Strategic sourcing is an efficient method through which the collected data can be analyzed to derive market research, negotiation, contracting, and forecasting prices. It standardizes the process that is used to gather and arrange the information that an organization can use.
It is a procurement process through which efficiency is achieved in supply chain management. With strategic sourcing, one can manage the spend categories, minimize the supply risks, and understand the pricing.
The organization then exercises the results rendered from the information analysis and uses its consolidated purchasing power. Thus, it can find the best value for a commodity in the market to satisfy the purchasing strategy with the business goals.
Growth through Strategic Sourcing
Strategic sourcing is popular because of the continuous digital transformation of the industries and the integration of various management tools and software to automate different processes. The process is based on the commodity that the organization buys, like the source, quantity, and price.
- Strategic sourcing focuses on the costs of the initial purchases along with the total cost of ownership.
- It also includes optimizing the source from where the commodity is bought, analyzing the market, and building relationships with the suppliers.
Before the rise in competition because of globalization, most companies considered sourcing as procurement. Sourcing was the measure of ownership of capabilities by a company. However, with the changes in the marketplace, the idea of sourcing has evolved to the ability of the company to control and extract maximum profit from the most critical situations.
With the spread of resources worldwide and the advent of technology and the internet, the process of outsourcing has become sophisticated and well-managed. Services and core functions such as marketing, research, development, engineering, manufacturing, etc., can now be acquired from other sources.
How does Strategic Sourcing Work?
The process of strategic sourcing can be customized as per the requirements of the customers. However, the goal of the process should be to create an integrated system that can help the organization boost its profitability.
Whether the process of strategic sourcing is observed in large organizations as a wider version of the category management plan or in mid-size organizations where strategic sourcing is followed for critical commodities, the process involves seven steps.
However, for the methods devised for strategic sourcing to be successful, the management should support the process, and the team should define clear and achievable objectives. Along with this, the stakeholders, shareholders, and other interested parties should be involved in the process.
- Understand the Category
The first step of strategic sourcing should be to define and understand the sourcing category. What quantity of commodity or services is being sourced, the types of categories, in what sizes? These are some of the details that need to be considered.
Along with that, one should also record the details of the end-users of the commodities, the geographical location of these users, and the people involved in the supply chain of its production. To understand the category of the commodities, one must ensure that their spend analysis is transparent. The data collected in this stage will be stored, sorted, analyzed, and as the last step, validated.
- Understand the Supply Market
The next step is to study and record the cost drivers, including the aspects included in producing the commodity of service that adds to the total cost. The prices of the raw material, labor cost, transportation cost, etc., are some of the elements that need to be analyzed. While recording these aspects, analyze the external marketplace to find new local and global suppliers. Also, find the alternatives to the current suppliers based on the analysis of risks and opportunities.
- Develop a Strategy
The sourcing strategy aims to reduce the costs and risks related to buying the raw product for production. One can choose to find an alternative or renegotiate with the current supplier. The team created to develop the sourcing strategy should include the subject matter experts and end-users, and the stakeholders so that the strategy can meet all the business requirements and fulfill the capabilities.
- Select the Required Process
There are various processes through which strategic sourcing can be employed. One of the most common methods is Request for Proposal (RFP), under which the specifications such as delivery and service requirements, legal terms and conditions, etc., are defined. RFP is used to solicit bids, and thus, needs RFI (Request to Information) to assess the qualifications of the suppliers.
To facilitate better communication and contracting during the sourcing process, cloud-based software is used. Such software ensures that the process is transparent and defendable.
- Choosing a Supplier
The next step of the process will be to conduct various rounds of negotiation with the supplier. A list is created that includes the shortlisted suppliers who fulfill the required criteria. Once the negotiation is completed, the contract is signed by both parties. One can implement the use of various software solutions to automate the process of contract management.
While implementing and integrating the solution, one must ensure that the supplier, end-users, and other people affected by the production are included. A seamless and strong communication should be developed so that the sourcing solution can be implemented properly.
