative means that supply managers
collaborate internally & externally.
Strategic Sourcing requires a strategic, long-range view of procurement, a move from
“requisition-to-PO” to enterprise procurement planning and delivery

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Strategic Sourcing

Primary Objectives
– Reduce the costs of goods and services
– Capture resulting savings
– Create contractual alliances with suppliers to support
the long-term goals of the University
– Maintain and improve product quality
– Improve business functions
– Optimize the total purchasing process

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Use of Cross Functional Teams
Traditional Approach Strategic Sourcing Approach

Engineer
CROSS-FUNCTIONAL
SOURCING TEAM
Engineer
++ Purchasing ++ End
Purchasing Agent Users
Agent
Finance Marketing
Logistics Info. Mgmt.
Material
Officer
Characterised by:
Characterised by: · Joint Responsibilities
· Functional Responsibilities · Enhanced Communications
· No Common Focus · Consistent Supplier Interface
· Lengthy Cycle Time · Short Cycle Time

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15 Leading excellence in procurement and supply
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Seven Steps Methodology
1 2 3 4 5 6 7
Implement
Conduct
Conduct Assess
Assess Collect
Collect Develop
Develop Solicit
Solicit &
& Negotiate
Negotiate &
& & Manage
Internal
Internal Supply
Supply Supplier
Supplier Sourcing
Sourcing Evaluate
Evaluate Select
Select Supply
Research
Research Market
Market Information
Information Strategy
Strategy Offers
Offers Suppliers
Suppliers Base

Feed Back Loop Should address:

 Measure & Report, Capture Learning & Ensure Compliance

Key Change Leadership fundamentals are necessary throughout implementation of the methodology to ensure
successful results
· Develop vision and strategy · Redesign infrastructure
· Enroll stakeholders
C H A N G E L E A D E R S H I P · Measure performance
· Communicate vision and strategy · Develop new values, skills, and behaviours

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 Assessing the Opportunity

1 ndd
u
u
t
cct I
Innttee
rrn
naall
Actions
•
Outcomes
CCoon aarrcchh Team Charter
ee •
RReess
• Develop team charter Current stakeholders
• Identify stakeholders • Overview of external spending/related
• Spend Analysis costs
• Categorization
• Identification of specific sourcing
opportunities and issues
• Stratify the buy
• Initial Sourcing Team Communication
• Communicate team Plan
scope
• Stakeholder buy-in to program scope
and opportunities

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Identify ”Quick Hits”
• Quick Hits are the “Low hanging fruit”
and can provide:
– Instant savings to the company
– Credibility to the work of the team
– Building support for further activity

Early on in the process, opportunities may arise that can be acted upon by
the Sourcing Team, or a separate initiative to capture cost and process
savings right away.
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Internal Research
 Developing the strategic sourcing strategy is a fundamental
part of the purchasing and supply management process.
 Strategic sourcing is a logical process involving the
application of tools by skilled, competent and
knowledgeable people.
 Developing and implementing strategic sourcing is a
functional process.
 Since it is such a broad area, it is advisable to sub-divide the
subject into a number of sections as follows.

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Positioning
 Positioning Purchasing and Supply Management for Strategic
Sourcing.

 Illustrate where the purchasing and supply management

functions sits within the organisation e.g. Alongside Finance,
Legal, Human Resources

 Illustrate the role of the function itself and those people that
carry it out - the purchasing and supply management
function's terms of reference, scope of responsibility and
objectives.
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As is Analysis
• Customer and Business Requirements.
• Spend Analysis
• Future Spend Analysis
• Market Analysis
• Categorization

Several analytical tools are appropriate for this stage including Porter's
Five Forces, PEST (Political, Economic, Social, Technological) and
SWOT (Strengths, Weaknesses, Opportunities and Threats).

