Metodologia Compra Estrategica

The CPO’s Guide to Strategic Sourcing
A 10-step guide to strategic sourcing implementation
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Chapter 1: Internal Research

In the preparation phase, you will focus on gathering data from within your company,
analyzing it, and building up a framework for the subsequent steps. The preparation phase
requires analytical skill in order to handpick useful information from the company’s
systems.
To review the strategic sourcing definition from CIPS, the purpose of strategic sourcing is
to satisfy business needs for predefined materials and services. Of course, every business
has many different needs, and you cannot do everything at the same time. This is why in
step one you will have to make choices and define your list of priorities and scope of work.
There are six parts to internal data research:

1
Categorization
2
Category risk analysis
3
Scope selection
4
Spend analysis
5
Cost structure analysis
6
Total cost of ownership
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1. Categorization
Categorization in the supply chain is a key element when defining a category manager’s
scope of work. There are different ways to categorize spend in a company. Some simple
examples of high-level spend categorization are direct/indirect, materials/services,
domestic/import, critical/noncritical, ABC, etc. However, these categories are simply too
broad to draw meaningful conclusions, and we have to go deeper into the details.
Fig. 1 – A sample spend categorization
Every company should have their own spend categorization structure, and it should be
maintained in the ERP material master. If the company has not created categorization in the
ERP material master, it should still have spend separated into different cost accounts.
Usually Accounting is responsible for separating spend into different cost categories. If
your company has no master data available, check with Accounting first to see if you can
use their spend data as a starting point.
When building up a categorization structure from scratch, make sure you include your
entire team in the process. You may also find it helpful to team up with Engineering and
Design in order to find the answers to some of your more technical questions. Build up a
category tree by starting at the highest level and then moving down to the details. How
many levels you want to go down and how detailed you want to go is up to the company’s
profile. In Fig.1 you will find an example of high level categorization for a typical
production company that produces machines.
Categorization should be done with the long view in mind; it should not be changed often.
Otherwise, if you change your categories frequently, you will not be able to compare
category spend between periods.
2. Category risk analysis
When you are done with categorization, you can start to analyze the data. Use the Kraljic
portfolio matrix (Fig. 2) to help you define a risk level for each category and its impact on
company performance. The Kraljic model is a four-quadrant (strategic, bottleneck,
leverage, and noncritical) matrix with one axis for supply risk and another for profit impact.
Fig. 2 – Kraljic portfolio matrix
Imagine each of your categories as a basket filled with products. One by one, take each of
those “baskets” and place it on the Kraljic matrix. This will help you define which
categories can be labelled strategic, bottleneck, leverage, and noncritical. Later on in Step 2
we will drill into each category and evaluate the risk level of suppliers in Category C.
If you’re not familiar with the Kraljic matrix, there are lot of materials available online.
Check out a few of them here and here. (I recommended taking some time to learn about
this matrix since the Kralijc model will be used in several steps of strategic sourcing.)
3. Scope selection
It is important to select a feasible scope. Selecting a category level that’s too high may put
you in a situation where very few or no suppliers can cover your category need. In cases
where you have one highly critical component, you can define this one component as your
scope of sourcing work. However, if you select a single product as your category, you may
spend a lot of time and energy executing your sourcing strategy for every single product.
The sweet spot lies somewhere in between.
It takes experience to select a proper categorization level. Work with your team on scope
selection; you should not define category scope alone.
4. Spend analysis
A spend analysis requires working with historical consumption data. During the spend
analysis phase, the more detailed data, the better. This is where your company’s ERP
comes in because this is where your purchase records are stored. If your company is not
using master data for making purchase transactions or the master data it is not maintained,
then the category manager’s work will be more complicated.
Fig. 3 – Total spend by suppliers and categories.
There are some workarounds for getting historical spend data, though. For example, you
can get the suppliers’ spend data from Accounting. If you are desperate enough, you can
even ask for your spend data from your suppliers. It may not look the best, but at least you
will get what you need.
Once you have the data, then you can analyze it. The category manager’s best friend is
Excel’s PivotTable. If you have a huge pile of data, no tool can beat it. PivotTable can be
used for spend analysis since it allows you to sort and filter data in many ways and drill
into the details. Ideally, PivotTable will be integrated with your company’s ERP so that you
will always have access to your organization’s most recent spend data.
The spend analysis should enable you to look at the data in different ways:
 Total spend by category and then by supplier

 Total spend by supplier and then by category
 Top suppliers with 80% of the total spend
 Category spend by supplier and then by product
 Category spend by product and then by supplier
Fig. 4 – Total spend divided by category and supplier
5. Cost structure analysis
Almost every company performs a cost analysis when calculating its own product price, but
not many try to do it for purchased items. It is not an easy thing to do, and it does require
some engineering skills.
First of all, try to figure out what cost elements make up the component price your supplier
offers you. Typically, for a physical product, one cost element would be raw material.
The second cost element would be machining. However, even machining can be split into
different operations: punching, bending, etc. (It’s not necessary to go so deep.)
Then the next elements would be finishing, like painting and packing.
Fig. 5 – Sample cost structure template
6. Total cost of ownership
The total cost of ownership calculation is an advanced cost structure analysis where, in
addition to product cost elements, other cost elements, such as acquisition (transportation,
warehouse, financing cost) and lifecycle (usage period, maintenance, repair), are taken into
consideration.
Prepare a TCO template (Fig. 6) and start filling it in with the data you already know. If
you’re missing some data, it is not a problem since we can put those gaps on the action list.
Fig. 6 – Sample total cost of ownership template
Both the CSA and TCO are powerful tools when negotiating with suppliers because you as
a buyer have an overview of different suppliers’ data when your negotiation partner has
only his own.
A cost structure elements template should be used when asking for quotations through an
RFQ.
Conclusions
Step one on the road to strategic sourcing is all about internal research. A category manager
must be familiar with each and every category, which is why it may take one to two months
before you can move on to the next step. The importance of this key preparation phase
should not be underestimated, as it is the foundation for all of the other steps to strategic
sourcing.

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Chapter 2: Supply Market Analysis

In this chapter, we will look outside of the company and start researching the supplier
market. This will guide us as we find suppliers who could potentially provide us with the
products and services we need. By the end of the supply market analysis, we will have
started to identify the suppliers to whom we will send out an RFx.
There are four parts to a supply market analysis:

1
Supplier market analysis
2
Demand analysis
3
Supplier interviews
4
Category risk level analysis
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1. Supplier market analysis
Select a scope for your supplier market. Depending on the category, scope may be global,
continental (regional), by country or some other region. By selecting a scope you will focus
only on those suppliers operating in this market. By using different public sources (mainly
the Internet) collect data for each supplier that could potentially supply your category. Do
not limit yourself to suppliers that are already your partners. Research ALL suppliers. You
need to track suppliers’ revenue and EBITA. Make an Excel sheet where you can record
supplier data.
Fig.1 Supplier market analysis
Now we have a list of players who can potentially supply us with the materials and services
for the category we are currently researching. By looking at this list we can see who
dominates the market and who makes the most profit.
2. Demand analysis
Next, we need to analyze our spend within the category. Use a spend analysis tool or take
data out of your ERP. Split your spend by supplier. Make an Excel sheet similar to the one
in Fig. 2.
Fig.2 Company category spend analysis
Now we need to identify how strong of a player we are by comparing our spend with
supplier revenue. Combine the data from the last two tables, and you will get an interesting
picture.
Fig.3 Company category spend related to market revenue