- Track Results
To measure the success of a strategic sourcing plan, it is essential to track its results. With the use of proper technological tools, one can measure where and how the supplier is adding to the value of production of the commodity or the service. Automated software can be implemented to generate reports and gather feedback such that supplier relationship management (SRM) can be assessed.
One should keep in mind that strategic sourcing is not a linear process. It does not end at reviewing the feedback and tracking the success of the process selected. Once the process is completed, one needs to restart the process and check the market conditions and suppliers again.
The Benefits of Strategic Sourcing
Through strategic sourcing, companies evaluate and analyze the market along with the sourcing suppliers, thereby ensuring that they always are in search of possible ways to reduce the costs.
Companies can ensure that its business goals are aligned with component sourcing. Thus, one can boost the efficiency of the supply chain while considerably reducing the risks.
The companies can create high value at low cost by ensuring that they analyze the sourcing suppliers on more inclusive costs other than the initial product cost. With the help of such analysis, they can ensure that the supplier they choose fits the criteria of their business goals.
Here are the ways through which strategic sourcing benefits organizations.
One of the most noticeable advantages that strategic sourcing provides is cost savings. When purchasing the raw material of a commodity at a higher volume, the businesses can negotiate to reduce the costs of the goods and services.
Thus, the company can increase profits by controlling the price of their goods and ensuring that they are kept to a minimum. The suppliers also prefer such an arrangement as it allows them to make long-term plans and sell a huge amount of their output. It also allows maintaining cash flow visibility long in the future.
- Stability of Supply
Through strategic sourcing, the organizations can ensure that they can get the material they need at all times. The process of strategic sourcing helps develop long-term supply partnerships. Without a proper and regular supply of raw materials, the businesses cannot have enough or proper goods and services available at a crucial time. It can result in loss of profit or degradation of the quality of the product, thereby affecting the relationship of the business with the customers.
With the help of a well-planned process of strategic sourcing, the businesses can ensure that their future procurement needs are planned so that they can avoid such situations that can lead to harm to the business.
- Risk Management
Strategic sourcing is also effective in reducing the risk companies can face during the supply chain process. The businesses can resolve any issues that they face during the supply chain to support better relationships developed with the suppliers. Strategic sourcing also enhances the communication between the suppliers and businesses so that there is no room for confusion or misconception.
- Better Organization
As the process of strategic sourcing is long-term by nature, it ensures that the businesses plan the supply chain process for the future as well. Thus, with strategic sourcing, the businesses can ensure that they are prepared for any event that can occur in the future, that may or may not be in favor of the business.
With long-term planning, the leaders can better regulate the risks and processes that are involved in the supply chain.
Various Approaches to Strategic Sourcing
With the change in the market and the rise in globalization, the line between insourcing and outsourcing has blurred. Both these practices have become interdependent and complex, such that they can cover a plethora of needs the businesses have to consider.
Here are some of the prominent strategic sourcing approaches that can transform the relationship between insourcing and outsourcing.
The method of crowdsourcing refers to the process when the businesses choose to outsource a particular process to people who are not related to or are external to the organizations. Most of such processes that are outsourced are traditionally performed internally.
With the help of crowdsourcing, businesses can overcome the limitations that they have in knowledge and experience. Also, through this method, they can utilize the labor capacity and skills available at a particular location.
Crowdsourcing services are employed on demand. Various volunteers, contract workers, and other such people combine and work on their own initiative to accomplish the task that is outsourced.
2. Solution Sourcing
When the company needs solutions for complex activities that require highly technical knowledge, solution sourcing can prove to be a great alternative to crowdsourcing. Under this process, various external service providers create and develop a solution for the organization as per the organization’s needs and requirements. The service providers can be independent or associated with another company.
With the help of solution sourcing, the organizations can receive various ideas and resources that they can apply to simplify the ever-rising business complexities and challenges. These challenges are assessed by experts who are well-familiar with their technicalities.
