Sep 12 2012

Sourcing Community. Purchasing Strategies.

Several companies with low demand power can join forces in order to achieve savings. Many companies have opted to outsource the management of certain product groups, especially those not at the core of their value-creation process; this enables them to focus their purchasing resources on issues of strategic importance. In the case of sourcing communities, companies organize themselves within a formal structure, with the collaboration intended to last for a long time. If the collaboration is done properly, savings of 5 to 15 percent will generally be possible, rising to as much as 50 percent in special cases.

But sourcing communities can do more. Because they are able to share resources, e.g. analysts or infrastructure, they make it possible to pursue sophisticated strategies even for low-volume sourcing categories. The aims of sourcing communities are closely linked to the size of the companies involved:

  • Smaller companies at the same location can make joint purchases of technical articles from one supplier, or achieve better terms for the supply of operating materials and supplies.
  • Medium-sized firms in favorable sourcing regions can share the effort and expense of identifying and qualifying suppliers.
  • Large companies can consolidate their demand for raw materials and have the materials bought on global markets by experts at the best terms.

In line with these widely differing goals, different types of sourcing communities can be identified:

  • Size of the participating companies: Here, a distinction is made between cooperations involving partners of equal strength and those with a mix of small and big partners.
  • Geographical focus: In this case, it is necessary to decide whether a geographical cluster should be formed or whether the sourcing community should be open to companies from various regions.
  • Sourcing category focus: The cooperation may focus on only a few product groups, or it may cover virtually the entire demand of its members.
  • Roles and responsibilities: A fundamental distinction must be made between sourcing communities whose activities are restricted to identifying suppliers (and perhaps negotiating master agreements), and those that also handle ordering on behalf of their members.
  • Interests and corporate strategies: A study by A.T. Kearney has shown that 81 percent of companies form sourcing communities with partners from within their own industry.

The success of sourcing communities depends to a large extent on the choice of suitable partners. The partners should all pursue a similar business philosophy and have similar expectations regarding the collaboration. Since working together in a sourcing community means a major cultural change for many companies, strong backing by top-management is essential, especially at first. Also important is that the group be of manageable size. Although the underlying idea of a sourcing community is an aggregation of purchasing volumes, small organizations with only a small number of members have proved to be more agile and more effective. Attention should therefore be paid to exclusivity. Irrespective of the legal form of the sourcing community, it should be headed by a single individual.

This person should be impartial towards all the members of the sourcing community. He or she must ensure a balance of interests internally and communicate externally (towards the suppliers) with one voice. The definition of management rules (e.g. sourcing principles and decision-making guidelines) should therefore take place early in the process.


Source: The Purchassing Chessboard.


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