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Categorization
• Key element when defining a category manager’s scope of
work. There are
• Different ways to categorize spend in a company.
• Some simple examples of high-level spend categorization
are direct/indirect, materials/services, domestic/import,
critical/noncritical, ABC, etc.
• The above categories are simply too broad to draw
meaningful conclusions, and we have to go deeper into the
details.
• For comparison, categorization should be done with long
view in mind.
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UNSPSC
• A hierarchical Structure
– The UNSPSC is a hierarchical classification, having five levels.
The levels allow users to search products more precisely
(because searches will be confined to logical categories and
eliminate irrelevant hits) and it allows managers to perform
expenditure analysis on categories that are relevant to the
company’s situation.
– Each level contains a two-character numerical value and a
textual description as follows:

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UNSPSC Classification Schema
• XX Segment
The logical aggregation of families for analytical purposes

– XX Family
A commonly recognized group of inter-related commodity categories

• XX Class
A group of commodities sharing a common use or function

– XX Commodity
A group of substitutable products or services

» XX Business Function
The function performed by an organization in support of the commodity

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UNSPSC Classification Example
• The commodity “pen refills” is part of a larger class of products, “Ink and lead refills”, which in turn
is part of a family of products, “Office supplies,” which is itself part of a segment of products, “Office
equipment, accessories, and supplies.” Each level of the hierarchy has its own unique number
– “Pen refills” = UNSPSC classification 44-12-19-03

Segment Category Number and Name

Segment 44 Office Equipment, Accessories and Supplies
10 Office Machines and their supplies and accessories
11 Office and desk accessories
Family 12 Office supplies
15 Mailing supplies
16 Office supplies
17 Writing instruments
18 Correction media
Class 19 Ink and lead refills
01 India ink
02 Lead refills
Commodity 03 Pen refills

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Hierarchy Category Number and Name
• The UNSPSC can be further extended by adding a ninth and tenth
digit after the commodity number. These numbers can indicate
business relationships to the supplier such as rental/lease,
wholesale, retail, or original equipment manufacturer (OEM).
• Example of UNSPSC classification code “43-20-15-01-14”
– Segment
• 43 Information Technology Broadcasting and Telecommunications Communications
Devices and Accessories
– Family
• 20 Components for information technology or broadcasting or telecommunications
Computer Equipment and Accessories
– Class
• 15 Computers Computer accessories
– Commodity
• 01 Computer switch boxes Docking stations
– Business Function
• 14 Retail

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SPEND ANALYSIS
A key step in the strategic sourcing process. The
Spend analysis software allows the procurement
team to get a detailed view into the organizations
current spending providing the following insights:
• Category level spend
• Spend by supplier in each category
• No. of suppliers in each category
• Discovering opportunities for cost savings

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Spend Analysis
The spend analysis should enable you to look at
the data in different ways:
• Total spend by category and then by supplier
• Total spend by supplier and then by category
• Top suppliers with 80% of the total spend
• Category spend by supplier and then by product
• Category spend by product and then by supplier

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Diagnostic of Spend
• Divide total corporate spend into categories.
• Divide spend category by business unit or location to
identify each supplier.
• To offer valuable insight the above should cover around 80%
spend.
• Spend category should be classified according to supplier
market competitiveness and its importance to organization.
• Kraljic Model could help in plotting categories.
• Once diagnostics are complete, the business must decide
which categories to address immediately and which one to
delay.
• Seven step process begins 29 for categories needing attention.
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 Total Cost of Ownership:
Considerations
Acquisition Ownership Operation Disposal
• Energy
• Procurement cost • Licences • Packaging
• Fuel
• Purchase price • Financing • Travel – Rail, Road, Air, • Equipment
• Delivery • Consumables Sea • Decommissioning
• Labour
• Installation • Maintenance • Replacement
• Spares
• Commissioning • Servicing • Infrastructure • Depreciation
• Migration costs • Repair • Downtime • Migration costs
• Testing
• Warranty • Surplus stocks
• Audit/Inspection
• Training • Ordering and Invoicing
• Taxes costs
• Contract Management
• Insurance

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Spend Data Management Defined
More simply, can you answer these questions?
• Which suppliers provide the greatest value to the enterprise?
• How does total spend roll-up in corporate families create
increased leverage to reduce supply costs?
• Which commodity and service areas represent the greatest
sourcing opportunities for spend reduction?
• What is my total spend by industry classification?
• Where is spend occurring with non-preferred suppliers?

