Within supply chain management and, in particular, Strategic Purchasing, three types of supply models are currently used. These are spend-based sourcing, risk-based sourcing, and strategy-based sourcing.
While all three are proven models, adoption of any will depend on the individual business and their requirements along with the vendor marketplace.
Spend-based sourcing begins with spend analysis. A business needs to know what is going to be purchased, who it is going to be purchased for, in what quantities, and what the terms and conditions are for suppliers.
Resources are typically 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 perform 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 done, and at the same time, the company must develop a sourcing strategy for the category involved. Once the strategy is implemented, it is time to search and select the suppliers. The next step is to implement the sourcing strategy for the category. Lastly, it is important to manage stakeholder expectations along with supplier relationships.
This spending-based sourcing leads to a better understanding of spending for each category and allows for policies that are tailored to each category. Companies can then prioritize the categories according to the business of the company. Another benefit is that the categories can be more easily defined.
Basically, spend-based sourcing can be defined as getting the right person to find the right thing for the right place at the right time at the right price from the right supplier with the right level of service.
Risk-based sourcing begins with identifying risks to the company’s supply, assessing those risks, and implementing mitigation strategies. To be successful at this, a company must fully understand the company’s mission and the impacts of its supply strategies and programs.
This puts the spotlight on the root causes of risk, which can be things like hiring new suppliers, riskier supply chains (using foreign suppliers), or goods that require a high level of customization.
Strategy-driven sourcing begins with an enterprise-wide strategic plan that incorporates input from all relevant stakeholders. Resources are allocated to purchases that have the greatest potential impact on the business and this allows the business to maximize its opportunities and minimize risk.
Strategy-driven sourcing looks at whether the purchase is operational or strategic. Operational purchases are those that have little effect on the company’s end customers, while strategic purchases have a significant impact on the company’s end customers or its bottom line.
When using this model, companies must apply a strategy that fits the purchase. Finally, it is important for a company to know which approach fits its bets in order to choose which model to adopt.
