In Part 2 of the procurement series, Anna Van Cleef discusses a high level view of the Source-to-Contract process and the best practices for procurement professionals.
As mentioned in part 1 of this series, the Source-to-Contract process is key in finding sources of supply for goods and/or services that are needed by the organization, selecting the right supplier to achieve those desired goals, and leveraging the right contracting strategy to achieve a win-win outcome.
Once a decision is made to procure goods and/or services based on a need, Sourcing and Procurement must find suppliers to achieve the organization’s goals. Sourcing and Procurement professionals have access to multiple resources to get started on defining an initial list. Some of these resources include: incumbent suppliers, trade associations, trade press, exhibitions, business advisors, directories, recommendations, government approved lists, competitors in the market, and other sources in which your organization has access.
After compiling a list of potential suppliers, the process of selecting the right supplier begins. Oftentimes, the first step is to gather additional details about each supplier to assist in the decision making process. Key information can be sourced from online research, recommendations, or through a Request for Information (RFI).
Once information about the suppliers has been gathered, there are a number of ways to refine the list of suppliers to make the final decision. Today, we will go just a little further into two such methods: Three Bids and a Buy and Supplier Scorecards.
This informal procurement method allows Sourcing and Procurement professionals to find three potential sources of supply, often one being the incumbent supplier, and determine based on the limited options, which is the best source of supply.
This method is often used when trying to find the low cost provider in a category with lower risk or overall spend.
When evaluating higher spend, new, or higher risk categories, the Supplier Scorecard method provides a more complete picture during the supplier selection process. Based on the aligned sourcing and procurement strategy, selection criteria for the supplier scorecard should be defined.
Criteria for a supplier scorecard can fall into many categories. Some of these include: price, quality, on-time delivery, financial stability, long-term potential for partnership, reliability, alignment to company philosophy, geographic support, transportation, travel costs, etc.
Leveraging your aligned selection criteria and the responses from the RFI and other types of requests, the Scorecard can be completed. Each criteria should have a weighting that aligns to the value that that criteria has toward enabling the goal for the organization.
Limit the potential suppliers to between 3 and 10 by identifying which suppliers do not meet the minimum criteria and remove them from the process. With the final list of suppliers, include other evaluators from within the organization to score each criteria. Additional sessions with these suppliers may be necessary to further clarify answers from the RFI and other requests that can drive the evaluation process.
Once clarifications have been made, the evaluators should input their scores for each of the remaining suppliers. Based on a weighted average, the supplier to select to achieve the goals of the organization should have the highest score.
So now that you have the supplier, and one or more backup options, make sure you apply the right contracting strategy to achieve a win-win outcome for both organizations.
Go back to the original goals of the organization regarding this sourcing or procurement event. Is this a strategic contract or is it transactional in nature? How do the organizations align on Porter’s Five Forces? Based on these and other details, ensure everyone on the team understands the strategy before the negotiation.
Often, negotiations start with an initial quote. This quote typically comes from a Request for Quote (RFQ) or Request for Proposal (RFP). This gives the organization a baseline understanding of where the supplier stands on key cost factors. This information may also have been used during the selection process.
Before beginning a negotiation, know your organization’s position on each negotiation point. Where is your organization able to compromise? What are deal breakers for your organization that would cause the deal to dissolve? What are the necessary outcomes for your organization to drive toward value creation and a win-win for both sides? The goal of negotiations should not be a “win-lose” approach where one organization plays “hard-ball” on all areas within the negotiation. This doesn’t lend toward long-term partnership and causes strain during the life of the contract. Drive toward the “win-win” where both organizations are able to achieve what is important to them or reach an appropriate compromise creating value for the supply chain as a whole.
Once negotiations have concluded and a win-win outcome has been achieved, it is time to put everything on paper. This consists of draft contracts between both parties seeking legal review and alignment until both parties agree and the contract is executed. Communication of the contractual terms and conditions to impacted stakeholders is important to ensure that the terms of the contract are upheld.
Original article posted on Medium by Anna Van Cleef