Building Commodity sourcing strategy

Whether you are a new sourcing manager in role or not, it's the first step in building "sourcing strategy". It gives you an overall hold on "Total commodity Spend" with fair idea on suppliers and saving and opportunity potentials.

It is, of course, the starting point, no doubt whatever may be your end objective. I always enjoyed building this sourcing strategy for 3 reasons:

1. It gives me complete idea about category/commodity spend
2. It gives me a fair idea about next 3 yrs strategy
3. It a document which I refer and modify every year.

What's a commodity or category: Now, when I say commodity, it's a set of items which can be combined together by the way these items get manufactured (steel, castings, forgings, machined parts etc). Basically, the processes and subsequently supplier base, supply market dynamics are same for a particular commodity.

First thing First: Stakeholder management - It's necessary to engage early all stakeholders across the organisation for refinement and validation of various aspects of commodity strategy. You can build a stakeholder engagement vs success of your strategy and follow thru actions.

Step next: Status as is :- Start gathering data on existing contracts, Purchase orders, previous couple of years purchase history, supplier details whatever you could get. Please keep in mind to note the source of data for set of records. You should be able to list out:

• Existing contracts, policy details.
• Analyse the impact of existing policy and contracts on commodity. Are they expired, outdated, valid etc.

Spend analysis: This is the most important stage in commodity strategy. Gather all tactical data source for previous purchases like GRN, purchase order, payments, rejections, suppliers , buyers, approvals criteria etc. Spend analysis should give you following information:

• How much you Spend: Total spend in that category, preferably for last 3 fiscal yrs.
• Where you buy from : Total number of suppliers, spend per supplier, total SKU per supplier, locations of suppliers, supplier spend growth, rejection etc.
• What you buy: Total numbers SKU, spend per SKU, SKU per supplier, single source SKU, multi-source parts etc., number of PO per parts etc etc.

Next to include is MARKET SUMMARY: Your own research on supply market plays a big role in building this portion of your strategy. At time,s you may need to do a bit of research on commodity market, supplier market, speak to experts etc to build this section. Typically it includes stuffs like market overview (Total production, total sell, industry position in your sector), supplier overview like who are key suppliers, suppliers' positioning, trends and developments, etc.

SWOT ANALYSIS must be included in your market summary or supply market analysis. For example, if you trying to build commodity strategy for STEEL, then a SWOT analysis of STEEL market should be included. just a snapshot of typical supply market analysis as below:

The NEXT important step is build "Supplier profile" : You are new or old in the role, it does not matter. You should build a small supplier profile (I used to have a one pager profile always) which includes Organization & History with your company, supplier strategy, product and service range, key financials & developments.

Do the bare minimum following analysis about the suppliers (at least top 5)

• supplier Cost drivers, control and impact.
• Total cost of acquisition for supplier
• Risk analysis of supplier

Now, we are almost done ! The ground work is finished and now it's time to derive strategy for your commodity on following areas:

• Risk management with respect to Quality, delivery, cost and sustainability.
• Cost reduction opportunities
• Supplier growth and exit plan.
• Supplier consolidation plan.

Last step but the least: This commodity strategy document is meant to be discussed internally but very confidential within your organization. So do select stakeholders and contents judiciously and of course share intelligently. It's a dynamic document and should be reviewed at least twice in a year.

Author bio: Founder and Director of Indinese Global Pvt. Ltd., a global sourcing and supply chain consulting firm. I am open for any support on spend analysis, overall opportunity identification, SWOT for supply market, cost reduction, commodity sourcing strategy, procurement capability building etc.