Any business or company and their suppliers are the two important players in the strategic sourcing process.
Strategic Sourcing Guide: Processes, Types & Benefits
Learn Strategic Sourcing, its Needs and Benefits in Supply Chain Management & Discover Important Tips to Implement Strategic Sourcing for your Business Today.
Strategic sourcing is an integral part of supply chain management that provides a systematic approach to assure timely delivery of goods and services and decrease the risk and costs involved in the supply chain. Strategic sourcing requires active collaboration between various departments of the business.
What is Strategic Sourcing?
The process of strategic sourcing involves businesses outsourcing their procurement system to professionals who can create the best possible model based on the company’s requirements. This also helps the company to focus on its core area of business.
What the company buys, from whom, at what price, what volume, etc., is all analysed as part of the strategic sourcing process. Some basic examples of strategic sourcing are:
- Identifying and engaging an architecture firm for a new construction project
- Choosing an effective customer relationship management software
- Selection of a new performance analysis software
Difference between Tactical Sourcing and Strategic Sourcing
Strategic sourcing is not simply purchasing goods and services needed for daily operations. Strategic sourcing is future-focused and looks at aspects like building relationships, cost reduction, and other strategic planning. Hence, strategic sourcing is entirely different from tactical sourcing, a short-term transaction activity that is more reactive to the company’s immediate needs.
While tactical sourcing looks at the short-term needs, strategic sourcing is a long-term strategy that looks at the company’s current and future needs. Since tactical sourcing is looking at short-term requirements, it doesn’t often consider the capabilities of the chosen vendor. Strategic sourcing, on the other hand, looks to build long-term relationships with vendors, understand their capabilities and try to achieve the lowest Total Cost of Ownership (TCO) and the lowest risk.
Strategic Sourcing vs Procurement
Procurement is the entire process of placing purchase orders, confirming these orders, following up with vendors and suppliers regarding delivery and ensuring final payment. Procurement involves day-to-day transactions, while strategic sourcing includes contract negotiation, strategic planning, outsourcing models, supply chain infrastructure and more.
Purpose
Procurement involves:
- Obtaining goods and services needed by any business for its daily operations, including identifying the source.
- Purchasing the necessary items.
- Negotiating on the price and terms.
- Inspecting them.
- Keeping track of all the processes.
Strategic sourcing involves building and laying down an effective supply chain management by using a successful strategy to identify a wider database of reliable suppliers, warehousing, distribution and quality, and arriving at the best total cost, not necessarily the lowest cost.
Approach
While procurement concentrates only on the price value of the product/ service, strategic sourcing looks at the bigger picture of the total cost involving the business with the supplier. With strategic sourcing, the business looks at any value addition from suppliers in the form of technology or expertise that gives the business a competitive advantage. With procurement, no value add is expected.
Strategy
The decision to choose between procurement and strategic sourcing depends a lot on the size of the business and its geographic location. With strategic sourcing, there is the involvement of high-quality products and services. So, the chances of the price being high is higher and if the business is small-sized, it makes more sense not to source strategically since the costs may exceed the turnover. If the business is large and located at multiple locations, sourcing strategically makes sense if the required goods, materials, or services are not available locally.
Importance of Strategic Sourcing
Strategic sourcing has a key role in the cost structure and the competitiveness of businesses. Strategic sourcing involves developing long-term partnerships with suppliers capable of providing high-quality products and services at competitive prices. The ideal scenario to implement strategic sourcing is when it involves high-volume purchases. The primary reason is that high volumes and high quality will significantly impact the cost structure. Let’s dive deeper.
Cost Management
Strategic sourcing benefits businesses because they can negotiate the prices due to the high-volume requirement and thus maintain a competitive edge on the price of their products. Strategic sourcing also benefits sellers or suppliers because they can sell a huge portion of their output, making it easy to plan in the long run. Businesses can also strategically source services like payroll processing or employee performance indicators, allowing the management to concentrate more on their primary focus area, thus increasing profits and controlling costs.
Alignment of Sourcing and Business Objectives
Strategic sourcing can help better align sourcing with business objectives, thereby helping in risk management. When the business sources products or services from those suppliers who are the best fit for that business, it will end up cutting costs and mitigating risks.
