Procurement departments are becoming increasingly more important to the organisations they serve, so it is important to ensure that your organisation is using the right procurement methods.
There are two primary sourcing methods that your organisation can use – tactical sourcing or strategic sourcing. Jeffrey Charles discusses the pros and cons of each.
What is your role in the procurement process? Are the methods used by your procurement department earning the most possible value for the organisation? Are you confident that there isn’t a more effective way for your organisation to purchase the goods and services it needs?
With companies focusing more and more on optimising their spend, it has become essential for procurement to find ways to reduce waste and save more money. Procurement is becoming increasingly more involved in the overall objectives of organisations.
Therefore, for an organisation to be successful, it requires procurement to follow industry best practice to achieve the greatest value in what it buys. The question that should thus be asked is: what is the most effective way for my organisation to obtain the goods and services it needs to function properly?
Option 1: tactical sourcing
Tactical sourcing is an approach that is typically used by smaller organisations. It is a more short-term, transactional approach to procurement.
When an organisation uses a tactical approach, agents base their purchasing decisions on fewer criteria. Procurement decisions are thus primarily made on price and available delivery dates.
Using the tactical approach, a procurement department purchases materials based on need. They do not take into account other factors, such as total cost of ownership (TCO) or the objectives of the larger organisation.
An example would be ABC Manufacturing that is running low on widgets. Their procurement department contacts various suppliers who sell the particular widget that is needed. They find that Widgets R Us has the lowest price and can deliver the required order later in the week. Since the other contacted suppliers had higher prices, or couldn’t deliver in the timeframe needed, procurement decides to place the order with Widgets R Us.
Tactical sourcing is, therefore, a straightforward process. There aren’t many complexities involved. This approach also tends to be more reactive than proactive.
After learning about strategic sourcing, it may seem that tactical sourcing is a less effective way of obtaining goods and services. However, the issue isn’t determining which method is better in a general sense. The issue is figuring out which method is best for your organisation. There is no one-size-fits-all solution.
Option 2: strategic sourcing
Strategic sourcing is a procurement approach that is normally used by larger organisations. This approach involves a longer-term focus. When using strategic sourcing, procurement decisions are based on multiple factors. It is thus not as cut-and-dry as tactical sourcing.
Using a strategic approach, you do not only base your purchasing decisions on availability and price. You also take into account the effect on the larger organisation.
One of the main issues that strategic sourcing deals with is TCO. Those who practice strategic sourcing work to reduce TCO as much as possible.
What is total cost of ownership (TCO)?
TCO is the entire amount of money an organisation expects to spend on a particular purchase. It takes into account more than just the sticker price. There are other components that determine the true cost of a particular purchase.
An example would be ABC Manufacturing that uses a more strategic approach to their procurement process. When considering purchasing widgets, they are not just going to look at the up-front price and availability. They are also going to perform a full analysis of the widgets’ TCO.
Some of the costs that they may consider are:
– The sticker price of the widgets
– Transporting the widgets from the supplier to the buyer
– Storing the widgets
– Training employees on using the widgets
– Care and maintenance of the widgets
The above factors will determine the overall cost of purchasing a particular item. When an organisation adopts a strategic approach, they are using a longer-term focus. Overall, this will help them to prevent wasteful spending. Strategic sourcing also takes into account the larger goals of an organisation.
Since procurement departments are becoming increasingly more important to the organisations they serve, it is important to ensure that your organisation is using the right procurement method. In some cases, a tactical approach will be the most appropriate. In other cases, a more strategic approach would be warranted. In other cases, a mix between the two might be what is needed.
If you are able to identify the method that works best for your organisation, your procurement department will make it easier for the larger organisation to accomplish its goals.