Strategic Sourcing for Projects

Sourcing is a very important part of any project and it needs to be strategically managed to give the best results in terms of cost and quality. Strategic sourcing is considered as an ongoing process of finding the best suppliers in order to maximize the value for an organization or for a specific project. It is defined as a systematic and fact‐based approach for consolidating an organization’s spend with efficient suppliers to achieve the best pricing. Every organization would have a sourcing plan and strategy which best suits its business objectives and geographic positioning. The sourcing specialists may either operate as a separate function of the organization with its members being allocated responsibilities specific to project  or they may operate as separate sourcing teams for each project. Irrespective of their mode of operation, the primary object remains to be reduction of cost while maintaining or improving the quality.

To develop a good sourcing strategy, it is necessary to assess the requirements, analyze the existing systems and spending and  review the market. The requirements of the organization as a whole and the amount of money spend to meet these requirements is to be assessed in order to identify the opportunities for saving. The organization’s overall spend on each category is to be leveraged to effect improvement in their value to price relationship in sourcing. This information can also be used to schedule and prioritize the sourcing of various commodities for different projects undertaken by the organization.

Specific objectives are to be set for sourcing with respect to each project and each commodity. The sourcing objectives of a compliance project may not be the same as a cost-saving project. Similarly the sourcing objectives may be quite different for a project involving a loyal and trusted customer when compared to the requirements demanded by a supplier consolidation project.  The sourcing strategy should be developed based on these objectives and needs to be defined in a clear manner to ensure that it is well understood by the team.

To have an effective sourcing, it is essential that the confidentiality of the targeted or budgeted price is strictly maintained. Exposure of this information shall give undue advantage to the supplier and enable them to price their quote accordingly, especially in the case the sourcing in which only a single source is considered. This not only deprives the Project Manager for losing an opportunity to increase the profit margin but also sets a wrong precedence which shall not be in the best interest of the organization.

Another part of strategic sourcing is the identification of suppliers. Utmost care should be taken if a supplier is being considered for the first time. The organization should have a supplier evaluation procedure which would look in to all aspects of business of the prospective supplier including the financial stability, engineering capabilities, facilities available, quality of products, past business references, quality assurance systems and certification, regulatory compliances, etc. This evaluation is to be carried out by competent personnel who are experts in the respective fields. In the case of global projects, it a prominent sourcing scheme is the one involving procurement of materials from low cost countries like India, China etc. While this gives enormous cost advantage to the project, it also exposes the project to the risk of quality issues. It should be noted that the quality expectations of the western countries is not the same as it is practiced in these low cost markets of the east. Therefore special emphasis should be given while defining the quality standards and the inspection procedure in the contract.

Once the suppliers are identified, the requirement specifications are to be issued to these suppliers in the form of RFI/RFQ to invite the bids from them. The specification documents must be prepared in a detailed manner and it should clearly define the engineering and quality requirements of the commodity being procured. In the case of high end engineering projects it is advisable that the bids be invited in the form of Techno-Commercial quotes so that the bidders can be shortlisted based on their technical capabilities prior to finalizing the supplier based on the commercial terms and conditions. The selection of the supplier is to be notified formally and it should be followed by the signing of the contract by both parties. The contracts should references to the relevant technical standards, requirement specifications and commercial terms and conditions for all aspects of supply and after sales support of the commodity.

Strategic sourcing  shall also include an ongoing process of supplier performance monitoring and supplier relationship management. The performance of the supplier is required to be evaluated periodically in terms of the business done with them as well as their overall business and necessary corrective actions are to be taken to further improve the sourcing activities and get better value and pricing. Strategic sourcing is a continuous process and must be based on fact based analysis and market intelligence. The scope of strategic sourcing extends beyond supplier price negotiation and takes into account the total cost of ownership and it helps in creating partnership with the suppliers and sharing the best practices across the projects.

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