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Strategic sourcing involves planning, scheduling, and group purchasing to save costs and increase profitability. It requires group purchasing, centralized sourcing services, and sourcing data management systems. Effective communication and cooperation between business units and financial services are crucial. Group purchasing can negotiate lower costs per unit, and centralized procurement staff can reduce administrative costs. Procurement management systems help manage the business process, identify savings opportunities, and ensure policy compliance.
The main concept of strategic sourcing is that through advanced planning, scheduling and group purchasing initiatives, a company can experience significant savings. In addition to the large dollar savings, there will be additional savings generated through a more efficient business operation and therefore increased profitability. Implementing strategic sourcing within a company requires three sourcing concepts: group purchasing, centralized sourcing services, and the use of sourcing data management systems.
Strategic procurement concepts require communication and cooperation between the business unit and financial services, and that procurement be implemented effectively. Even a simple concept, like encouraging planned purchases, can cause major operational problems if not discussed with the business unit. For example, a bakery might order dry goods each week, based on the work orders scheduled for that period. If the purchasing department decides it is more cost effective to order these materials once every two weeks, the kiln will experience difficulties with storage, access and loss prevention.
Group purchasing is the process of combining the total resource requirements for different departments within the company and issuing a standing purchase order. This single order is for a larger quantity than multiple smaller orders. Therefore, lower costs per unit can be negotiated with the supplier. If departments are physically located in a number of buildings, the contract can set delivery windows and address delivery costs. This practice is quite common in large companies, as part of an integrated strategic procurement business plan.
The administrative cost is the cost to the organization for the entire procurement cycle to pay. This includes salaries and support costs for personnel involved in purchasing, invoice processing, production control, and vendor inquiry resolution. An organized and managed process eliminates a significant amount of these costs, as they are incurred only once for each commodity. Centralized procurement staff can provide a greater level of support to business units and ensure that policy is followed.
Procurement or procurement management systems are often delivered as part of large accounting software or enterprise resource planning solutions. This form is used to create purchase requisitions and purchase orders and related invoices and process goods receipts. In addition, the analysis and reporting tools integrated into this type of system allow the purchasing department to manage the business process, determine the overall costs for the institution and identify potential savings opportunities. The reports can also be used to ensure compliance with policies and as evidence in response to any legal challenges.
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