Seems that our spend covers 12% of the total demand market, which makes us a valuable
customer to every supplier, but especially to Supplier B since our share of his revenue is
20%.
If we compare suppliers’ EBITA data we see we can buy from suppliers whose EBITA is
higher than average. These are raw numbers, and you should never come to quick and easy
conclusions based only on statistics. Make note of these findings on your list of savings
hypotheses. Later on during discussions with suppliers try to obtain the missing information
from them.
3. Supplier interviews
During the first and second steps we came up with some ideas and questions that we need
to check out. Let’s start by gathering the missing information. Why do we do this? Like I
wrote in the first article, the category manager must be critical by nature. He or she needs to
know what his or her company’s price level is compared to the market price level. In other
words, we need to get a benchmark price level. I suggest to start by fishing for information
from your existing suppliers. You should already be holding quarterly business review
(QBR) meetings with your key suppliers. Take along your CSA and TCO templates that
you started to fill in during Step 1 and try get the answers you need to fill in the gaps.
For the new suppliers that you identified in your market research, run a quick RFI and ask
for information about the supplier and their products. Try to understand if the supplier and
their product or service is suitable to you.
4. Category risk level
We also need to define the category risk level. Once again we will use the Kralji matrix that
you are now familiar with from Step 1. Evaluate each supplier using different criteria like
availability, quality, finances, or cooperation level.
Fig. 4 Category risk analysis

If you identify your category risk as high, you need to take action to either avoid or mitigate
the risk.
Summary
The outcome from the supply market analysis should be a better working knowledge of the
supplier market and your place in it. You have identified potential suppliers and know your
value as a customer. You have already started to take a wider view of your categories. You
have identified category risk levels and have some ideas for how to deal with them. With
each step, you are learning more and more. Piece by piece, you will put together a complete
category management picture. By collecting and analyzing this information, you will
become a stronger negotiator in the future.

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Chapter 3: Current Sourcing Process

Analysis
In previous chapters, you broke down your current spend by category and analyzed the
supplier market. Now you will begin to analyze your current sourcing process.
The following guide will walk you through an analysis of your current processes.
You will learn:
1
How to find benchmarks for products and suppliers.
2
How to identify knowledge gaps and create a list of opportunities.
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After completing the market analysis in Step 2, you discovered new information about the
components most suitable for your organization. You also identified new potential
suppliers who could possibly deliver the components you need. Now it’s time to understand
what your current negotiating position is among these new alternative suppliers. Do you
understand everything about the components you buy for your category? Are your current
suppliers the best quality price partners for you?
To answer these questions, you need to have a benchmark for both products and suppliers.
You need to know which supplier provides products with the best functionality, at the best
price possible, and with the most reliable service.
Let’s start the analysis with the components you have in your categories that have been
bought from different sources.
1. Find benchmarks
Fig.1 Current vs. New Suppliers

Procured component analysis
Begin by interviewing stakeholders and asking open-ended questions. For example, you
might ask designers why you are using an engineered part instead of a cheaper, easily-
replaceable standard component. This might be a case where the designer has accidentally
requested a component that makes the end product more expensive. I personally have seen
some over-engineered components. Here’s one example that comes to mind: a machine is
supposed to work in a normal environment , and in the bill of materials there are dozens of
different fasteners made of carbon steel, but one item is made from stainless steel. There is
a huge price difference between bolts made of carbon steel or bolts made of stainless steel.
Sometimes you might produce the same or similar products over the space of several years.
The product development department is going to be focused on its own design but not at
the procured component level. Are the components you’re buying really the best ones on
the market? Are they being bought at the optimal price-quality ratio? Current technology is
developing so fast, and there are new products and technologies constantly coming onto the
market.
Category managers should be experts in their own categories; they should be able to see
these new opportunities. When the “catman” finds alternative components or solutions, he
or she should consult with product design and engineering. In some cases, the final
approval for a new component should be gotten from the end customer.
Category managers should also find similar or alternative components on the market that
they can benchmark against the existing components. The benchmarked product should
provide a base for comparing the total cost of ownership. As I previously described, the
TCO has different cost items, but here you should take into consideration additional
criteria, such as ease of assembly and working efficiency. There can also be different
benchmarked products for different criteria. For example, best price can be one product but
best functionality another. As soon as you identify the benchmarked component, you can
define a gap and start thinking about how to close it.
Supplier base analysis
Now you’re going to do the same thing with suppliers as you did with the components.
Based on the component research results, start to evaluate potential suppliers and compare
data with existing ones. Look over their financial ratios; find out their geographical location
and customer references. Make yourself a table to compare the data for your existing
suppliers and your potential suppliers. Include one sheet for the company’s overall data and
a second sheet for total cost of ownership. You need to get as detailed a picture as possible
for the existing supplier value chain and cost. The outcome of this exercise is to find a list
of potential suppliers to whom you can send an RFI.
Besides these obvious factors, there might be some hidden ones that could remarkably
increase the initial cost of changing suppliers. In order to start doing business with a new
supplier, you will have to invest a certain amount of time and money. This is known as the
supplier acquisition cost (also referred to as supplier onboarding costs). Try to predict your
acquisition costs by looking at the costs for qualification, audits, tooling, testing, training,
and travel.
Remember, both benchmarked products and suppliers must be from the global market.
Even if you are not going to source from overseas, it is important to have benchmarks from
a global perspective.
Supply chain analysis
To begin this analysis, take a look at the geographic reach of your supply chain. Your
supply chain will look vastly different depending on whether your suppliers are located
next door or overseas. When comparing local suppliers with overseas suppliers, you should
look at several factors beyond procurement price. For example, if you move your supply
chain to Asia, transit time may increase by up to 60 days and you’ll be buying bigger
batches to save on logistics costs. Of course, this will then increase your stock levels. All of
this affects your production planning. On the other hand, a local supply chain might be
more flexible. With overseas sourcing, you might win on product cost, but you’ll lose on
logistics. Therefore, you need to compare total supply chain costs for all possible
alternatives and weigh your options.
Benchmark your existing supply chain with both local and global alternatives. Start with
delivery terms, transit time, batch order size, and stock levels, but make sure to consider
everything when benchmarking your supply chains.
Fig.2 Global Benchmarks
Below are some open-ended questions that can help you identify supply-chain-related
challenges involved with changing suppliers. Find two answers to each question – what it’s
like with your current suppliers and what it would be like with new ones.
 What is your current sourcing pattern according to the Kraljic matrix?

 What size are your typical batch orders?
 What is your current average inventory level?
 What is your purchasing currency?
 Do you use collaborative e-tools?
 What is your current supply set up?
 Do you buy locally, regionally, or globally?
 What kind of logistics routes do you use?
 Do you have to pay customs duties?
 What are freight costs per unit?
 What kind of risk do you have in the current supply chain?
 Do you have active alternative sources?
 Do you see any options for getting more value out of your current supplier?
Doing this valuable exercise will help you understand your purchasing pattern, which is an
essential part of the next step: defining gaps and creating a list of opportunities.
2. Define gaps and create a list of opportunities
After researching and finding benchmarks from the global market, you will have a lot of
new information. Take the time to properly record your findings. Make note of any that
seem illogical. For example, why are we buying a bigger volume from a supplier whose
product is more expensive? Or why do we have different specifications for the same
product? Why are we are using different surface requirements for similar components?
These questions will help you start to identify and define the gaps in your sourcing
procedures.
A good category manager must be critical of the facts and ask for the reasoning behind
them. Write down these “whys” since they may lead to sources of additional savings. This
is your list of opportunities.
In most cases, your list of gaps and opportunities will relate to dry facts that will need
confirmation from other stakeholders. A sourcing person cannot be an expert in everything,
so he or she should look to the experts for additional information. Typical sourcing
stakeholders are product designers, production engineers, and logistics specialists. They
should be dealt with at the specialist, not managerial, level because you need real data
directly from the field.
Present your list of gaps and opportunities to both your team and the specialists and experts
you’ve identified as being able to help you with the in-depth data you need. Work together
to confirm that the gaps you’ve identified are indeed gaps and not simply misinformation in
need of clarification. With the specialists on board, you may be able to identify more gaps
between the current situation and the benchmark and come up with new opportunities for
savings.
During this step, you will not need to begin problem solving quite yet. Worry about
identifying and defining first; then, in Step 4, you will start choosing a strategy to help you
bridge these gaps.
Summary
After completing this step, you are almost ready to choose a strategy. This is a big thing if
you know what your current sourcing setup is and what you can possibly achieve in the
future. You will probably have over a dozen ideas and topics, and you’ll see that there’s
“low-hanging fruit” but there will also be more complex ideas. Do not overthink this; you
cannot pick all the savings at once.
Strategic sourcing in category management is a continuous process of improvement, and

you can plan your future actions to pick the tricky “fruits” in the next round. The important
thing is that you have identified the gaps, and you know what to do. In strategic sourcing,
as in negotiation, the one who has the most information generally has more power and a
greater probability of reaching the target.

