What is Strategic Sourcing?
Strategic sourcing optimizes a company’s consolidated purchasing power to find the best valued goods and services in the marketplace. It involves designing and executing a procurement plan with the end-to-end costs and opportunities considered. Cost factors cover the total cost of ownership, not just the purchase price of the materials. Opportunities such as consumer-demand-driven supplier partnerships and showing transparency in the supply chain are included to build customer trust.
How Does Strategic Sourcing Work?
The process incorporates companies working in-house or outsourcing their procurement model to professionals to build the best strategic sourcing model based on what has been provided. Through this, businesses can focus on their revenue-generating activities with more concentration.
As part of the sourcing process, what the organization buys, from whom, at what price, and what volume are analyzed. Strategic sourcing differs from conventional purchasing as it emphasizes the entire life-cycle of a product rather than its original purchase price.
Benefits of Strategic Sourcing
Now that the idea of strategic sourcing is well-defined, it is essential to understand its benefits and why it makes sense for more companies to adopt strategic sourcing. There are various advantages a company can leverage by implementing strategic sourcing. Those are:
- Increased Level of Cost Savings
The most prominent benefit companies will experience from strategic sourcing would be higher levels of cost savings. Identifying and selecting suppliers who provide the highest value at proper pricing will enable a company to achieve higher cost savings continuously. According to reports, 54% of top procurement professionals have identified cost savings as a critical focus area and strategic sourcing helps attain that goal.
- Better Arrangement of Sourcing and Business Objectives
Properly arranging the sourcing activities of a business to its organizational goals and objectives is at the heart of strategic sourcing. The better arrangement allows the company to achieve higher business performance with increased efficiency and minimal supply chain risks.
- Long-term Relationship with Suppliers
Strategic sourcing helps a company build long-term relationships with its suppliers. By strengthening the focus on the core capabilities of the suppliers and encouraging the right suppliers for a proper sourcing objective, strategic sourcing helps build a synergy between companies and their suppliers. Sustained relationships with suppliers also suggest that when the suppliers are valued and allowed in various sourcing decisions, they feel motivated to enhance their performance to meet the company’s objectives.
How Do We Implement Strategic Sourcing?
Here are Some Common Steps to Effectively Implement Strategic Sourcing in your Business
Knowing the benefits of strategic sourcing brings us to designing a process to implement strategic sourcing in a company. While a single strategy might not match the specifications and requirements of every company, we can outline a basic structure that guides the strategic implementation of a sourcing process:
- Identify and Categorize Spend Profiles
Before initiating the strategic sourcing process, identify the spend areas present across all the business areas in the company and categorize them based on how critical/non-critical the spend area is. Categorization will help you in prioritizing the sourcing activities for each spend area. If needed, other categorization criteria that better suit the business requirements can also be developed (e.g., domestic/international spend, direct/indirect spend). It is necessary to do a risk analysis of the chosen spend categories to prioritize and develop strategies in such cases.
- Building a Sourcing Strategy
Another step includes a strategy building on how each categorized spend area will be proposed. This helps identify the requirements of the business units that necessitate spending and defining goals, objectives, and timelines to meet the requirements. This also compels building a communication workflow so that all stakeholders associated with the respective sourcing projects have clear visibility of upcoming updates.
- Analysis of the Supplier Market
This step involves executing an in-depth analysis of the current and future suppliers to understand and evaluate suitable supplier profiles. This includes analyzing the revenue/market share of suppliers to know their market position and industrial performance along with the risks and opportunities of the supplier market.
- Request for Supplier Information & Identifying the Selection Criteria
As soon as the supplier market research is completed, the next step can be to request RFIs/RFPs/RFQs from suppliers. It is crucial to communicate the exact requirements of the organization as well as the end goals and performance expectations so that the suppliers have a clear understanding of what the organization needs. This is important to provide an accurate path and develop strategies to fulfill the business’s objectives.
The information submitted will provide insightful data—the pricing structure, delivery and warranty terms, product/service specifications, etc. After the submitted data is verified, the selection criteria can be identified for supplier selection.
- Selecting Suppliers and Executing Contracting Process
After identifying selection criteria, then suppliers offering the highest level of cost savings and deliver quality. After selecting a supplier for the relevant spend areas, the contracting process starts onboarding the suppliers.
- Measurement and Periodic Tracking of Supplier Performance
The strategic sourcing process doesn’t end at choosing a supplier. This step is to efficiently measure how suppliers perform with regard to the requirements and objectives of the company. It is essential to engage in periodic tracking of supplier performance and to identify areas for improvement. This can significantly help businesses understand supplier risks and design strategies to decrease many possible supply chain disruptions.
- Implementation of Supplier Relationship Management (SRM)
Another step in the strategic sourcing process is factoring Supplier Relationship Management (SRM), making the relationship between the organization and suppliers a loop instead of a one-way process. SRM enhances collaboration between an organization and its suppliers by transforming a small customer-buyer relationship into strategic value partners. Both parties participate in building proposals and innovative strategies that optimize the sourcing needs of the company. The relationships that emerge from such synergized collaboration are long-term and can be leveraged to enhance supplier performance. The Supplier Relationship Management (SRM) links suppliers and organizations to meet current and future requirements in the most efficient and value-maximizing manner.
What’s the Difference Between Strategic Sourcing vs. Procurement?
Procurement and Strategic Sourcing are similar, but different. Strategic sourcing helps to understand where the two overlap and what differentiates strategic sourcing and procurement.
Strategic Sourcing is a portion of vendor management, and vendor management is a core procurement competency (or digital e-procurement). Finally, e-procurement is a portion of the larger practice of supply chain management.
Procurement is the process of sourcing and implementing partners, including placing orders and contracting for services, following up throughout the process/project, and ensuring payment. Procurement overlays the entire life cycle of how your business engages with a vendor, from the initial search to the completion.
Strategic sourcing occurs at the very beginning of procurement. It is where the stage is set. Before any contracts are signed, any purchases are made, or any agreements are inked, supplier sourcing must take place. The sourcing process identifies the ideal supplier for your needs.
With a strategic sourcing framework, the whole procurement life cycle is developed. Selecting strategic suppliers has an enduring ripple effect for your organization. When executed well, it makes the entire procurement process run smoothly. Strategic sourcing is an investment in the procurement process.
|Strategic Sourcing – Choosing a Vendor||Procurement – Doing the Work|
|Initiates the partnership||Extends through full relationship|
|Evaluates long-term goals||Focuses on a specific need|
|Involves lots of internal inputs||Involves narrow group of people|
|Focuses on caring and examining vendors||Focuses on acquiring groups|
|Long-term planning and thinking||Action and goal-focused strategy|