Vendor Selection for Strategy
Vendor Selection & Quality Management: Sourcing as a Stratagy
"It’s no longer ownership of capabilities that matters but rather a company’s ability to control and make the most of critical capabilities. " Harvard Business Review
Forward-thinking companies are making their organizations more flexible. And with the decline of the vertically integrated business model, sourcing is evolving into a strategic process for organizing and fine-tuning the value chain. The question is no longer whether to outsource a capability or activity but rather how to source every single activity in the value chain.
In selecting vendors you'll certainly want to ask yourself, What should I keep in-house and what should I outsource? In other words, what are your most critical capabilities?
And remember during the selection process that performance is about more than just a low purchase price: The costs of transactions, communication, problem resolution and switching suppliers all impact overall cost.
A CASE STUDY- 7-ELEVEN
We weren't surprised to open Entrepreneur Magazine a couple of months ago and see that 7-Eleven took the top spot in their 2017 Franchise 500 ranking! That's because we've been watching them (and other rockstar businesses). However, they weren't always on top. n 1991, when 7-Eleven's current CEO Jim Keyes was named chairman of the executive committee, the retail was losing both money and market share.
Keys launched a business review and it became apparent that 7-Eleven was trying to do too many things and was not good enough at any of them. It operated its own distribution network, delivered its own gasoline and made its own candy and ice. It even owed the cows that produced the milk it sold. Keyes found it hard to believe that a company could be best in class in every one of those functions and began structuring partnerships to outsource critical capabilities. Citgo began supplying gas and Frito Lay along with others become snack food suppliers.
First, by utilizing the scale of a specialist, 7-Eleven immediately cut distribution costs by 5%. However, the real gains came in service. Instead of delivering fresh goods to its stores only a couple of times a week, "they" began making deliveries twice a day. This meant fresher products which drew in customers. Their sourcing strategy transformed the company. In narrowing its focus to a small strategically vital set of capabilities, the company had reduced overhead while streamlining capabilities. It reduced head count by 28% and cut managerial levels in half. Inventory turns increased to 72% more than the industry average.
So you're asking...how does this help my business? Here are three Considerations from our research for custom home builders in working with vendors.
First: Identify your critical capabilities
Is design one of them? Is having your own framing crew a core competency? If not, outsource. Ask yourself if by partnering with specialists can gain you some benefits?
Second: Track Vendors with Supplier Scorecards
Keeping scorecards are the best ways that larger manufacturers keep track of supplier performance. We can do the same with our vendors: Keep a database and review annually.
Third: Consider Single Sourcing: Advantages of using one or few vendors
Research shows that these are the benefits from to stretching your vendor pool too wide. Keep those specialties close to you and reap these benefits.
#1 Lower Administrative Burden & Faster Onboarding
Engaging a few vendors to work more often (rather than sporadically) will help keep their knowledge of your specific requirements fresh, requiring less ongoing training from you.
#2 Buying Power
Many vendors are willing to negotiate volume discounts when receiving high volumes of work.
#3 Quality Control
It’s far more efficient and effective to impose standards on and to oversee the quality of fewer vendors, allowing for a greater degree of performance management.
#4 Stronger Partnerships
Stronger partnerships are good for client relations and make working life more simple and more enjoyable. Who doesn't want that?!
Harvard Business Review: Strategic Sourcing from Periphery to the Core