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Chapter 4: Strategic Sourcing

Methodology
Chapters 1-3 covered all of the preparation needed before you can decide on a strategy to
get the most out of the savings opportunities you’ve identified. By now you’ve analyzed
your spend and established your strategic suppliers and also explored possible alternate
suppliers. You are almost to the strategy selection stage of the strategic sourcing cycle, but
before you dive into it, you will need a better understanding of the methods we’ll be
applying.
Our guiding question for this chapter: How do I build up a sourcing strategy?
Chapter 4 is a brief overview of strategic sourcing methodology. In it, we will take a look at
two common strategic methods that can be used as a base for preparing your sourcing
strategies.
The methods we will cover:

1
Porter’s Five Forces
2
A.T. Kearney’s Purchasing Chessboard®
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Method #1. Porter’s Five Forces
Michael Porter’s Five Forces method helps us to understand and evaluate competitive
forces within our industry and the supplier’s industry. Every company has customers,
suppliers, and competitors in the industry. Understanding your position and the power
relationship between these forces gives you valuable knowledge about how to implement
your strategy.
Michael Porter described five competitive forces: supplier bargaining power, buyer
bargaining power, industry internal rivalry, threat of new entrants, and threat of substitutes.
The procurement function is most interested in supplier power and buyer power.
Fig.1 Porter’s
Five Forces
Let’s take a closer look at these powers. A typical high supplier power situation occurs
when the supplier can increase prices, and the buyer can do nothing about it. On the other
hand, buyer power is high when the buyer has multiple alternative sources and can push
purchase prices down.
Imagine your company at the center of these five forces and analyze your position. Your
company is sustainable if it can find a balance between these forces. However,
sustainability is not always enough. In order to be successful, you also need to have the
power to push the system out of balance, but only if you can do it for your own benefit.
Next, think of your supplier in the middle of these forces and weigh your power against his.
You’ll have to consider several of the factors I mentioned in the previous chapters, namely
how much of your spend accounts for what part of the supplier’s revenue and how
dependent you are on an individual supplier for certain manufactured components or
specific services. I suggest you use Porter’s method to think about and understand these
competing forces every time you are preparing a strategy to use with your key suppliers.
Competitive power can change at any point in time, especially when there are changes in
the market. During boom times, the supplier usually has the stronger bargaining power, but
during a recession, the opposite occurs and customer bargaining power increases.
If you are interested in learning more about Porter’s Five Forces, I suggest you check out
the Five Forces tool from MindTools. This tool can be used in a variety of business
situations, but you can also use it as a guide during your sourcing analysis.
Method #2. A.T. Kearney’s Purchasing Chessboard®
Porter’s Five Forces is great for a high-level, theoretical analysis. It’s important to carry out
this analysis first in order to give you an idea of where you stand, which can be especially
helpful when it comes to negotiations. However, while it does provide you with a broad
understanding of your market power, it doesn’t outline the actions you should take once
you have this knowledge. That is where A.T. Kearney’s Purchasing Chessboard® comes in.
It’s a practical tool designed specifically for procurement.
The Purchasing Chessboard® is another matrix but one with 64 fields, like a regular
chessboard. Buyer bargaining power is located along the horizontal axis, and on the vertical
axis, supplier bargaining power.
Fig.2 A.T. Kearney’s Purchasing Chessboard®
The Purchasing Chessboard® is made up of three layers. The first layer is divided into four
general purchasing strategies: manage your spend, change nature of your demand, seek
joint advantage with supplier, and leverage competition among suppliers. These are the
proposed main strategies for the large product categories as introduced by Kraljic in his
matrix and that we also touched on in Chapter 1 “Internal Research.”
The second layer has four approaches for each high-level strategy, coming to a total of 16
strategy approaches. These approaches give you a better focus going into the next level of
methods. The second layer helps you clarify the purpose and the long-term goals of the
methods below each approach.
The third and bottom layer has four methods for each approach, for a total of 64 strategy
implementation methods. There are quite a few methods, so you have a lot to choose from
if you have to find the proper method at once. Drilling down from layer one to three helps
you find your way to the strategy that best fits your situation.
In the next chapter, I will describe how exactly to use the Purchasing Chessboard® and go
through a practical exercise. In the mean time, you can go to their website to explore this
method more in depth. They even have a Purchasing Chessboard® LinkedIn group if you
want to ask questions of experienced practitioners.
Summary
I am a mechanical engineer, and I like structure. I had a eureka moment the first time I saw
the Purchasing Chessboard®. It was so logical and self-explanatory. Like most of you, I
found several of those methods to feel quite familiar. But at the time, I felt lost as to what
methods to use when and what should the next step be after one method has already been
carried out. Then I said, “Eureka!” when I saw for the first time a system behind the
approach and methods that can be used one after another. The main idea of the Purchasing
Chessboard® is to increase your bargaining power. The goal is to move step-by-step
towards the bottom right quadrant. In Chapter 4, I will try to explain how I use this great
tool from A.T. Kearney to find and execute a comprehensive sourcing strategy.
Chapter 5: The Purchasing Chessboard® and Sourcing Strategy Selection
The previous chapter was an introduction to strategy preparation, and I explained the
methods you will use when planning your sourcing strategy. By now, you should have
learned about your supplier base and your product details. You have already identified a lot
of hypotheses, and you have selected realistic ideas about where to start your strategic
sourcing implementation. Step by step, you are learning more about your categories,
increasing your negotiation powers, and boosting your sourcing self-confidence.
This chapter covers the following four points:
1 Weighing your bargaining power

2 A sourcing strategy example
3 Creating a sourcing strategy action plan
4 A guide to using the Purchasing Chessboard
1. Weighing your bargaining power
Imagine your company is in the middle of Porter’s five competitive forces: supplier
bargaining power, buyer bargaining power, industry internal rivalry, threat of new entrants,
and threat of substitutes. Your company is sustainable and stable if it can find an
equilibrium between these forces. Stability is good, but having it now does not guarantee
you will have it in the long run. Competitors, customers, and suppliers will make sure that
you do not operate for very long in a stable environment. In our modern globalized business
environment, you will need to be proactive if you want to control your market position.
Ensuring a stable market position requires teamwork; all functions must work together for
this common goal. Sourcing and Supply Chain are responsible for increasing bargaining
power when it comes to negotiating with suppliers. When these two functions succeed in
increasing bargaining power, then they improve Sales’ negotiation position with customers.
One thing is to have strong bargaining power; another thing is to know how to use it. In the
long run, cooperative supply chains tend to be more successful than competitive ones.
How do you evaluate your own bargaining power and find a suitable sourcing strategy
using the Purchasing Chessboard®?
It is a tricky task that requires experience and gut feeling. A.T. Kearney recommends
assessing buyer and supplier power on an 8-point scale. However, I have had trouble with
this. I would struggle with determining the difference between 3 and 4 points or between 5
and 6 points.
I found it much easier to assign those points once I broke them down into four different
categories. Then each of those categories could be assigned 0, 1, or 2 points, which is a
much easier scoring rubric to manage.
Let’s take a closer look at how I break down these scores. First, try to evaluate bargaining
power between you and your supplier. Think about all your findings from the preparation
carried out in the previous chapters, and try to measure them on a scale from 0 to 2.
Weigh supplier and buyer bargaining power using these four dependency criteria:
 Business (spend/revenue) dependency: Look at buyer’s share of supplier’s

revenue and supplier’s share of buyer’s spend. Who depends on the other the most?
 Supplier competition and ease of replacement: How easily and quickly can you
replace supplier with an alternative supplier? Do you use a double-source strategy?
 Component complexity and ease of replacement: How easily and quickly can
you replace a component or service? Can you reduce component complexity?
 Innovation and technology dependency: Do you need an innovation and
technology partner? What is the level of your partnership?
Fig.1 Bargaining power four-point analysis
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Chapter 6: The Vendor Selection Process

