“Strategic sourcing is a systematic corporate/institutional procurement
process that continuously improves and re-evaluates the purchasing activities
of a company. It is one component of supply chain management. While most
organizations implement strategic sourcing initiatives for the purposes of
saving money, other reasons for implementing strategic sourcing include
improving supplier performance and minimizing risk.”
As Purchasing evolved into Sourcing, so did the ability to measure its value.
As Purchasing evolved into Sourcing, so did the ability to measure its value.
Many companies now spend more than half of their
operating costs on direct materials, indirect materials, and services, with
manufacturing companies typically spending between 50 and 70 per cent of
revenue on direct purchases.
·
In many markets,
customers expect prices to drop or remain flat while quality or capability
increases.
·
Investors expect
EPS (earnings per share) to continue increasing while prices remain flat and
while the salaries of talented executives steadily increase.
SOURCING VALUE SUMMARY
|
Value
Measurement
|
Value
Definition
|
Capture
Method
|
|
PPU - Price Per Unit
|
Lower unit costs
|
Simple Auction
|
|
TCA - Total Cost of Acquisition
|
Lowest Landed Cost
(includes freight) |
Adjusted Auction
|
|
TCO - Total Cost of Ownership
|
Lowest Usage Cost
(includes indirect cost) |
Decision Optimization
|
|
TVM - Total Value Management
|
Highest Value to Cost Ratio (balances risk vs. cost)
|
Integrated Decision Optimization
|
Widely Accepted Sourcing
Standard - Total Cost of Ownership (TCO)
PRO's
TCO takes into account all direct costs (such as PPU, transportation, tariffs, etc.), indirect costs (product utilization costs, switching costs, transaction costs, etc.), and quantifiable market costs (quality, brand, etc.). In essence, it captures every cost associated with the product and provides a total usage cost. TCO is often considered the best comparative cost metric.
CON's
Although TCO is significantly better than TCA, (which is better still than PPU), it is still a very cost centric approach. When misunderstood, TCO can distract sourcing professionals from their ultimate goal, which is optimizing the supply chain from a total value perspective and insuring that each sourcing project yields long term gains, and not just short term cost savings.
Strategic sourcing is sourcing for value. It’s concerned with finding the right price, not the lowest price. Sometimes value is gained by selecting a lower cost provider, and sometimes value is gained by selecting a higher cost provider with greater quality and reliability.
PRO's
TCO takes into account all direct costs (such as PPU, transportation, tariffs, etc.), indirect costs (product utilization costs, switching costs, transaction costs, etc.), and quantifiable market costs (quality, brand, etc.). In essence, it captures every cost associated with the product and provides a total usage cost. TCO is often considered the best comparative cost metric.
CON's
Although TCO is significantly better than TCA, (which is better still than PPU), it is still a very cost centric approach. When misunderstood, TCO can distract sourcing professionals from their ultimate goal, which is optimizing the supply chain from a total value perspective and insuring that each sourcing project yields long term gains, and not just short term cost savings.
Strategic sourcing is sourcing for value. It’s concerned with finding the right price, not the lowest price. Sometimes value is gained by selecting a lower cost provider, and sometimes value is gained by selecting a higher cost provider with greater quality and reliability.
TVM insists that all value-based measures
and costs are included in the model, thus minimizing potential risks. Sourcing
based on a TVM approach is easily obtainable for all organizations – especially
ones already following a TCO approach.
SPEND MONEY STRATEGICALLY {YOURS OR OTHERWISE}
aXcelerate Sourcing amrut.nerlikar@axcelerate.in
