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Within supply chain management and, in particular, Strategic Purchasing, three types of sourcing models are currently used. These are spend-based sourcing, risk-based sourcing, and strategy-based sourcing.
While all three are proven models, the adoption of any one will depend on the individual business and its requirements along with the vendor market.
Spend-based sourcing begins with spend analysis. A company needs to know what it is going to buy, for whom it is going to be bought, in what quantities and what the terms and conditions are for suppliers.
Resources are typically allocated to 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 spending 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 needs to 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 spend-based sourcing leads to a better understanding of spend for each category and allows for policies that are tailored to each category. Companies can then prioritize the categories according to the company’s business. Another benefit is that 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 the risks to the company’s supply, assessing those risks, and implementing mitigation strategies. To be successful in 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, allowing the business to maximize opportunity 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 suits its bets in order to choose which model to adopt.