In Chapter 5 you designed a sourcing strategy with the help of the Purchasing Chessboard®.
Now your strategy roadmap is in place, and you know how get to your desired negotiating
position. If you think back to our strategic sourcing cycle, we have already covered the
planning stage and are now moving on to taking action.
The next step is the vendor selection process. In the supply market research chapter, we
identified a couple of potential vendors. Now you’ll need to gather detailed information
from potential vendors. Using that information, you’ll begin to narrow your options. The
RFI process should be utilized to initiate the vendor selection process. The vendor selection
process is wrapped up by performing a product qualification and site visit.
In this chapter, we will answer the following questions:
1
What criteria should I consider during vendor selection?
2
What is an efficient way to run the RFI process?
3
What should I look for during product qualification and site visit?
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1. Vendor Lifecycle
The vendor lifecycle covers the entire vendor-buyer relationship, from vendor selection, to
onboarding and performance measurement, and finally ends with the offboarding process.
Vendor selection is actually the second step in the vendor lifecycle. The first step, market
research, we already completed during the planning stage of our strategic sourcing process.
The main objective of the vendor selection process idea is to ensure vendors are a good
match for the buyer before actually entering into a business relationship. The vendor
selection process itself also has several important steps: vendor self-evaluation and
qualification, product qualification and site visit.
Fig.1 Vendor Lifecycle
2. The Vendor Selection Process
Self-evaluation and RFIs
After you’ve done your research and found a few interesting companies who could be
potential vendors, put together your vendor requirements and a self-evaluation
questionnaire. In order to get detailed answers each company and their products, you’ll
need to get in contact with them and ask for straight questions. In many companies, the
buyer-vendor relationship begins with a vendor self-evaluation. As a time-saving technique,
buyers encourage potential vendors to register themselves by filling out a self-evaluation
questionnaire on the buyer’s company’s homepage.
However, if you do not have a vendor self-service environment, your best bet is to run an
RFI. Whether you run the RFI on a SaaS solution or do it the old way by email, you need to
benchmark potential vendors against qualification requirements. An RFI is much more
efficient than sending an open-ended email to multiple vendors, especially if you use a
SaaS solution specifically designed for the process. An e-sourcing solution lets you ask
vendors questions by setting up a questionnaire. This way they’ll be able to provide
information about themselves and the products they provide. Plus, you’re able to send the
same RFI to several companies, saving you precious time.
In the vendor qualification requirements document, you need to describe expected

qualification levels for the focus areas most important to you. Since you are looking for a
partner to be part of your supply chain, your requirements should reflect how your
company does business on a daily basis. Based on your vendor qualification requirements,
put together a questionnaire that can be divided into your preferred focus areas. Add
detailed questions to each block. It may be helpful to phrase questions so that they can be
answered with yes, no, or partially. This will make it easier to analyze the answers later on.
At this point, you can also request evidence for specific questions, such as certificates or
other documentation.
Vendor Selection Criteria
Think about including the follow six areas in your self-evaluation questionnaire:
Management, Sustainability, Product, Process, Improvement, and Costs.
1. Management: These questions should convince you the company has management
systems in place and follows both internal and external standards. For example, you
might ask for quality management certifications, such as ISO9001, or ask about
their company code of conduct. Basically, you want to guarantee the company is
committed to being an honest partner.
2. Sustainability: Here you’ll be looking for evidence that the company is financially
sustainable and follows all appropriate safety rules. Depending on your company’s
primary areas of concern, you can also ask about social and environmental
sustainability.
3. Product: Ask for evidence of the product test reports and certifications. You’ll also
want to know how product quality is ensured, whether there is product development
process and version handling process, etc.
4. Process: These questions will help you identify the processes your vendor has in
place for handling nonconformities and managing sub-vendors. You’ll want to see
that your vendor can target any production issues and fix them before they
adversely affect your supply chain.
5. Improvement It’s also important to see that there’s a continuous improvement
process in place. The key here is to discern whether and to what extent vendors
cooperate with sub-vendors and/or customers.
6. Cost: Finally, if they’re willing to share, ask for information on their product cost
structure. This may include the factors that affect their pricing, which can help you
anticipate cost fluctuations down the line. You may also want to ask them if they are
willing to make an effort to reduce costs and share these savings with you, the
buyer.
Qualification
Once you get the questionnaire answers back, you can create a nice scorecard and
benchmark their scores against the requirements. You can set a threshold (80%, for
example) indicating what level of score in order to qualify a vendor. The qualification
threshold should not be set in stone, though. There should be some room for flexibility. For
example, single source vendors and vendors that supply critical products may need further
analysis. On the other hand, vendors supplying indirect products and services may not need
to be held to such rigorous standards.
Vendors who do not reach the qualification threshold level should complete an
improvement plan and repeat the qualification procedure later on once they’ve carried out
their improvement plan.
Fig.2 Vendor Qualification Scorecard
Product Qualification and Site Visit
During the self-evaluation stage, you also need to make sure that the products you plan to
buy meet your standards. You should ask from vendor all product related documentation
like certifications, testing reports, etc. While it depends on product sensitivity, you may
also want the product tested. Consult with your engineering team, and the vendor to make
the necessary arrangements.
Vendors whose products and processes meet or exceed the qualification threshold can be
moved on to the next phase: the site visit. During the site visit, sit down with the vendor’s
representatives and go through the vendor qualification questionnaire and product
documentation together. If certain certifications or documents weren’t provided with their
original answers, now would be a good time to make sure you get the evidence you need as
support.
The site visit can help you address any lingering questions you might have about the
vendor. You can gauge how honest your potential partner was when answering the
questionnaire and try to determine whether everything is indeed as good as they said. At the
same time you have chance to inspect their premises and meet their teams. You’ll want to
make sure the vendor is really a good fit as a collaborative partner in real life and not just
on paper.
Summary
Just as strategic sourcing is a continuous process, so, too, is supply base optimization; while
you are onboarding new vendors, you will be offboarding others. The category manager is
responsible for maintaining an overview of all category vendors at all times. Obviously,
you cannot offboard vendors before you have a replacement already in the onboarding
phase. Ramping down one vendor and ramping up another should be done simultaneously.
Fig. 3 Continuous Supply Base Optimization
The vendor selection process should not be underestimated. During this process, you will
be able to foresee possible vendor-related risks while still in the early phase of the
relationship. This process will help you decide whether to accept this risks and create a
contingency plan to deal with them head on, or simply choose to avoid doing business with
certain vendors if the risk is too big. In single vendor situations, it is especially important to
identify and mitigate risk early on.
 The next stage in the vendor lifecycle is onboarding. We will discuss this in the next
chapter where I will describe how to carry out the RFP process now that you have
qualified potential vendors. Log in
 Sign up

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Chapter 7: RFQ Management Process

In the last chapter, we covered the RFI and vendor selection process. As a result of that
process, you created a short list of qualified companies who could potentially become
vendors. Now the next step is to challenge your existing supplier by running an RFQ. By
adding an element of competition, you can leverage the RFQ to achieve cost savings or
otherwise add value to your supply chain by choosing the right vendor who can meet your
terms under the best conditions possible.
This chapter covers the following three points:

1
The difference between RFQs and RFPs
2
Managing the four-step RFQ process
3
Essential RFQ documents
Download PDF
What’s the difference between RFQ and RFP?
I must admit that not so long ago, I realized request for quotation (RFQ) and request for
proposal (RFP) are not synonyms. I thought it was simply a matter of different terms being
used in different English-speaking countries, like truck and lorry in American and British
English, respectively. I’ve since come to a clear understanding of the difference between
these two terms.
Generally speaking, an RFQ is used when you know exactly what you need, and you are
only asking for the price. On the other hand, an RFP is used when the buyer has a problem,
and he asks suppliers to come up with different solutions (i.e., proposals) and identify the
accompanying costs. For further clarification, the acronym RFx is used when talking about
requests in general, where x can be I, Q, or P.
Fig.1 The difference between RFQs and RFPs
The RFQ process should be one of the most common operations carried out by every
purchasing and supply manager on a daily basis. However, even as the most common
operation, it can still be run many different ways. Whichever way you do it, the RFQ is the
most powerful method to get quick cost savings.
On the other hand, RFPs can and should be used by a wider range of individuals. Besides
category managers, project managers and engineers can also use this process when looking
for new and innovative solutions.
All types of requests can be run in an e-sourcing system, saving you additional time that
can then be spent on the other stages of strategic sourcing. Instead of sending an
unstructured email, it is much more efficient to run an RFx in a SaaS application, such as
DeltaBid. This type of software lets the supplier do part of your job, such as entering basic
identifying information into the system. As the buyer, you upload the supporting
documents (like the ones outlined in the next section) and create a pricing template. A
pricing template is useful because it makes it much easier to compare bids and award a
winner. In order to be more efficient, you can actually combine this step and the previous
one and run the RFI and RFQ together as the same event. While not recommended for all
situations, it can be very useful for companies operating with a project-based business
model. E-procurement solutions can also help you build trust with suppliers by showing
that your RFx is being run in a formal, professional manner and that you’re taking steps to
mitigate the risk of quote leakage and fraud.
The RFQ Process
The RFQ process can be divided into four steps: preparation, processing, awarding, and
closing.
Fig.2 The RFQ Process
1. Preparation
This is the most important part of the process and should not be done in a hurry.
Throughout the entire RFQ process, you should spend at least 50% of your time on
preparation and 50% on the rest of the steps. During the preparation phase, visualize the
whole RFQ process from the invitation until awarding and closing the deal. This “big
picture” will help you keep your final goal in mind.
There many types of RFQs, including open, invited, sealed bid, or reverse auction. RFQs
are usually run by only inviting prequalified suppliers, and I recommend doing the same
with reverse auctions. The number of bid participants generally ranges from 3 to 8, but
again it depends on the category.
On the other hand, RFPs can be open to all potential suppliers. Regardless of whether it’s
an open bid or invite-only, you can both run as sealed bid sessions. This is a type of bidding
process where participants provide their bids in a sealed “envelope” and no buyer is
allowed to open the bids before the final deadline. It is a great strategy to use to combat
fraud and bid leakage before the bid has come to a conclusion.
Once you’ve decided what type of RFQ you wish to run, then you’ll need to prepare the
documentation. RFQ documentation is the set of documents that will be sent to bid
participants. The actual documents you choose to include may vary, but this list includes
the most common RFQ documents.
Important RFQ Documents

 Invitation and description: Here you should describe your company, the project,
and any other necessary background information. Make sure the purpose of the
RFQ is clearly laid out.
 General terms and conditions (GTC): Attaching the GTC or contract template
gives bidders a framework to follow when they consider making a bid. State clearly
which terms are negotiable and which are not. Clarity here will reduce negotiation
time when it comes time to close the RFQ.
 Pricing template: It is very frustrating to try and compare quotes submitted in
different formats and structures. By preparing a pricing template you give
participants guidelines they must following in order to submit a bid. Using the same
format for all participants will help you to compare offers and easily find the best
one. If necessary, you can even request suppliers divide prices into cost elements.
Define price breakdown cost elements in the pricing template. Cost elements may
vary depending on the category, and of course, cost drivers are different for
different goods and services. In an RFQ, your pricing template will be very specific.
For RFPs, you can use a simplified list of items (or bill of materials) to give bidders
an opportunity to surprise you with new solutions.
 Pre-qualification requirements and questionnaire: If you have not qualified
suppliers by running an RFI, you can do to it during the RFQ process, but you’ll
need to prepare pre-qualification requirements and questionnaires. Running an RFI
and an RFQ at the same time might be suitable for project management companies
since different suppliers are likely to be used for different projects. For more details
on RFIs and vendor qualification, read Chapter 6. Sometimes pre-qualification
criteria is preceded by a non-disclosure agreement (NDA) or confidentiality letter
that must be signed before the supplier gets the rest of the RFQ documentation.
Prequalification requirements may vary depending on the category.
 Awarding selection criteria and weights: In order to keep the RFQ process
transparent and easily understood by participants, you will need to describe the
awarding criteria and weights you plan to use when selecting an RFQ winner. You
should distribute those to the participants in order to reduce disputes.
Some example criteria that can be used in awarding:
o Functionality of product / range of services

o Initial price of offered product / service
o Total cost of ownership during product lifetime
o Cost drivers of offered product / service in the requested format
o Risk associated with offered product / service
o Ability to meet stated requirements
o Risk associated with selected supplier (e.g., financial, delivery, quality,
compliance, sustainability, etc.)
Qualitative, monetary, and risk aspects of the sourced product or service should be
weighted according to how critical they are to business objectives. Involve your
internal stakeholders when putting together awarding criteria to ensure alignment.
Now when you have put together your set of documents you are ready to send the
entire RFQ documentation package to participants.
2. Management
While the RFQ is underway, you should treat all participants equally. Share the
same information with everyone. Questions from any one supplier should be
answered and distributed to all participants.
It is against business ethics to leak price information or other supplier-specific info

to other bidders. Some e-procurement systems have a sealed bids functionality
where no one, not even the buyer, can see completed bids. The bidding system will
only open after the deadline. Sometimes, if you have not reached your price targets
in the first round, you can decide to undergo a second round (a reverse auction) with
limited participants. In this case you should give the participants the price target you
are hoping to reach.
3. Awarding
Awarding is the second most important step in the RFQ process. Here you decide
with whom you are going to deal. Now all the effort you spent on preparation
becomes valuable. If you asked suppliers to use a price template, then just collect
the bids and compare them, apples to apples. This is when the awarding criteria and
weights come in handy.
Fig.3 DeltaBid’s Bid Comparison Chart

For the awarding decision it is wise to use a wider group of people, such as a tender
committee. Invite your internal stakeholders and let them award the bid based on
predefined criteria. Based on the awarding team’s decision, write up a memo and
include how many bids you received, how many were qualified, what were the
disqualification reasons, what were the awarding criteria and weights, how each
tender committee member voted, and what was the final decision. Awarding
decisions are definitely one of the more interesting steps that internal auditors like
to see, and it is useful to have evidence available.
4. Closing
After selecting a winner, set a meeting for closing the deal and signing the contract.
If you put your GTC and other contract terms into the RFQ documentation, it
should not be complicated to close the deal. If you did not, you may have a long
negotiation ahead and you cannot even be sure that the offered price level will
remain. Of course, suppliers will use any argument they can in order to increase the
bid price.
It is good business to provide feedback to all participants, not only the winner. But
even if you have selected a winner, do not announce the final decision before you
have signed a contract. Once you announce the winner publically, the winner gets a
boost of negotiation power and closing the contract may become difficult. Keep
your options open until the contract is signed with best conditions possible and only
then announce bid results to all participants. Thank everybody for their
participation. It is up to you whether you decide to announce the winning company
or not, but it is definitely not ethical to publish the winning bid.
Summary
The RFQ process is one of the most powerful processes a buyer can use to get price
information from the supplier market. Every buyer should learn how to run an RFI and
RFQ process effectively. Many salesmen think that when you close the deal and sign the
contract, the work is done and bonuses will be paid. But in fact, it is just the beginning! It is
like a marriage. Hollywood makes it look like the hard part is meeting the right person, but
once you do, you get married and ride off into the sunset. However, we know that in real
life the hard work comes after. Just like after you get married you have to nurture your
relationship with your partner; after you sign the contract, you need to work on building the
relationship with your new supplier to keep the strategic sourcing cycle going.
Running RFQs via Mail? Try DeltaBid RFQ Tool for Free for 30-Days
It takes under 10 minutes to see what the solution is about.

