Within supply chain management and particularly Strategic Procurement there are currently three types of sourcing models in use. These are, Spend Driven Sourcing, Risk Driven Sourcing and Strategy Driven Sourcing.
While all three are proven models the adoption of any one will depend on the individual company and its requirements along with the supplier market.
Spend Driven Sourcing starts with spend analysis. A company needs to know what is to be bought, for whom it is to be bought, in what quantities and what are the terms and conditions for the suppliers.
Normally resources are allocated to the areas with the highest spend although it can also be applied as a structured sourcing process to non traditional purchases such as benefits, energy and travel.
Spend Driven Sourcing follows this seven step process. The first step is to conduct a spend analysis on the chosen category of goods/services. This is followed by an internal review to determine the company’s need in that category. Once this is complete a market analysis is conducted while at the same time the company should develop a sourcing strategy for the category involved. After the strategy is in place it is time to source and select the suppliers. The next step is to implement the sourcing strategy for the category. Lastly it is important to manage the stakeholders expectations along with the supplier relationships.
This Spend Driven Sourcing leads to a better understanding of spend for each category and allows for policies that are tailored to each category. Companies are then able to prioritize the categories according to the company’s business. A further benefit is that categories can more easily be defined.
Basically, Spend Driven Sourcing can be defined as getting the right person to find the right thing for the right place at the right time for the right price from the right supplier with the right level of service.
Risk Driven Sourcing begins by identifying the risks to the company supply, assessing those risks and putting in place mitigation strategies. In order to be successful at this a company must fully understand the company mission and the impacts of their supply strategies and programs.
This puts the focus on the root causes of risk which may be things such as taking on new suppliers, riskier supply chains (using overseas suppliers) or goods that require a high level of customization.
Strategy Driven Sourcing starts with a company wide strategic plan incorporating input from all the relevant stakeholders. Resources are allocated to purchases that have the greatest potential impact for the company and this allows the company to maximize its opportunities and minimize risk.
Strategy Driven Sourcing takes a look at whether the purchase is operational or strategic. Operational purchases being those that have little effect on the company’s final customers, whereas strategic purchases do have a significant impact on either the company’s final customers or its bottom line.
In using this model companies must apply a strategy to fit the purchase. In closing it is important for a company to know which approach bets fits in order to choose which model to adopt.