“How Can You Manage What You Don’t Measure?”

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Spend Visibility Options

Transactional &
Transformation Presentation Alternatives
Master Data
Output Files
CLIENT NAME AT ATNUM AT NAME AT SUBNUM AT SUBNAME AT ULTNUM AT ULTNAME

3M COMPANY J CH0336 7052825 3M COMPANY 0 0

CONAGRA BEEF 16748788 CONAGRA BEEF 0 8071131 CONAGRA FOODS, INC.
CONAGRA DAIRY 16571351 CON AGRA DAIRY FOODS CO 0 8071131 CONAGRA FOODS, INC.

Data Data Mapping/

COUNTRY SKILLET 17130902 COUNTRY SELECT COMPANY 0 8071131 CONAGRA FOODS, INC.
LAMB WESTON 2433489 LAMB-WESTON INC 8520330 LAMB-WESTON INCORPORATED 8071131 CONAGRA FOODS, INC.
FERNANDO'S FOODS CORP. 5603941 CONAGRA MEXICAN FOODS INC 8071130 CONAGRA FOODS FROZEN FOODS GROUP
8071131 CONAGRA FOODS, INC.

MEADOW GOLD DAIRIES 3321387 MEADOW GOLD DAIRIES 7320009 DEAN DAIRY GROUP 10878311 DEAN FOODS COMPANY

Sources Categorization
RYAN MILK COMPANY, INC. 4389247 RYAN FOODS COMPANY 0 10878311 DEAN FOODS COMPANY

FLOWERS BAKING - NORFOLK 10531344 FLOWERS BAKING CO. 1825068 FLOWERS BAKERIES LLC 13890077 FLOWERS FOODS, INC.
FLOWERS BAKERY 2781568 FLOWERS BAKING CO 1825068 FLOWERS BAKERIES LLC 13890077 FLOWERS FOODS, INC.
BUTTER KRUST BAKING 2054204 BUTTER KRUST BAKING COMPANY 11365197 BUTTER KRUST BAKERY 13890077 FLOWERS FOODS, INC.

KELLOGG SALES (FROZEN) 14166597 KELLOGG USA INC 0 16125443 KELLOGG COMPANY
KELLOGG SALES (FROZEN) 14166597 KELLOGG USA INC 0 16125443 KELLOGG COMPANY
KELLOGG SALES COMPANY 14166597 KELLOGG USA INC 0 16125443 KELLOGG COMPANY
KELLOGG SALES COMPANY 14166597 KELLOGG USA INC 0 16125443 KELLOGG COMPANY

Operating Co. 1
AUSTIN FOODS COMPANY 2889871 AUSTIN QUALITY FOODS 17142989 KELLOGG SNACKS 16125443 KELLOGG COMPANY

Output SIMPLEX GRINNELL 8537335 SIMPLEX GRINNELL 38721 SIMPLEXGRINNELL LP 18340971 TYCO INTERNATIONAL LTD.

(A/P data mart)

“The Spend Cube”
or
y Standard Reports/Views
teg
Ca
Operating Co. 2
(A/P

Suppliers
systems)

Operating Co. 3 Analytics Platform

(A/P
systems) Organization

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Analysis Dimensions
Spend cube can be analyzed across its dimensions which provides a comprehensive view of purchasing
Types of Analysis
Level Purpose Examples
Overall Provide a top-level picture of spend • Spend and Number of Suppliers by category
• Spend and Number of Suppliers by location / business unit
• Spend to Sales ratio by location/ business unit