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Chapter 8: Keeping the Sourcing Cycle in

Motion
You’ve come to the point where the strategic sourcing process loop has closed, but that
does not mean your work is finished. Strategic sourcing is a continuous process of
improvement, and now you have to look for additional improvements in the second round
and beyond.
This chapter covers the following three points:

1
Preparing for round two with analysis and reflection
2
Moving from TCO to TVO
3
Transitioning to a new sourcing strategy
Download PDF
So far, you’ve analyzed your spend and consumption patterns. You know your processes
inside and out, and you understand the supplier market’s potential. Most likely you’ve
interviewed internal stakeholders and suppliers. With their help, you probably come up
with a dozen different ways you can increase savings.
The first round should have been dedicated to achieving some easy wins and picking the
lowest hanging fruit. It helps to have a boost self-confidence to know you’re heading in the
right direction. This gives your process improvements momentum and helps you prove to
the rest of your organization the value of procurement. These are all good things, and
you’ve gotten off to a strong start. However, your organization expects your contribution to
the bottom line every year. How do you get the process started all over again?
1. Preparing for Round Two with Analysis and Reflection
To get started on round two of your strategic sourcing, you’ll need to go back to where you
started the first round: with measurement and analysis. Before planning the next round of
activities, you should first measure how well you succeeded in the first round. Did you
regularly capture all your savings and connect them with your category spend? Were you
and your manager happy with the results? Was it easy to achieve initial savings? If it was,
don’t worry, subsequent rounds will gradually get harder and harder.
Again, you’ll have to analyze your spend. (Review this topic in Chapter 1.) Once you do so,
you may want to make changes in categorizations. Be careful, though. If you do change
your categorization structure, you will lose the ability to compare current category
performance with previous years. Make changes in the categorization structure only if
absolutely necessary and doing so would allow you to analyze your spend in greater detail.
Fig.1 Savings Analysis by Category
Analyze the savings you achieved and compare them with the opportunities list. Did you
carry out the savings actions from your list with each and every supplier within the
category? Probably not all. But now you have new spend information, and you have new
benchmark products and cost breakdowns that you should analyze and compare. Do all
your category suppliers already use cost breakdown pricing and are those cost elements
comparable? If you see that one supplier is not competitive but you want to keep him, do a
supplier site visit, complete a full process audit, and identify points for improvement.
Suppliers are your external stakeholders and valuable resources. As we wrote in Chapter 6,
just as strategic sourcing is a continuous process so, too, is supply base optimization. While
you are onboarding new vendors, you will be offboarding others. Your supply base is a
living list that should be actively renewed on a regular basis. Of course, keep in mind that
you cannot offboard vendors before you have a replacement already in the onboarding
phase. Ramping down one vendor and ramping up another should be done simultaneously.
Questions to help you reflect and identify gaps to address in round two and beyond:
 Have you captured all the projected savings from the last quarter?
 Did you collect all savings as planned?
o If you didn’t, why were you unable to carry out your plan?
 Did you spot any savings leakages (unrealized savings)?
o If yes, can you find out why they occurred and are you able to fix them?
If you had trouble achieving your desired outcome during the first round, try to figure out
the reason why. Look at the chart below. Do any of these sourcing challenges look
familiar? Ask yourself if there’s something you can do to overcome these challenges. You
may need to become your function’s internal champion and ask for support from your
manager.
Fig.2
Sourcing Challenges
2. Moving Beyond TCO to TVO
On the purchased component side, the first quick win can be achieved by running an RFQ
for the specified product. There can also be different benchmarked products for different
criteria. For example, best price can be one product but best functionality another. As soon
as you identify the benchmarked component, you can define a gap and start thinking about
how to close it. (Review benchmarking in Chapter 3.) While it’s worth repeating as often as
necessary for as many components as possible, you won’t be able to use it to achieve the
same cost savings year after year. And although strategic sourcing is cyclical in nature, you
will notice diminishing returns in the categories that you’ve optimized.
During the first couple rounds, you may be able to bring down purchase price by running
RFQs or expanding your geographical scope from regional to global. You’ll even have to
move beyond total cost of ownership (TCO) eventually. To truly move your sourcing
processes into the strategic sphere, you’ll have to move on to total value of ownership
(TVO) analysis.
Using TVO as a guide for your sourcing process will provide you with numerous benefits
beyond cost savings. This way, you take into consideration additional criteria, such as ease
of assembly and working efficiency. Examine the whole supply chain of this product and
evaluate every operation. Ask yourself what value it provides to the customer. If you find
operations that provide no value, then try to get rid of them. In addition to looking for ways
to increase process efficiency, you can also find ways to reduce supply risks and reduce
risks to brand reputation through suppliers.
If you haven’t optimized your supply chain in the first round, then now is a good time to
consider it. Think about freight mode, batch size, packing requirements, inventory level, or
other logistics issues. Have you considered import taxes? Import taxes differ depending on
the country of origin. For example if this is the case, changing to a supplier from a different
country might give you cost savings.
3. Transitioning to a New Sourcing Strategy
Use the new supplier information, stakeholder interviews, and new benchmarks to review
your existing sourcing strategy, the one you developed in round one. The supplier-buyer
dependency level gives you the basic framework for deciding if and how you can change
the balance of bargaining power and buying strategy.
Remember the goal is to move step-by-step towards the bottom right quadrant of A.T.
Kearney’s Purchasing Chessboard, and that involves either changing demand or changing
specifications. (Take a look at Chapter 5 for more details.) Review your strategy, re-
evaluate your dependency level and see whether your strategy is still valid or needs to be
adjusted a bit. Maybe you will find that there is no point of contention with a supplier, and
you’re better off entering into the strategic alliance.
Summary
Strategic sourcing is not a new buzzword; it’s already a concept that’s been around for
decades. According to a report by the Aberdeen Group, about 30% of organizations don’t
have a strategic sourcing program in place, which means there’s still room for
improvement. Plus, they found the main driver for 78% of respondents for implementing
strategic sourcing was the pressure to reduce costs. This means many are still focused on a
purely tactical approach to procurement.
Fig.3 Top
Strategic Sourcing Driving Factors
Furthermore, among those who do, actual performance levels vary. The figure below
represents the findings of an IIAPS Services study using the PSCM Index to benchmark
category management and strategic sourcing performance of over 400 organizations.
Overall, the best mean performance levels occur for the tendering process (running RFx’s,
contracting, and negotiating). Again, this area is where the comfort zone for tactical
procurement lies. For strategic procurement to take place, performance levels for the work
leading up to the tendering process and afterwards when developing new strategies must
improve.
Fig.4
Strategic Sourcing Benchmark Scores
Strategic sourcing and strategic procurement have to include the groundwork of

categorization, spend analysis, and supply market analysis. This lays the foundation for
making strategic decisions and improving round after round. It’s a long road with many
obstacles, but that is what makes it interesting.

