Should My Small Business Engage in Strategic Sourcing?
Strategic Sourcing Optimizes Supply Chain but Takes Resources
For your small business to engage in strategic sourcing, you are going to have to invest considerable resources. Those considerable resources include dedicating resources and time that might otherwise be used to run your small business.
Small businesses usually have their employees doing what it takes to keep the lights on and the engines humming. The return on effort is usually measured in — did what I just do make a difference today? And strategic sourcing isn't meant to make a difference today.
Sourcing is typically broken down into tiers — not by small business owners (who don't have that kind of time) but by those who have the time to break down business functions into tiers. Those tiers are defined by: 1. the amount of effort it takes to get that level of sourcing done, 2. the potential impact that level of sourcing might have on a company, and 3. the organizational resistance one might expect by trying to engage in that level sourcing.
Ladies and gentlemen and small business owners, your sourcing tiers are:
- Quick Wins
- Tactical Sourcing
- Strategic Sourcing
- Transformational Sourcing
The sourcing tier that is defined by the least amount of effort, the least potential impact and least organizational resistance is the Quick Wins tier.
Quick wins are sometimes described as "three bids and a buy." Most companies regard these quick wins as low-hanging fruit and if your small business has never bid out its products or services, this quick win tier could net you 3 percent to 10 percent short-term savings.
Quick wins are a very basic level of sourcing engagement and the amount of effort it takes is literally, "Hey, instead of placing a purchase order with my normal supplier, let me ask two or three other suppliers how much it would cost to buy that thing."
The reason that you should receive very little organizational resistance when you engage in attempting to get quick wins is that it's not very disruptive. To engage in a quick wins scenario, small businesses don't typically need to hire extra people or spend too much extra time getting this sourcing strategy done.
But the 3 percent to 10 percent savings that you'll initially realize will see diminishing returns pretty quickly. For example, if you've never engaged in "three bids and a buy" and you do it — you're only going to see savings the first time or two (for the same product). After the third or fourth time, your suppliers are going to tell you, "That's as low as I can go."
At that point, it's time to engage in a higher tier of sourcing engagement.
Tactical sourcing take the idea of quick wins and makes it slightly more sophisticated. As a result, your small business will see a higher degree of savings, but it's going to take more effort. And when you realize that the purchasing guy or gal (or buyer or admin assistant or whatever job title you've assigned to the person placing your supplier orders) is spending more time talking with engineers and end users and supplier business development folks than placing purchase orders, you might balk.
Tactical sourcing looks at notions such as — "Hey, if I do a slight modification to this product specification, I can buy it from Supplier B instead of Supplier A. And if I start aggregating more spend at Supplier B, they're going to help me drive substantial year-over-year savings."
Tactical sourcing also considers such things as supplier consolidation. If your small business can reduce the number of suppliers it deals with by 25 percent, then those guys and gals you hired to do your supplier purchase order placement should have less work to do (and can focus on other "keep the lights on" tasks).
However, it takes effort to get there, and that's only if you want to deal with sourcing at the tactical level. The main question that we're trying to address here is whether your small business should engage in strategic sourcing, which takes even more effort.
Strategic sourcing sounds like a great idea. What grown-up company doesn't want to approach their business processes strategically?
And while strategic sourcing can result in significant purchase price savings, inventory reduction, process optimization and supplier consolidation — it's not easy.
To engage in true strategic sourcing, a person needs to be dedicated to doing it. That means that your buyers are placing orders and your supply chain folks are managing the current suppliers. And a strategic sourcing person is working with incumbent and potential new suppliers to evaluate capabilities. They're also working with supply chain folks and engineers and logistics and warehousing and quality and regulatory (if applicable) experts to design and execute a new way of sourcing.
Some large corporations have strategic sourcing groups with hundreds of employees. So, to the question of whether your small business should engage in strategic sourcing — under the purest definition of strategic sourcing — probably no.
But should your small business work to optimize its supply chain — by figuring out how to delivery products to your customers, when your customers want those products — and by spending as little money as possible getting that done? Yes.
Start by attacking those quick wins and then focus on tactical sourcing strategies to get you there.
Attaining a level of transformational sourcing is akin to building a sentient robot army to maintain peace in our time. It might look good on paper or at a board meeting, but imagine convincing Boeing to completely outsource its Dreamliner manufacturing.
The amount of effort it takes and the level of organizational resistance usually makes transformational sourcing a non-starter for small businesses.
Stay focused on the purchase price savings of quick win sourcing and total cost savings of tactical sourcing — and one day your small business might be big enough to take on strategic and transformational sourcing.