Category Compare categories to identify sourcing • Top categories by spend

opportunities • Spend to supplier ratio by category
• Pareto analysis by category
• Supplier overlap by category
Supplier Identify supplier base and fragmentation issues • Top suppliers by spend
• Pareto analysis overall and by location/ business unit
• Supplier overlap

Item Isolate item discrepancies and prepare • Number of items by category

category baselines for sourcing • Number of suppliers by item
• Price variance of an item across locations/ business units

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 Assessing the Opportunity
2 c
c t
t
a
Ma
M
r
rkkeett Actions Outcomes
nn dduu eenntt • Alternate Suppliers
oo
CC ssssm m
se e •
AAsss • Where to buy? Supply Market Analysis
• When and how much • Identification of specific sourcing
to buy? opportunities and issues
• Reviewing Market • New Technologies and Products
Dynamics • When and how to buy?
• Risk Identification • Conditions and contraints related to
• Evaluating Major Cost particular product.
Elements

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Supply Market influences your decisions
on:
1. …what & how much to buy?

1 ?
? ? 3
2 ? 4 ?

2. …where to buy?

3. …when & how to buy?

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STEP 2
Conduct Market Assessment
• Alternative suppliers, other than incumbents, are
identified.
• Key supplier marketplace dynamics are identified.
• Supplier and user target cost information is
determined.
• Major supplier cost components are evaluated,
and the supplier’s supplier marketplace is
analyzed for risks and opportunities.

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Supply Market Analysis

• You should aim at understanding the

market rather than reacting to it!

Supply
Market Review of the structure, characteristics &

Analysis =or service

trends of a market for a particular product

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 Assess the ability of different markets to meet your requirements
 Identify the markets which represent the best opportunity & lowest
risk for a purchase
 Identify new products & technologies
 Understand conditions & constraints related to particular purchases

Reduce costs & risks

Identify opportunities
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 Demand and Supply
Factors influencing
demand

Factors influencing
Price
 supply
Available income
 Price
 Prices of substitute goods
  Prices of inputs
Prices of complementary
 Technology
goods
 Buyers’ preferences and  Suppliers’ expectations
tastes  The number of sellers
 Buyers’ expectations
 The number of buyers 39 Leading excellence in procurement and supply
Porter’s Five Forces Model
Threat of New
Entrants

Supplier Market Internal Buyer Bargaining

Bargaining Competition Power
Power
Other possible forces:
Source: Pressure from • Globalization
Competitive Strategy • Digitization
Michael E. Porter (1980) Substitutes • Deregulation

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41 Leading excellence in procurement and supply
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SWOT Analysis
• Low product
• Broad customer innovation
base • Traditional,
• Established
Strengths Weaknesses unionized business
product range processes
• Established • Low patent
distribution
channels
Internal Factors protection

• Emergence of other
uses and markets
External Factors • Emerging overseas
suppliers
• Emerging overseas Opportunities Threats • NPD costs are high
markets • Environmental
• High entry barriers regulations

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43 Leading excellence in procurement and supply
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STEP 3
In Step Three, the sourcing team
develops a supplier survey for both
incumbent and potential new suppliers.
3 l e t S
c on
up
p l ie r
The survey helps to evaluate supplier
performance capabilities and cost.
l The team also verifies spend
Co rmati
o
Inf information with data provided by
incumbent suppliers.

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This Step will help you to:
Identify
criteria to
appraise Locate, screen
and further
suppliers
research suppliers

Assess suppliers’
Measure & rate
capabilities,
potential
motivation & suppliers
financial situation

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Tool for Supplier Survey: RFI
• A request for information (RFI) is a standard business
process whose purpose is to collect written information
about the capabilities of various suppliers. Normally it
follows a format that can be used for comparative purposes.

• An RFI is primarily used to gather information to help make

a decision on what steps to take next.

• Typically, vendors will not respond to an RFI unless the

effort to do so is not excessive and there is an expectation
that an order or at least an RFP will follow.