Optimisation of Ideal Suppliers
Another important aspect of strategic sourcing is the optimization of ideal suppliers. Businesses need to identify and inspect the capabilities of suppliers and integrate inventory management systems and analyse the capabilities of the suppliers. Once proper identification and research of suppliers is carried out, the company will be able to get the best and most reliable suppliers at the lowest cost.
Long-term Relationship Building with Suppliers
Strategic sourcing invests in relationships with suppliers. As the relationship progresses, there is more transparency that leads to easier processes like ordering, inventory management, and invoice preparation. Lower time taken for the entire process means low costs. Close relationship with the supplier also helps businesses identify and resolve problems quickly and also motivates the suppliers to optimise their performance.
Strategic Sourcing Process Challenges
As per a PriceWaterhouseCoopers survey, it has been observed that companies that focus on optimising their supply chain, perform better than competitors who do not focus on their supply chain. While strategic sourcing is vital and businesses do take it seriously, there are a variety of challenges to get the supply chain right. Here, let’s focus on the top four challenges that businesses face:
Accurate Forecasting of Demand
Having visibility of sales by season, location, product, category, or customer personas, helps businesses understand trends and forecast demand accordingly. To arrive at these trends and demands, businesses need to have the right data and analysis.
Managing Margins
The market is highly competitive and it is vital to negotiate the best prices to manage profitable margins . This can happen only if the forecasting is accurate so that suppliers understand your predicted sales volume to be ready to meet your requirements.
Managing Suppliers
Similar to how you assess employee performance, it is also important to identify how your suppliers are performing. Which suppliers are offering the best prices, the best lead time, the best value-added services, deliveries, and other quality metrics.
Managing the Purchasing Process
Managing the entire purchasing process is a humongous task. Any errors in the manual processes relating to purchase or sales orders, stock or inventory management can be detrimental to the relationship between the company and the suppliers as well as the company and its customers. Hence finding an ideal way to manage this process is a challenging task.
Metrics to Consider for Strategic Sourcing
Spend Analytics
Spend analytics are used to decrease costs and improve efficiency by increasing visibility. It helps to identify, categorise and analyse the company’s spend data.
Product Quality
Strategic sourcing is not just purchasing, it is termed strategic sourcing because it takes into account the cost of savings and the product quality. The quality of products available has to be at the forefront when selecting a supplier.
Procurement Average Cycle Time
One important and critical metric to consider for strategic sourcing is the average cycle time for the entire process - from the time the need is identified by a business unit to delivery and payment in full. This metric measures the efficiency of the entire sourcing process.
Supplier Reliability
Strategic sourcing is not just purchasing, it is termed strategic sourcing because it takes into account the cost of savings and the product quality. The quality of products available has to be at the forefront when selecting a supplier.
How Strategic Sourcing Works
Strategic sourcing starts with reviewing the needs of the business and its past spends. This is followed by developing a strategy plan, collecting market data and analysing it and finally selecting the ideal supplier. This process involves evaluating the supply market and sourcing the highest quality goods and services in the most cost-effective manner.
Once the supplier is identified and the contract is signed, there has to be regular and continuous monitoring of supplier performance and ideating methods to improve the entire process.
7 Steps of Strategic Sourcing Process
Strategic sourcing has its advantages, however, there are few steps to consider for an effective sourcing strategy. Let’s look at the different steps that can be used for a successful strategic sourcing process.
Identification and Categorisation of Spend Profiles
Identifying spend areas is one way of initiating the strategic sourcing process. Categorising the spend profile across the business based on its critical and non-critical nature will help to prioritise the sourcing needs for each spend area.
Building a Sourcing Strategy
This step involves building a strategy where the requirements of different business units are identified, their spending patterns, objectives and timelines. Once the requirements are identified, a communication system needs to be built for all stakeholders to have visibility of the requirements.
Analysis of the Supplier Market
This strategy involves a deep analysis of the current and future suppliers - analysing aspects like their market standing and performance and their ability to manage risks in the supplier marketplace.
Request for Supplier Information and Identification of Selection Criteria
When any business requests for the supplier information, they are looking for information about capability of prospective suppliers’ with regards to their goods and services. This is necessary to relay a clear understanding of what the business needs are so that the suppliers can develop strategies to comply with those requirements.
Selection of Suppliers and Execution of Contracting Process
This step involves selecting the supplier who can offer the best quality goods and services at the highest level of cost savings.