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Chapter 9: The Strategic Sourcing Toolbox

We take computers and mobile phones for granted, but these two items are just pieces of
hardware. They’re nothing without software and applications. In business, ERP (enterprise
resource planning) systems are the most common software solutions. According to a 2012
Aberdeen study, about 86 percent of companies with between 100 and 1,000 employees
have already implemented this software, which supports back office core processes and
streamlines front office processes. Unfortunately, when it comes to procurement, the ERP
comes up short, and additional tools are needed.
The following tools are discussed in this chapter:

1
Spend Analysis
2
Requisitioning
3
RFx Events
4
Supplier Relationship Management
Download PDF
Basic ERPs lack certain procurement functionalities while in more advanced ERPs these
necessary functionalities can be very expensive. Therefore, in order to successfully carry
out a strategic sourcing process, you need to implement additional tools. Some of these
“tools” are really modified Excel spreadsheets, but others are specific SaaS solutions
custom designed to meet the needs of procurement professionals and the strategic sourcing
process.
Spend Analysis
A spend analysis tool is an essential part of spend management. Its goal is spend visibility,
and it should allow you to aggregate, classify, and leverage spend data. In order to plan
your sourcing actions, you need to have the ability to capture your starting point and then
measure any improvement in your progress. Just like a CFO needs to know the company’s
cost structure, the CPO needs to know the costs of goods and services, and the category
manager needs to understand his category’s spend structure.
Spend analysis should answer the following questions:
 What was bought and at what price? (list of materials and cost)
 From whom are we buying? (list of suppliers)
 How much do we buy? (volume)
 How do we buy? (frequency and order batch size)
Fig. 1
Spend Cube
For more detailed reminder of how to carry out a spend analysis, refer back to
Chapter 1 of this guide.
As far as tools for spend analysis go, the category manager’s best friend is Excel’s
PivotTable. If you have a huge pile of data, no tool can beat it. PivotTable can be used for
spend analysis since it allows you to sort and filter data in many ways and drill into the
details. Ideally, PivotTable will be integrated with your company’s ERP so that you will
always have access to your organization’s most recent spend data but you can live with
periodic updates.
E-procurement Tools
Requisitioning
The core procurement process is called Purchase to Pay (P2P). It is mainly an internal
process, and it starts with requisitioning, purchase orders, approvals, goods receipt, and
invoice receipt, and ends with payment to supplier. These steps are available in most ERPs,
and you might think it is adequate for managing the P2P process. But think again: not all
P2P process participants are ERP users.
Requisitioning is the first step in the P2P process. Purchase requests could come from any
person in the organization. Typical requesters are project managers and production
engineers, but it could be any employee in any department. While they usually aren’t ERP
users, they are procurement customers and you need to serve them. Email is not an efficient
tool for keeping track of requisitions. In order to better serve your internal customers, it’s
best to implement requisitions management software.
Fig. 2 Requisitions Management Dashboard
This type of software provides you and your stakeholders a collaborative platform to use
during the initial stages of the purchasing process. Similar to helpdesk software, internal
stakeholders can send their demand orders to procurement. Process compliance is a
challenge that CPOs face on a daily basis. It is always easier to get on the right track from
the very beginning. A requisition management solution helps CPOs change the purchasing
process and track compliance.
Read more about the benefits of implementing requisitions management software.
RFx Event Management
In this guide I have discussed RFx events quite extensively. (See Chapter 6 and Chapter 7).
As far as I know, there’s no ERP system capable of running RFx’s. That leaves companies
with only three choices for running RFx’s: use email, develop an in-house solution, or
purchase a license from a SaaS provider. Email is inefficient and developing in-house
solutions can be extremely costly in terms of both time and money. The market is leaning
towards a preference for SaaS.
Fig. 3 RFx Event Management Dashboard
E-sourcing solutions save you the additional time you need to effectively implement
strategic sourcing. This type of software also lets the supplier do part of your job, such as
entering basic identifying information into the system. As the buyer, you upload the
supporting documents and create a pricing template. A pricing template is useful because it
makes it much easier to compare bids and award a winner. In order to be more efficient,
you can actually combine this step and the previous one and run the RFI and RFQ together
as the same event. (I discussed this earlier in Chapter 6.)
While not recommended for all situations, it can be very useful for companies operating on
a project-based model. E-procurement solutions can also help you build trust with suppliers
by showing that your RFx is being run in a formal, professional manner and that you’re
taking steps to mitigate the risk of quote leakage and fraud.
Read more about the benefits of e-sourcing.
E-auction
An e-auction in procurement is a reverse auction in which the roles of the buyer and the
seller are reversed, and the primary objective is to drive purchase prices downward. The
reverse auction is one of the most efficient tools buyer can use to find a supplier with the
best price. No ERP provides a reverse auction functionality, which is why many
organizations are again looking to SaaS tools.
Fig. 4 Reverse
Auction Bid Comparison
During a reverse auction, suppliers can submit multiple offers, usually in response to
competing suppliers’ offers, bidding down the price of goods or services to the lowest price
they are willing to receive. As competing bids are open in real time to every participating
supplier, reverse auctions promote information transparency. This, coupled with the
dynamic bidding process, improves the chances of reaching the fair market value of the
item.
Supplier Relationship Management

There are a lot of customer relationship management (CRM) tools on the market but not
many supplier relationship management (SRM) tools. I must admit that Sales and
Marketing seem to be in a preferable situation compared to the rest of the company when it
comes to e-tools. ERPs do not provide CRM or SRM in the standard solutions, which is
why many companies implement SaaS solutions.
A supplier contract lifecycle management tool is basically an internal document repository

with some advanced features. Every document added to the system should be categorized
by different tags. Tags can be anything from contract, pricelist, and audit protocol to
meeting memos, insurance certificates, claims, and more. A document repository should
allow users to set up notifications for document expiration dates.
Fig. 5 Supplier Database
A comprehensive supplier relationship management tool includes supplier contract

lifecycle management tool functionality but with additional collaborative features.
Collaboration should be with both internal and external stakeholders (suppliers).
Here are some examples of these collaborative features:
o Supplier self-service portal:
Advanced SRMs allow suppliers to input their own data into the system. For example, they
can take care of supplier registration and self-qualification questionnaire results recording.
They can also upload documents, such as a recent insurance policy. The SRM will notify
suppliers when a document needs to be renewed. Buyers can also trigger notifications for a
data update. The supplier self-service feature reduces data entry work for the buyer.
o Activity management:
Just like many CRM tools, an advanced SRM tool will include the option to set reminders
and record supplier-related activity. The buyer can even set up reminders for a scheduled
call or meeting, store email communications, and record RFQ results. The SRM can also be
used to store memos and schedule future activities.
o Supplier performance management:
The most important feature, as well as the most complicated, is supplier performance
evaluation. Some KPIs are measurable, like on-time delivery, but some may be subjective,
like ease of doing business. Involve your internal stakeholders whenever you need
subjective measurements. Register your KPIs in the SRM and share the results with your
suppliers. Any feedback is better than no feedback.
o Supplier reclamation management:
Handling reclamations is not so enjoyable, but it’s quite common. As in romantic

relationships, supplier relationships also have their ups and downs. Handling supplier
reclamations is a process that mixes several activities but starts with registration and ends
with a final decision. Advanced ERPs have this available in quality modules, but they lack
collaborative features.
Summary
Many procurement people still work mainly with ERP, email, and Excel. Up until now it
was the only way since ERPs did not have special procurement features. However, small
software companies (DeltaBid included) realized the gap in supply and demand and now
there are many solutions available specifically for CPOs and procurement specialists.
This is almost the final chapter in The CPO’s Guide to Strategic Sourcing. When I started
writing this series of articles, I did not know if there would be much demand for them. I
wrote them for new CPOs who might be starting a career at a new workplace. I wanted to
help him or her with a structured step-by-step guide. Based on the feedback from readers on
LinkedIn, I can say I was positively surprised, and I feel like I reached my target.
The last chapter addresses a big part of the strategic sourcing process — the people.
Strategic sourcing can’t be successful without dedicated employees, skilled team members,
and a well-managed procurement function.
Chapter 10:
Creating an All-Star Strategic Sourcing
Team
Successfully implementing an effective strategic sourcing process requires collaboration
from both internal and external stakeholders. With so many people involved, your strategic
sourcing team can make or break the success of your project. This chapter shows you how
to select the right players for top-notch category management.
Read on to learn more about:

