5 Key Elements for the source input in Supply Chain Management – planning | sourcing | manufacturing
5 Key Elements for the source input in Supply Chain Management
Before you’ll have a product or service to sell to your customers, you generally need to buy things from your suppliers. We sometimes call that procurement or purchasing. But in the SCOR Model, it’s part of the source process. Let’s look at how source fits in to the rest of your supply chain.
The things you buy can be categorized as direct purchases and indirect purchases. It’s important to understand the difference because many companies divide these purchasing responsibilities between separate teams and they often use different processes. Anything you buy that becomes a part of the products you make is a direct purchase. The other things you buy that don’t go into your products those are indirect purchases. So if you run an automotive factory, the metal you buy to build cars is a direct spend and the janitorial services to keep the building clean are an indirect spend.
Whether we’re talking about direct or indirect costs, one of the goals for every purchasing department is reducing the amount of money they spend and there are some common techniques they can use. They can order larger quantities in order to get a volume discount. They can enter into a long-term agreement in exchange for a lower price. They can ask for competitive bids through reverse auction or a request for proposals. They can switch to a lower cost supplier and they can ask your current supplier to reduce their prices. While each of these techniques can be effective, they can also have expensive side effects. For example, placing larger orders can cause you to carry more inventory and committing to long-term agreements could reduce the flexibility of your supply chain.
That’s why many companies are adapting an approach called strategic sourcing. With strategic sourcing, you take into account other supply chain priorities like transportation and inventory costs, risk management, quality, and sustainability. The result is a metric called your total cost of ownership or your total cost to serve. In addition to measuring your total cost to serve, the APICS Supply Chain Council recommends several cycle time metrics that you can use to assess the performance of your source process.
Managing your source processes correctly can lead to cost savings, but it can also lead to additional benefits like increasing revenues, reducing risks, and improving sustainability. Implementing supply chain management allows you to use strategic sourcing to evaluate the real impact that your purchasing decisions have on your whole business.