Measurement and Periodic Tracking of Supplier Performance
Another important metric to consider for strategic procurement is to effectively track how suppliers perform with regards to the requirements and goals of the business. Periodic assessments and identifying areas for improvement can help businesses understand the risks and problems associated with the supplier. They can then implement strategies to mitigate such risks.
Implementation of Supplier Relationship Management (SRM)
Integrating supplier relationship management into the strategic sourcing process increases the collaboration between the business and the supplier. Their relationship is not merely a one-way process of demand and supply, but a strategic one. Such relationships can be used to improve supplier performance in a way that even future requirements are met effectively with maximum value add.
Key Factors Driving Automation of Strategic Sourcing
Automation has entered in most aspects of all businesses, and sourcing is not far behind. Businesses have started to adopt automation to strategic sourcing to streamline and simplify the entire process. Here is a list of factors that drive increased use of automation to the strategic procurement process:
Enhanced Data Reporting and Increased Visibility into Sourcing Projects
Automation generates data that improves visibility and allows in-depth assessment of all the sourcing activities of the business, thus allowing the company to make better decisions. The data generated through automation includes spend activities, performance of the supplier and the risks involved in the supply chain.
Robust Management of Key Spend Categories
Automation can help identify the different spend categories that exist across business units. Visibility on these spend categories helps the business to control and streamline its spend activities.
Supply Chain Risk Assessment
Automation helps businesses to identify and evaluate risks that hamper the supply chain and also mitigate these risks. This enhances the business output, reduces costs arising out of supply chain failure, and helps businesses handle any type of internal or external disruptions.
Higher Level of Accountability while executing Sourcing Projects
Automation can create a systematic workflow of all sourcing activities and enhances the visibility and compliance of all the relevant personnel involved.
Benefits of Strategic Sourcing
Strategic sourcing has many benefits like reduction in direct and indirect costs, improving efficiency, reducing supplier risk, helping to make better decisions and creating a long-term supplier relationship. Let us look at the benefits from the perspective of the buyers and suppliers.
Buyer Benefits
Improved guidelines for the future
Strategic sourcing lets businesses collate data and make choices that allows them to assess the efficiency with their current suppliers.
Improved relationships with the supply chain
Since strategic procurement involves working in sync with different business units, it ensures that all future requirements are also transparent so they can avoid situations that may be detrimental to the business.
Well organised
Strategic sourcing focuses on long-term planning, so even future requirements are clearly visible. This allows managers and other personnel leaders to concentrate more on other challenges that need their attention rather than the sourcing process.
Risk management
Good and long-term relationships with suppliers can help in smooth and quick resolution of potential problems. So, if a supplier is having cash crunch issues, the business can advance some working capital based on the relationship to allow the supplier to keep the operations going.
Supplier benefits
Cost management
With strategic sourcing, suppliers can sell a significant portion of their output. This helps them plan better and provide their buyers with clear visibility on long-term cash flow.
Greater stability
Since strategic sourcing focuses on long-term relationships, businesses can choose only one supplier instead of several. This provides the supplier with a greater degree of stability in their day-to-day operations.
Top 3 Best Practices for Strategic Sourcing
Let’s look at the best practices for strategic sourcing.
Use eRFX events and eAuctions
Strategic sourcing allows businesses to automate and regulate the creation, distribution and storing of all sourcing events. The most important take-away from this is higher efficiency as compared to manual intervention.
Use contract management software
A contract management software can help businesses manage all their contracts. These softwares can integrate supplier details from eSourcing events. In the absence of such management software, supplier agreements can roll on to the next financial year and create pricing and service irregularities.
Track spend and savings
A reliable savings tracker solution can enable businesses to create forecasts, track and deliver reports and make the right adjustments against their budget. It can easily display their deliverables and its value.
Conclusion
Businesses are implementing strategic sourcing to establish a comprehensive approach to manage their sourcing needs and be more proactive to the many supply chain disruptions. We have seen that the most important aspect of strategic procurement is finding an ideal partner (in this case, a supplier) with the right capabilities who understands the business’ goals. Forming a strong relationship with suppliers helps the business to enhance their performance and gain a competitive advantage in the supply chain.
Additionally, with automation also marking its presence in the sourcing process, businesses can optimise the sourcing process even more to suit their working environment and their kind of business. In a nutshell, Strategic Sourcing is an integral part of large businesses and has made a grand entry. It’s here to stay.
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