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Suppliers
Where to find Organization
• Directories • Structure
– Yellow Pages
– Chamber of Commerce • Culture
– Minority Purchasing • Dedication to business development
– Thomas Register
• Accounts lost in last 3 years
• Networks
– Internet • Policy on open book cost disclosure and
– Minority Councils independent financial audits
– SBA • Incentives for performance
– Trade Shows
• Years providing product or service
– Other buyers

• Financials Processes
• • Implementation and acceptance of technology
Total Annual Revenues
• Total Assets • Strength of management experience
• Annual revenues in the outsource • Qualifications of operating management
segment • Qualifications of the work force
• Financial rating • Quality of labor management relations
• Sales Growth • Current best accounts

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Supplier Research
• Cost structure • How the company
• Financial status
is viewed
• Customer satisfaction
• Core capabilities
levels
• Support capabilities • Strategy/future
• Relative strengths and direction
weaknesses • Culture
• Buyer’s fit with
supplier
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Examples of screening criteria:
Product range / minimum quality

Minimum / maximum quantities available 
Delivery lead-times
Maximum acceptable price & payment conditions 
Overall reputation/ major problems
Business relationships with your competitors
Location & exporting experience
Type of company (manufacturer, wholesaler…)
Size
Use of e-commerce
Language capabilities

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An example:
3 Appraisal criteria:
Technical performance
Product reliability
Lead-time to delivery…

Allocating weights:
Technical performance = 10 points
Product reliability = 10 points
Lead-time to delivery = 9 points

Product reliability = 10 points

Low meantime between failures (3 points)
Low outage rate (3 points)
Durability of equipment (4 points)

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Case 1: Measuring
Case equipment
1: Measuring equipment
Appraisal criteria (and components with Overall weight Supply
allocated weights) (1- 10) target
(*)
1. Technical performance
10 Q
 Precision in measurement (10)

2. Product reliability
 Low meant ime bet ween f ailures (3)
10 Q
 Low outage rat e (3)
 Durabilit y of t he equipment (4)

3. Lead- time to delivery

9 A
 Delivery of t he main equipment (9)

4. Continued availability of spares

 Off ers of cont inuit y of supply (1)
 Financial st abilit y (3) 10 A
 Core product f or supplier (3)
 Sust ainable market posit ion (3)

(*) Q = quality; A = supply availability; R = supplier responsiveness; C = cost

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Case 1: Measuring equipment (Cont’d)

Appraisal criteria (and components with Overall weight Supply (*)

allocated weights) (1-10) target
5. Technical support
¨ In installation and commissioning (2)
¨ Readiness to train staff on-site (3) 10 R
¨ Response time to queries (2)
¨ Response time to maintenance and repair (3)
6. Life-cycle cost
¨ List price (1)
¨ Discounts (1)
7 C
¨ Cost of spare parts (2)
¨ Cost of staff training (1)
¨ Cost of maintenance support (2)
TOTAL: 56
(*) Q = quality; A = supply availability; R = supplier responsiveness; C = cost

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Financial statements: 9
12

The Balance Sheet - shows the financial situation in terms

of Assets & Liabilities at a point in time

The Profit & Loss Account - shows the

financial situation in terms of
Revenues & Outflows over a
period of time

Different companies use different accounting practices,

and accounting rules vary from one country to
another

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 Financial ratios:
Ratios for solvency (I)

Current ratio Current assets

Current liabilities

Current assets - stocks

Acid ratio
Current liabilities (quick ratio)
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 Appraising Suppliers is:

 A way of determining how a supplier will perform

 A basis for developing a list of approved suppliers
 A basis for developing a supplier development programme
 A basis for developing a vendor rating system
 The start of a business relationship

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Determining appraisal
criteria...
The Performance Equation
Performance = Capability Motivation
x

Evaluate the
Evaluate the
supplier’s interest &
supplier’s ability
to supply your company potential commitment

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 STEP 4: Develop Supply Strategy
This will help you to:

 Develop appropriate supply strategies for

SUPPLY
a company’s different categories of STRATEGY
products and services.