1
How to select category team members
2
Why you need a review board and steering committee
3
The importance of building your team’s credibility
Download PDF
Introduction
Strategic sourcing initiatives usually originate with top management. At some point, they
come to the conclusion that the costs of goods and services are not being managed well
enough, such as when global price trends go down but the company’s procurement spend
fails to follow suit. Or perhaps the decision is driven by poor supplier performance, and
they want to motivate suppliers to improve.
Whether it’s one case or the other, the CEO may decide to hire a chief procurement officer
(CPO). This newly hired CPO needs to dive into this sea of problems and search for
opportunities to fix them. He/she needs support and guidance on where to start. While this
guidance may come from outside sources, such as this strategic sourcing guide, the CPO
will soon discover there’s too much for one person to handle.
Organizational structure
Before we describe the organizational structure at the category level, we need to address the
big picture. By definition, Strategic Sourcing should be a strategic function. In order to run
Strategic Sourcing, the responsible person needs to have the authority to operate
companywide, beyond the borders of his or her own function.
In large corporations, Strategic Sourcing is typically run by the Supply Chain Manager
(SCM) or Chief Procurement Officer. At the very least, he or she must hold a managerial
position and be able to count on strong CEO support. If you break it down, a SCM is
usually responsible for the full material value chain from supplier through production down
to the customer. A CPO is typically responsible for inbound flow, sourcing and
procurement. In small or medium-sized companies there are fewer management levels and
fewer individual roles. For example, there may be a CPO or Head of Procurement, but their
responsibility actually covers the management of the entire supply chain.
Large international companies tend to have a matrix organization structure. With this type
of organizational structure, local CPOs may have more than two managers to whom they’re
required to report. Usually the line manager is a local business manager, but functionally he
reports to the country SCM and global business unit SCM.
Depending on the size and geographical coverage of your company, sourcing tasks can be
divided into different categories and regions. In order to assemble your category team
without creating conflicts with line management, you need to understand your company’s
reporting structure. Team members should be nominated pending approval by their line
managers.
How to build up your category team
Back in chapter one, we started with defining your category scope. This provides your team
with a specific focus. Once you’ve defined your scope, then team members should be
selected based on category team targets.
Let’s look at one global category as an example: roller bearings. Roller bearings are used in
several industrial applications, such as robotics, motors and generators. In this example,
these applications are used in different global business units, and they’re produced in
different regions of the world. Take a look at the graph. The size of the bubble indicates
spend volume by global business unit. When it comes to category teams, business units
with a larger spend volume take the lead and coordinate category activity globally. For
example, the BU Robotics category team member should come from the Americas, but he
is responsible for coordinating volumes and actions with other the regions within the same
BU. Similarly, the BU Generator team member should come from Europe, and so on.
Fig.1 Roller Bearings Category Team Members
You should select team members based on the geographical, business and functional areas
your category scope covers. Note that every interested group should be included. If your
team members are from other units, then make sure you get approval from the management
of those organizations. Your team should also have a similar knowledge base and a
common understanding of strategic sourcing as a process. (The CPO’s Guide to Strategic
Sourcing is a good base to work from!)
Once you have your team in place, you should agree on house rules and working
guidelines. When you work in different time zones, you should have a proper document
sharing platform. Sharing information and regular communication is absolutely necessary
for effective teamwork. (This article has a list of seven online tools your global team can
use to help boost productivity.) Team members should also play a role in setting up the
decision-making process, and then have authority to enforce those decisions in the home
unit.
Review board
In addition to the regular category team members, you may choose to involve experts from
other functions like manufacturing, quality, IT, development, engineering or finance,
depending on your team’s needs. The review board is responsible for evaluating ideas,
providing specialized input and pre-approving team decisions.
Steering committee
Besides the review board, you also need to have a steering committee. The review board is
more of an advisory board, and the steering committee empowers your team’s decisions
and makes change happen within the organization. The steering committee usually includes
the CEO or, in larger companies, the business managers who are most interested in the
success of the category team. The steering committee sets the targets, and category
manager reports back to the committee on the team’s progress and results.
The category manager can also brings up strategy questions for the steering committee to
discuss. When strategic decisions go through the steering committee, it’s easier to enforce
the category team’s decisions within the organization. Changing suppliers or components
might look easy on paper, but these changes are often faced with resistance for a variety of
reasons.
Team credibility
Did you know that 90% of end product costs are decided during the design and engineering
phase? There is a huge potential for savings if an experienced category manager comes on
board right away during the product design phase. However, if your final product has
already in production, you have only limited cost saving potential. Without credibility, the
category team won’t be invited to join the design and engineering workgroups, and the
company will not reach its strategic sourcing targets.
Fig.2 Savings potential in different product lifecycle phases
Your category team should constantly be looking for ways to sell its value to internal
stakeholders. One of the best ways to do this is adopt a more service-oriented mindset.
Think of your stakeholders as customers. After all, your team’s goal is to work with them
to meet their needs while also meeting the objectives of the overall organization.
Soft skills
While in the process of selecting your team members from various global business units,
don’t forget to give your potential team members’ soft skills sufficient consideration.
Effective category management requires a significant amount of collaboration, so you’ll
want to choose individuals you are able to work well with others or find a way to support
soft skill development within your team. (Here’s an article on five important soft skills all
procurement professionals should have.)
Summary
The strategic sourcing process is continuous one that runs over a space of months and
years. No category manager can or should run the process alone. If you’ve read through the
whole strategic sourcing guide, you’ve probably come to see who it requires individuals
with multiple areas of expertise running a number of simultaneous activities. It requires a
lot of patience to analyze and dive deep into your data. Better solutions and ideas develop
when you set up a framework for discussing and sharing ideas and addressing concerns
with the team. A strong team is a necessary asset to any successful strategic sourcing
process.

Metodologia Compra Estrategica

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The CPO’s Guide to Strategic Sourcing

A 10-step guide to strategic sourcing implementation

Chapter 1: Internal Research

There are six parts to internal data research:

2. Category risk analysis

Fig. 2 – Kraljic portfolio matrix

Fig. 3 – Total spend by suppliers and categories.

 Total spend by category and then by supplier

Fig. 4 – Total spend divided by category and supplier

5. Cost structure analysis

Fig. 5 – Sample cost structure template

6. Total cost of ownership

Fig. 6 – Sample total cost of ownership template

The CPO’s Guide to Strategic Sourcing

Chapter 2: Supply Market Analysis

There are four parts to a supply market analysis:

Fig.1 Supplier market analysis

Fig.3 Company category spend related to market revenue

4. Category risk level

Fig. 4 Category risk analysis

The CPO’s Guide to Strategic Sourcing

Chapter 3: Current Sourcing Process

You will learn:

Fig.1 Current vs. New Suppliers

Supplier base analysis

Supply chain analysis

 What is your current sourcing pattern according to the Kraljic matrix?

2. Define gaps and create a list of opportunities

Strategic sourcing in category management is a continuous process of improvement, and

The CPO’s Guide to Strategic Sourcing

Chapter 4: Strategic Sourcing

The methods we will cover:

Method #1. Porter’s Five Forces

Method #2. A.T. Kearney’s Purchasing Chessboard®

Chapter 5: The Purchasing Chessboard® and Sourcing Strategy Selection

This chapter covers the following four points:

1 Weighing your bargaining power

1. Weighing your bargaining power

 Business (spend/revenue) dependency: Look at buyer’s share of supplier’s

Chapter 6: The Vendor Selection Process

2. The Vendor Selection Process

Self-evaluation and RFIs

In the vendor qualification requirements document, you need to describe expected

Vendor Selection Criteria

Fig.2 Vendor Qualification Scorecard

Product Qualification and Site Visit

Fig. 3 Continuous Supply Base Optimization

The CPO’s Guide to Strategic Sourcing

Chapter 7: RFQ Management Process

This chapter covers the following three points:

Fig.1 The difference between RFQs and RFPs

The RFQ Process

Fig.2 The RFQ Process

Important RFQ Documents

Some example criteria that can be used in awarding:

o Functionality of product / range of services

It is against business ethics to leak price information or other supplier-specific info

Fig.3 DeltaBid’s Bid Comparison Chart

It takes under 10 minutes to see what the solution is about.

The CPO’s Guide to Strategic Sourcing

Chapter 8: Keeping the Sourcing Cycle in

This chapter covers the following three points:

1. Preparing for Round Two with Analysis and Reflection