What is your role in the procurement process? Are the methods used by your Procurement Department earning the most value for the company? Are you confident that there isn’t a more effective way for your organization to purchase the goods and services it needs?
With companies focusing more and more on optimizing their spend, it has become essential for Procurement to find ways to reduce waste and save more money. Procurement is becoming increasingly more involved in the overall objectives of the company.
Therefore, for a company to be successful, it requires Procurement to follow Industry best practices for getting the greatest value in what it buys. The question that should be asked is “what is the most effective way for my organization to obtain the goods and services it needs to function properly?
There are two primary sourcing methods that your company can use. This post will discuss the pros and cons of both methods.
Tactical sourcing is a an approach that is typically used by smaller organizations. It’s a more short-term, transactional approach to procurement.
When an organization uses a tactical approach, agents make their purchasing decisions based on fewer criteria. Procurement decisions are made based primarily on price and available delivery dates.
Using the tactical model, a procurement department purchases materials based on need. They don’t take into account other factors such as total cost of ownership (TCO) or the objectives of the larger organization.
Here’s an example:
ABC Manufacturing is running low on widgets. Their procurement department contacts various suppliers who sell this particular widget.
They find that Widgets R Us Inc has the lowest price and can deliver the order later in the week. Since the other suppliers had higher prices or couldn’t deliver in the time frame needed, the procurement department decides to place the order with Widgets R Us.
Tactical sourcing is a straightforward process. There aren’t many complexities that are involved. This approach tends to be more reactive than proactive.
After learning about the strategic sourcing method, it may seem that tactical sourcing is a less effective way of obtaining goods and services. However, the issue isn’t determining which method is better in a general sense. The issue is figuring out which method is best for your organization. There is no one-size-fits-all solution. ‘
Strategic sourcing is a procurement approach that is normally used by larger organizations. The strategic approach involves a longer-term focus. When you’re using a more strategic approach, your procurement decisions are based on multiple factors. It’s not as cut-and-dry as the tactical approach.
Using a strategic approach, you don’t only base your purchasing decisions on availability and price. You also take the impact on the larger organization into account.
One of the main issues that strategic sourcing deals with is the total cost of ownership (TCO). Those who are practicing strategic sourcing work to reduce the TCO as much as possible.
What Is Total Cost Of Ownership?
So what exactly is total cost of ownership? The total cost of ownership is the entire amount of money a company expect to spend on a particular purchase. It takes into account more than just the sticker price. There are other components that determine the true cost of a particular purchase.
Here’s an example.
Let’s say ABC Manufacturing used a more strategic approach to their procurement process. When they consider the purchase of widgets, they’re not just going to look at the up-front price and availability. They’re going to do a full analysis of the widgets’ total cost of ownership
Here are some of the costs they may consider:
- The sticker price of the widgets.
- Transporting the widgets from the supplier to the company.
- Storing these widgets.
- Training employees on the use of the widgets.
- Care and maintenance of the widgets.
These factors determine the overall cost of purchasing a particular item. When a company adopts a strategic approach, they are using a longer-term focus. Overall, this will help them prevent wasteful spending. Strategic sourcing also takes into account the larger goals of the company.
Since Procurement Departments are becoming increasingly more important to the organizations they serve, it’s important to ensure that your company is using the right procurement method. In some cases, a tactical approach will be the most appropriate. In other cases, a more strategic approach is warranted. In other cases, a mix between the two might be what’s needed.
If you are able to identify the method that works best for your organization, your Procurement Department will make it easier for the larger organization to accomplish its goals.