 Spend your time and effort where it is

most needed when managing the supply
process, and therefore achieve the best
results.

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STEP 4
Step Four is the development of the sourcing strategy. The
combination of the first three steps—the internal assessment, the
market assessment, and updated supplier information—provides
important input to developing a sourcing strategy.

The sourcing strategy for the category will depend on three factors:
1. How competitive is the supplier marketplace?
2. How aligned are your organization’s users on the need versus
opportunity to test incumbent relationships?
3. What alternatives to a competitive assessment exist for your
organization in this category or closely related categories?

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Having a supply strategy
means knowing:
 How many supply market segments to buy from

 How many suppliers to buy from

 What type of relationship to have with your suppliers
(arms length or collaborative)
 What type of contract to have
 Which operational procurement strategies to pursue

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Supply Positioning Model
Takes into account:

 The level of annual expenditure on an item

 The potential impact on the enterprise of not meeting supply

targets

 Supply opportunities & risks

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Supply Positioning Model:

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5 l iicc
/
iitt/EE
STEP 5: Solicit/Evaluate Offers
l
vvaal
uua
attee

l
SSoo rss
er
OOffffe Step Five involves preparing a Request for Proposal (RFP) or
RFQ. This will define the basis for competition to the pre-
qualified suppliers. It includes product or service
specifications, delivery and service requirements, evaluation
criteria, pricing structure, and financial terms and conditions.
In addition, a communication plan is executed that will attract
maximum supplier interest, ensure that every supplier
competes on a “level playing field,” and enable the buying
organization to arrive at an optimum selection decision.

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Request for Proposals (RFP)

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Request for Qualifications (RFQ)

Request for Qualifications: as defined means a

solicitation document requesting submittal of
qualifications or specialized expertise in
response to the parameters and scope of
services required.

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Bids and Bid Solicitation (BID)
• Bid: as defined means a document submitted in
response to a Bid Solicitation to provide goods at
a certain price, quantity, timeframe and under
specific terms and conditions requested by the
department.
• Bid Solicitation: as defined means a document
requesting submittal of bids for goods or services
specified by the department.

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BID v. RFP v. RFQ

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Solicitation process
• Solicitation process comprise of following 4
steps.

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Solicitation Documents
• Scope of Documents
– Invitation and Description
– General Terms and Conditions
– Pricing Template
– Selection Criteria & Weights
• Functionality of the product/ range of services offered
• Initial Price
• Total Cost of Ownership
• Cost drivers of selected product
• Risk associated with supplier or Product/service offered.
• Management
• Awarding
• Closing & Debriefing

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Facilitating E-Reverse Auctions

• Buyers and suppliers able to communicate in

real-time, worldwide, via the Internet
• Development of robust, user-friendly, third-party
auction systems
• Significant improvements in goods and service
quality and cycle time reduction

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6 e cctt
t
aatee Step 6—Negotiate/Select
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SSuupp In Step Six, the sourcing team applies its evaluation criteria to the
supplier responses. If additional information is needed beyond the RFP
response, it is requested. Conduct the negotiation process with a larger
set of suppliers, then narrowed to a few finalists. If the sourcing team
uses an electronic negotiation tool, more suppliers may be retained in
the process longer, providing greater opportunities for success among
diversity suppliers.
Award scenarios are conducted to compare a series of outcomes in
terms of total value or implementation cost differences. User
departments are included in the final selection process. Senior
executives are briefed on the selection outcome and their approval is
obtained. Senior executives are prepared to receive calls from any
disappointed suppliers once they understand the rationale.

