Introduction

Marketing, Finance and Production have so far been regarded as the focus-area of top management. Things are changing; increasing awareness that the company spends 60 – 70 % of the cost of goods sold in purchasing has made purchasing a promising area to hunt for facing global competitiveness. This fact has been realized by some of the progressive companies in India along with its counter parts in Western World, Tata Steel is one amongst them. The matrix shown in the figure: 1 defines the impact of purchasing function for an organization:


Companies are now placing best people in their purchasing functions. While skilful contract negotiations could extract price discounts of between 1 and 5 percent from suppliers, today’s cost pressures for 10 to 30 percent price reductions require a totally new set of purchasing skills: challenging materials specifications, questioning products and their package designs, and influencing “make” versus “buy” decisions etc.

Further with increased competition in the marketplace, an organization’s success could well be tied to the ability of its suppliers to invest in new product development, respond to a change in demand or indeed work together to achieve improvements in network or manufacturing design and efficiency. Purchasing and supplier collaboration can reduce the need for large inventories and quickly introduce goods and services to accommodate new product designs as well as changes in existing ones.

In situations like this, program like Strategic Sourcing, which focus on the following assumes greater importance in keeping organizations competitive advantage.

• Developing in-depth understanding for knowledge based buying
• Developing systems and procedures for building World–Class purchasing organization
• Building sustained value creating relationships with suppliers

Strategic Sourcing is being recognized as separate function and necessary action is being taken by most of the corporate in this field. World over, though the objective of Strategic Souring is same, organizations adopt different ways of implementing it, so does Tata Steel.

Strategic Sourcing Methodology:

What is Strategic Sourcing? 

A typical Purchasing Function is limited to transactional job of collecting information about the requirements of user department and carrying out commercial checks and balances to finally procure the product & service. The information collected in the process is rather consequential and the relationship with vendor at best one sided.

Strategic sourcing recognizes that people, including innovative suppliers, are a valuable part of an organization and focuses on reducing waste or non-value-added costs. It is defined as: “A disciplined, systematic process for reducing the total costs of externally purchased materials, products and services while maintaining or improving levels of quality, service and technology”.

Strategic Sourcing studies are tedious and time-consuming initiatives. The block diagram of strategic sourcing methodology followed in Tata Steel is shown in figure: 2.

Commodity Matrix:

The process of strategic sourcing starts with spends analysis, which identifies, consolidate and standardize information from a wide range of data sources. The outcome of this spend analysis is the commodity matrix. Tata Steel, part of its annual Strategy Development Process, revisits ‘Commodity Matrix’. It is a methodology for classifying commodities in four quadrants. It categorizes expenditure on two dimensions: Complexity of the product and saving potential of the product. Analyzing these dimensions of the product / service reveals the commodities that are to be considered for strategic sourcing study. (Refer figure: 3 for ‘Commodity Matrix’)

Core items are those that directly impact the company’s throughput. The buy value of these items are high and so the complexity of product. These items are generally manufactured by medium to large companies; the thrust is on developing alliances. E.g. Refractory for Steel Industries, Sponge iron, Aluminium etc.

Commodity items do not directly impact the company’s throughput, but they play an important role in reducing the downtime of the plant and machinery. Complexity and saving potential of these items are less comparison to core items. Since these items are typically bought throughout the company under various applications (wide variety) and their demand too fluctuates, the challenge lies in consolidation & standardization. e.g. Cement, Electrical and Mechanical Spares etc

General items, like commodity items, do not impact the throughput of the company but they facilitate the creation of a congenital working environment. These items are also bought throughout the organization but unlike commodity items they are more or less standardized. So, the challenge lies in consolidating company-wide buy so as to maximize the volume. E.g. cell phone, personal computers, printers and other office supplies.

Critical items: these items are important from the safety, health and ergonomics point of view of the employee. The complexities of these items are high – what is important here is the right specification.
The Structure of Strategic Sourcing @ Tata Steel:
Strategic sourcing studies are cross-functional in nature and are called Commodity Competence Teams (CCT). CCT comprises members from user departments, expert groups, commodity managers from procurement organization (supplier inclusion on need based) etc.

Segment Steering Committee (SSC) (figure no.4) which review the progress of Strategic Sourcing initiative are chaired by senior executives of the company and comprises members from user departments, expert groups etc (see figure). SSC provides:

• Provides strategic direction and guidance,
• Establish performance targets,
• Review progress of the CCTs, and
• Provide support for successful implementation.

At the end of in-depth study on internal requirements and external analysis of commodity, CCTs has two methodologies for performing Strategic sourcing study:

• Strategic Sourcing through Sourcing Levers,
• Strategic Sourcing through Supplier Value Management (SVM)

Strategic Sourcing through Sourcing Levers

This methodology talks about appropriate supplier screening mechanism, developing process maps and bottom-up costing etc. After completion of these steps, the team develops appropriate sourcing levers closing the deals with the suppliers.

Strategic Sourcing through Supplier Value Management (SVM):

How it is different from Sourcing Lever Approach of Strategic Sourcing:

The sourcing lever approach of Strategic Sourcing addresses the internal value chain of Tata Steel and some cases goes up to distribution channels of suppliers. The “Supplier Value Management” not only address the internal value chain, but it also addresses the value chain of suppliers. Unlike other process, SVM considers the value chain of the supplier and that of Tata Steel as the single entity and understands that any enhancement / improvement at the suppliers end will directly enhance the value delivered to the end customer. This program also gives an opportunity to study the supply chain of the suppliers and identify revenue leakages.

Selection of commodity for SVM:

The selection of commodity and the supplier is the main distinguishing factor between SVM and Sourcing Lever approach of Strategic Sourcing. Tata Steel follows following criteria for conducting SVM with suppliers:

• Supplier should be a manufacturer
• Tata Steel’s to be key customer for the supplier
• The commodity should have direct impact on Tata Steel’s throughput
• Share the same values and culture of Tata Steel (Cultural fit)
• Willingness to be a long-term partner with Tata Steel

Conclusion:

As companies seek to discover ways to increase overall excellence and competitiveness, a new source of value has emerged – Strategic Sourcing. Strategic Sourcing is a proven approach to understanding and delivering significant cost reduction and building a sustained value-creating relationship with the suppliers.

The fundamental objective of any organization is lowering the cost of goods manufactured. This can be achieved through reduction in prices of purchased products & services and reduction in their specific consumption. Strategic Sourcing does exactly the same by addressing the total cost.

Purchasing Organizations have come a long way over the past decade. From the starting point of the traditional buy-sell, transaction-based purchasing, the practice has moved through stages of change that redefines most aspect of the business.

At Tata Steel, Strategic Sourcing has delivered 80 million US $ over last 5 years and these savings continue to grow every year. This has played a key role in making Tata Steel the lowest cost producer of steel.