Solution sourcing provides various benefits to the businesses, such as a varied diversity of solutions, boost innovation, and faster processes. Along with that, the businesses can initiate solution sourcing at a low cost.
3. Network Sourcing
Network sourcing can be classified among the following three types of interaction.
- Purchasing network
Such interaction consists of two or more businesses or organizations collaborating to get better and more profitable pricing than the pricing, which would have been possible if the organizations were working independently.
- Service provider network
Through such an interaction, the businesses can communicate with the community of professionals and industry experts to get help to resolve any business-related or technical challenges that they may be facing.
- Network to network
Network to network interaction refers to the process that occurs when any of the above two associations purchase the services.
Network sourcing can effectively increase access to various services that cannot be available internally. Also, it can help the organization to boost its standards and economies of scale. With such interaction and collaboration, both sides can receive access to more expertise and resources, which would not have been possible in case both the parties were working independently.
Businesses can gain flexibility in their organization as they do not need to invest in procuring and developing such skills and technical knowledge internally.
Co-sourcing occurs when both parties enter into a long-term relationship such that they are both invested in the outcome they both gain from the collaboration. The process of co-sourcing refers to a partnership under which the service provider and the client organization or the asset manager create workgroups to integrate their functions. Through this collaboration, both the parties provide customized support to each other as per their requirements.
Most processes included in co-sourcing last for three to five years. The process generates an interdependent relationship through which the operations and managerial tasks of both companies are integrated. The goal of such collaboration should be to create a competitive advantage. The businesses can ensure that they receive better value and lesser risk through the process of co-sourcing.
Co-sourcing can boost transparency in the managerial and operational tasks of the companies along with boosting innovation. It also allows a smooth exchange of knowledge between both parties.
5. Mesh sourcing
Unlike other sourcing between two organizations and businesses, mesh sourcing is not a one-on-one relationship. It is a complex web of multiple relationships through which different organizations are tied together. Each of these interdependent parties has a particular interest that they share with others. These interests could include values, social change, profit, brand recognition, etc. Through mesh sourcing, one creates a hyper-specialized environment through which various businesses are integrated.
It is an environment spread across several organizations to outsource and receive services. Thus, with mesh sourcing, the distinction between outsourcing and traditional business practices ceases to exist.
Mesh sourcing provides a collaborative environment to businesses searching for innovative ways through which they can integrate with other businesses to maximize their value and generate sustainable returns.
The process of mesh sourcing is maintained by ensuring that the interconnectedness between different organizations and businesses is sustainable and efficient. Thus, it enhances the access a single company can have to various services while also boosting the economies of scale.
6. Vertical Integration
Vertical integration is the collaboration of companies at different stages of production, supply chain, or distribution of the product. Backward integration occurs when the company acquires a supplier to provide the product. When the company acquires other companies so that they are responsible for distributing the product, then it is called forward integration.
Benefits of Automated Strategic Sourcing
Strategic sourcing can be best implemented with the help of technology. With the help of software and applications, one can automate the steps that are involved in the process of strategic sourcing. One can get the following benefits by employing technology with their sourcing strategy.
- Increase efficiency of the process while lowering the costs
Through automation, one can reduce the complexity of management of strategic sourcing. Using filters and analyzing the spent data recorded by the software, one can easily notice how and where they need to change and adjust their sourcing strategy.
- Enhanced optimization
Automation can identify the places where costs can be reduced by making changes. It also helps in reassessing the rates and services provided by a supplier quickly and accurately.
Strategic sourcing software can standardize the process and generate reports about the suppliers, commodities, and business needs. It can be a part of a comprehensive procurement system or procure-to-pay software.
With strategic sourcing, one can ensure that their procurement processes are more focused on prices. It helps to evaluate the value of the business long term. With strategic sourcing, one can reduce the costs by selecting and negotiating with the supplier who best matches the needs provided in the business plan. It also provides a detailed outline regarding measuring the performance of the strategy and how it can be improved and adjusted to meet the changes in the market.