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Negotiation & Supply Chain
• Negotiation is most important tool of the procurement
profession.
• Key objective is to get best possible long term or short term
agreement based on TCO.
• No one knows is exactly sure as to where commercial
negotiation began except that some form of negotiation is
associated with our early attempts at commercial enterprises.
• Traditional Negotiation: More of a game where seller set the
agenda. Half the discussion was less than honest.
• Concepts such as JIT, Partnering, Supplier Consolidation,
Supplier Certification, Strategic Alliances demand a new
approach to negotiation
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Negotiation – a complex skill set
POWER

Preparation &
Strategies & tactics
planning

Effective
Negotiation

Face-to-face
skills

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Strategic Approaches

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Negotiation Cycle

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BATNA
Best Alternative to a Negotiated Agreement
Advantages:

• Forces negotiators to realistically evaluate their

negotiating strength
• Prevents blind negotiations
• Protects from accepting terms that are too unfavorable

“The least damaging outcome anticipated if no

agreement is reach”
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7 p lleem e
e
Step 7—Implement Recommendations
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BBeen • The winning supplier(s) are notified and invited to participate.
• For incumbents, there will be a communication plan that will include
any changes in specifications, improvements in delivery or service
requirements or pricing. The buying organization may have received
significant improvements from the process. It’s important that
improvements are recognized by the organization and by the supplier.
• For new suppliers, a communication plan has to be developed that
manages the transition from old to new supplier at every point in the
organization’s process that is impacted by the spend category.
Receiving docks, using department, finance, and customer service are
often impacted by a change, meaning that they will be particularly
sensitive to risk during this period.
• It is particularly important to measure the new supplier closely in the
first several weeks of performance.

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Benchmarking and tracking results
 This is a key element of the sourcing management process.
It is the start of a continuous cycle, starting with
benchmarking the current status of the commodity or
category, monitoring the results and ensuring that full value
is being achieved.

 Back to Step 1 to review the supply market again and

restart the process in a constantly evolving marketplace.

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The relative bargaining position of
buyers and suppliers changes over
time…

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 Establish Baseline Metrics

• What is the $$spend

• Who are the users
• Who are the suppliers
• What is service level
• What is value-added
• How many transactions are involved
• What is the impact on cash flow
• How long do they take
• How much inventory exists
• Where does inventory exist
• Is this asset intensive

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Additional Baseline
• What is the labor cost
• How does technology fit
• Who will lead the team
• What skills are needed
• What resources are available to the team
• What is the scope
• What are the boundaries
• How will we secure commitment
• How will we maintain commitment
• What are the incentives

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Key Features
• The procurement organisation is clustered by
similar expenditure groups, called Categories
• Categories have sub-category areas, which are
assigned to team members
• A strategic sourcing process is followed
• The sourcing process flows from stakeholder
engagement to supplier relationship
management
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Road Map
Strategic Sourcing Conduct Spend Diagnostic
Collaborative Identify/Prioritize Opportunities
Launch Cross Functional/Divisional Teams
Purchasing Establish User requirements
Process Execute RFP Process/Select Supplier
Monitor Compliance

INCREASED CUSTOMER Develop Timely and Accurate View of Spending Data

SATISFACTION and Technology
Simplify and Stream-line Processing (P-Card)
E-Procurement Development
SIGNIFICANT COST REDUCTIONS

Products and Rationalize Current Specifications

Services Evaluate New/Alternative Products
Implementation of
Best Practices
Best Practices Analysis
Business Process Analysis
MISSION Processes
Identify Non-Value Activities TACTICS
STRATEGIES Implement Continuous Improvement Practices/Metrics

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ROADMAP
The major components of a strategic sourcing roadmap often include:

• Sourcing Strategy—identifying and prioritizing supply and demand

improvement opportunities by area of spend
• Sourcing Operating Model—process and organization required to
support the overall sourcing strategy, goals and objectives
• Vendor Management—approach and process required to manage
vendors to ensure that product is provided at the right total cost with
minimized risk
• Cost Management—knowledge of product/service total cost and applying
the understanding of cost drivers in vendor negotiations
• Sourcing Technology—tools required to enable the sourcing organization
to realize cost-savings goals

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THANK YOU!

For More Information

contact me:
[email protected]

Tel: +91 9971171220

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