The Future of Sourcing

Since the beginning of the pandemic, the global supply chain has been experiencing several challenges with the disruptions having harmful impacts on the industry, namely the lack of raw materials, which in some cases has led to a reduction in the production rate or even led to the suspension of shifts. Although growth is forecasted in global consumption due to uptake of vaccines, if value chain issues are not overcome organizations will not be able to increase their turnover. This means that the sourcing and supply chain management process plays a crucial role in the business with its decisions having a direct impact on customer service and on the results of any organization.

The traditional method

Traditionally, there is a purchasing department focused on establishing contracts with suppliers and monitoring the purchasing process. This department normally assumes a transactional position where suppliers are simply perceived as mere suppliers of goods or services.

As this department is evaluated by the cost savings rather than by the reliability of its deliveries and consequent turnover guarantee, the lowest purchase price is the main decision factor. Therefore, when extraordinary measures are needed to ensure the on-time delivery of components such as using priority transport or purchasing materials at a premium price, the increased prices are often attributed to other departments in the company.

If the initial intention is to compare prices and increase the capacity of negotiation, there is consequently a general lack of knowledge regarding the number of existing suppliers, since around 50% of the companies’ suppliers are inactive and the time dedicated to developing them is less than 1 day per month.

Sourcing 4.0: A disruptive paradigm shift

Sourcing encompasses the procurement, purchasing and supply functions. Procurement consists of all activities related to the search for new goods, services and suppliers in the market, and to their negotiation according to the company’s needs. Purchases, on the other hand, are about establishing contracts with suppliers and monitoring the process from acquisition until payment. Finally, supply aims to manage the delivery flow of goods and services.

The sourcing area should thus adopt a strategic role, focusing on profit while assessing the total cost of ownership. As an interdisciplinary activity, it must sit alongside the Commercial, Development and Production areas as they formulate and implement corporate strategy, and plan demand and capacity.

A tailored strategy should be developed for each category to maximize value creation. Suppliers should then be perceived as business partners, and therefore innovation, quality, long-term value, risk and sustainability should also be considered. It is also very important to ensure that communication with these partners is done exclusively through this department to be able to pass on a single message in a clear and simple way.

With regards to guaranteeing the transparency of the value chain, it is essential to implement digital tools that allow a real-time display of the status of the various orders and stock levels of the materials. This set of indicators, also known as the control tower, will support the sourcing team when making decisions and when evaluating the performance of the various suppliers. In these evaluation models it is essential to include service level related indicators such as delays or failures in deliveries. Technologies such as RFID or Blockchain can also be extremely useful for traceability in the value chain by enabling continuous monitoring of the status and location of each material.

To complement this, it is essential that communication routines are implemented between, at least, the Production, Sourcing and Commercial areas. In these war rooms, key indicators are analyzed, and planning decisions are made. It is therefore crucial that sourcing teams are also staffed with technically and commercially competent people and that they are seen as part of an attractive career path within the company.

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