Purchasing
departments are increasingly seen as highly valued strategic contributors to
the organisation because of their ability to impact product design and quality,
cost of goods sold, cycle time, and hence, the firm’s reputation,
profitability, and competitive position (Wisner, Tan & Leong, 2008).

Searching
for the right sources of supply is often seen as one of the core responsibility
of procurement and supply managers. Because this purchasing function poses a
great deal of risk and reward if effectively executed, it represents one of the
most challenging of all procurement tasks.

Over
the past decades, a lot of factors have combined to drive the organisations to
approach sourcing more strategically. These factors include changing global
economic climate, increasing number of global competitors, demands by customers
and government for organisations to become more environmentally focused, rising
cost of materials and energy, and the desire to deliver new products quickly
and cheaply.

With
these trends, the recognition that tactical sourcing will not succeed in
developing a supply base that will yield the benefits of strategic sourcing
became clear. Strategic sourcing takes the concept of sourcing a step further
to go beyond just source identification and selection to include managing the
firm’s external resources in ways that support the long-term goals of the firm.
Its scope includes the make-or-buy decision, supplier identification and
selection, managing and improving supplier relationships and capabilities,
monitoring and rewarding supplier performance, and developing supplier tiers.

Effective
strategic sourcing decisions will only be made when all relevant factors have
been considered and weighed against the risks and opportunities which apply.

It
would be possible that the most important purchasing decisions is not only
concerned with selecting the right sources of supply; but also developing and
managing a collaborative relationship that is beneficial to both parties in the
long run.

If
the correct source decision is made in a particular instance, then the buying
company’s need should be met perfectly. In such circumstances, it would receive
the required goods and services at all times. However, the very simplicity of
this statement conceals the complexity of source decision making, for in
arriving at the right decision, many factors have to be considered.

Strategic
sourcing thus involves much more than simply picking a supplier or contractor
for each requirement in isolation. It involves continuing collaborative
relationships both with preferred and potential sources. It involves decisions
on how to allocate the available business, and what terms to do business on.
Development of collaborative relationships and eventually world-class supply
management requires concerted strategic planning.

Strategic
sourcing deals with planning, designing, and building a reliable and
competitive supply base, determining the strategy for procurement, defining
pricing strategies and supply chain requirements. The strategy involves
integrating of its objectives in line with or conforming to the objectives of
stakeholders in operations, finance, marketing and distribution. Operating at
this level requires procurement, manufacturing, and technology groups to work
together to establish the best possible supply network, and to develop optimal
supplier capabilities.

Strategic
sourcing decisions are not just made based on the procurement managers’ whims
and caprices. They represent astute business judgment and thus involve the
consideration of several factors.

Profitability
in simple terms is the ability to make profit. Profit is a function of cost
minimization. Finding the best suppliers means that an organisation will be
able to get greater value, lower prices, supplier involvement in production
efficiency, high quality materials, discounts, and better relationships. All
combining to reduce the costs of doing business and add to the profitability of
the organization. Also, by developing strategies that will make the
organization have fewer suppliers, purchasing costs can be reduced, saving some
few coins for the profit.

Organisations
that seek to acquire quality materials and services at reasonable costs or
produce quality products at affordable price must first develop strategies
that will help find credible sources of supply of materials, equipment and
services, and build strong sustainable relationships. Sourcing is a very
important part of procurement manager’s job. Most supply professionals espouse
the idea that the entire procurement function is string around sourcing.

The
risks of buying the wrong items, services or from the wrong supplier can have
major impacts and ripple throughout a business. Consequences can range from
late delivery to total service failure liability and can even affect market
competitiveness. In addition, if the selected suppliers cannot provide
opportunities to reduce costs, improve and upgrade product/service offerings or
provide other market-facing advantages, then an organization can quickly find
itself losing market share. To help solve this dilemma, businesses are
beginning to develop sourcing strategies that can create supply chain solutions
offering insights into the optimum approach to buying. Often known as strategic
sourcing, it begins the critical process and lays the foundation for creating
value through the purchasing process.

1.2             
Statement of
the Problem