Learn how the procurement method evaluates the total cost of inputs within a company – Strategic Sourcing Methodology
We frequently hear in conversations among professionals working in the procurement area, a lot about the Strategic Sourcing methodology. Although much is said about this method, few master and apply it effectively.
Strategic Sourcing is a pragmatic method for executing highly thorough competitive bidding processes.
The Strategic Sourcing methodology has allowed companies to achieve significant gains in purchasing price reduction. Above all, it improves the quality level of the product or service delivered to the end customer.
In the application of Strategic Sourcing, it is common to establish a long-term relationship with the supplier chosen in the process.
Strategic Sourcing Methodology
The Strategic Sourcing methodology is a process that identifies and qualifies potential supply sources for products or services. Furthermore, it technically evaluates proposals and acquisition models, enabling highly effective negotiations. Above all, it assists in shaping solid commercial and operational agreements with the selected bidder(s).
Thus, when well managed, this process brings fairness, transparency, and objectivity to the selection of the bidding winner. Likewise, it creates a conducive competitive environment to achieve favorable business outcomes for the contracting party.
The Strategic Sourcing methodology of Level Group was conceived based on the methodology applied by traditional procurement consultancies, with adaptations developed through best practices gained across more than 1,000 projects carried out for large organizations. Check it out:
Step 1. Data Collection – Strategic Sourcing Methodology
This stage is fundamental to the process, as it is when the project's baseline is defined.
By baseline, we mean a snapshot of the current state of what is practiced within the company. The baseline must consider the scope of the service to be contracted, current rates, and applicable taxes. Likewise, the SLAs (Service Level Agreements) agreed upon with suppliers, among other key data.
SLAs define services, service level targets, and the roles and responsibilities of the parties involved in the contract.
Step 2. Market Analysis
A detailed market analysis is necessary to identify potential suppliers capable of providing the service in question.
Initially, the client must nominate potential suppliers deemed capable of meeting the demand. Once the initial list of potential suppliers—known as the longlist—is drafted, an RFI (Request for Information) is prepared. Accordingly, a technical questionnaire is sent to the suppliers.
Following the suppliers' responses, various analyses are performed to carry out an initial screening. At this point, only technically qualified suppliers advance to the price request stage.
Among the tools used at this stage, we highlight the SWOT Analysis, where the positive and negative aspects of each bidder are identified. Another crucial tool for market analysis is the matrix representing Porter's Five Forces.
The matrix considers five factors—the competitive "forces"—that must be analyzed to develop an effective business strategy. In this analysis, it is possible to identify factors that favor suppliers during negotiations, as well as areas where they are vulnerable.
Based on the RFI and the analyses conducted, a technical matrix is developed, presented on pages 10 and 11, where suppliers are scored according to criteria established by the company's technical team. Ideally, only companies achieving a minimum score of 60% should participate in the price request stage. Once this cutoff score is applied, the
suppliers who will proceed in the process (shortlist) are defined.
Step 3. Preparation of RFP Materials
During this stage, all competitive bidding materials to be released to the market are prepared. It is vital that the documentation to be published contains the exact scope to be contracted, as well as the SLAs that will be enforced throughout the contract term.
This material must also include the list of documents required from suppliers, such as clearance certificates, accreditations, etc. The draft contract that will govern the provision of services may also be provided to suppliers.
A standard quotation template is also prepared at this stage. It is crucial for this spreadsheet to be standardized so that all suppliers submit their pricing strictly in accordance with what was requested, streamlining and facilitating subsequent analyses.
Step 4. Quotation, Analysis, Discrepancies, Quoted Scope, TCO
After the materials are prepared for market release, they are sent to the suppliers. At this stage, during the quotation process, it is customary to hold a workshop involving all participating suppliers to clarify any questions that may arise. Following this workshop, technical site visits are scheduled with the suppliers so they can thoroughly understand the requested scope and clarify any additional questions.
Once all questions raised throughout the process are consolidated, responses are prepared for each of them and distributed to all suppliers, thereby ensuring no company receives preferential treatment.
After the deadline, proposals are submitted by suppliers with two distinct components: technical proposals and commercial proposals. At this point, the technical proposals are forwarded to the requesting department, and the commercial proposals to the procurement department.
Should any questions arise, it is important to clarify them directly with suppliers to avoid erroneous evaluations and the presentation of skewed results.
On the commercial side, evaluating only the quoted price is not enough. It is essential to consider the Total Cost of Ownership (TCO) of each supplier's proposal, which includes logistical and financial costs, supplier reliability, etc.
At the conclusion of this stage, a weighted assessment of technical and commercial aspects is performed, and results are analyzed against potential scenarios to determine the best negotiation strategy.
Step 5. Negotiation
Once the technical and commercial analyses are completed, a select group of companies is invited to proceed to the next phase of the service provider selection process. This stage aims to level the submitted pricing among companies, considering the scope defined in the technical proposal. The negotiation strategy applied at this stage varies from process to process, with no single standard or prescribed method.
After completing this stage, updated supply scenarios are developed based on the data submitted by the suppliers. These scenarios must be validated by the technical department.
Step 6. Contract Drafting
Drafting a clear and detailed contract can ensure operational security throughout the delivery of the service. This contract must include all negotiated conditions, in both commercial and technical terms. Exit clauses must also be defined in the agreement. Since this involves the provision of services, suppliers must be required to regularly demonstrate compliance with tax, labor, and social security obligations regarding the personnel assigned to execute the contract.
Accordingly, in the event of a change of suppliers, this transition must be planned around a timeline of activities, minimizing the risk of disruptions in current service delivery.
Conclusion
In short, as observed, this is a comprehensive technique where virtually all critical elements are addressed when contracting a service.
In addition to ensuring accuracy in scope refinement and proper comprehension by the supply market, throughout the Strategic Sourcing methodology it is essential to utilize tools for a thorough evaluation of bidders. If this process lacks the necessary depth, operational and financial risks may be assumed over the life of the contract.
However, even with the pragmatic application of this methodology, it is not possible to eliminate all risks from a procurement process; nevertheless, portions of these risks can be mitigated or at least identified so that contingency plans can be implemented during the contract term.
