Strategic Sourcing

Introduction

In this fiercely competitive global market, we need a strategized approach to gain a foothold and maximize business performance. Taking sourcing one step ahead, strategized sourcing helps businesses efficiently align with the most suitable suppliers.

What is Strategic Sourcing?

Strategic sourcing enhances a business’s sourcing activities to ensure your business needs are in sync with your supplier’s capabilities. Instead of selecting your supplier based solely on cost and location, strategic sourcing focuses on more comprehensive factors like supplier market research, risk and spend analysis, outsourcing models, etc.

Strategic sourcing ensures your sourcing activities are more agile and holistic. Keeping the entire process on its toes with frequent reviews and audits, it aims to reduce the supply line risks and optimize the Total Ownership of Cost (TCO).

How is Strategic Sourcing Different From Sourcing?

Strategic sourcing differs from traditional sourcing practices in focusing on long-term sustainability and cost optimization. Traditional sourcing chooses suppliers based on parameters such as price and location of suppliers.

Strategic sourcing is a new approach that builds on traditional sourcing practices but also considers what’s happening in the global economy, company goals, and emerging technologies. It considers factors such as contract negotiations, market analysis, risk profiles, quality of service, and such. This approach helps organizations make better decisions about buying goods and services, thus giving them a competitive advantage.

Strategic sourcing is a dynamic process with constant re-evaluations, and updates as the market changes and new opportunities arise. Traditional sourcing practices are not enough for today’s ever-changing world.

What is the Difference between Tactical Sourcing and Strategic Sourcing Strategy?

The difference between these two types of sourcing strategies comes down to how much time they take into consideration when making sourcing decisions. Strategic sourcing takes a holistic approach by looking at the entire supply chain to increase efficiency over time, while tactical has more of an immediate focus on meeting current needs for materials or services.

Strategic sourcing is a long-term approach that considers the company’s overall requirements. The goal is to optimize the company’s sourcing strategy and to be proactive in getting the best supplier for a given product or service.

On the other hand, tactical sourcing is a short-term approach where companies are looking for suppliers that can quickly provide them with what they need.

The strategic sourcing process usually starts with an assessment of a company’s current suppliers, followed by an analysis of their needs and requirements to find new potential suppliers. This step is followed by negotiations between the company and potential suppliers, which may lead to contracts being signed. Tactical Sourcing skips this process of market analysis and research.

Small or mid-size manufacturing companies usually prefer tactical Sourcing. It is a good option for companies with time constraints or tight schedules.

Drawbacks of Tactical Sourcing

• Misses out on building beneficial supplier relationships
• Cannot negotiate better contracts due to lack of market research
• This can lead to a loss in quality

Benefits of Strategic Sourcing

Optimization of Cost

The strategic sourcing team performs an in-depth market analysis before selecting the most suitable supplier with the most suitable price tag. This cost-benefit analysis is a huge benefit for companies because it helps them save money and stay competitive in their industry.

Beneficial Supplier-Business Relationships

By considering the business needs while choosing the supplier, you ensure that the supplier’s capabilities align with your business objectives. This partnership reduces friction and enables you to build a long-term and mutually beneficial relationship with the supplier.

Focus on business objectives 

Instead of solely focusing on the supplier cost, strategic sourcing considers your business needs and objectives in the supply chain management process. In this way, you are paired with the most suitable supplier at a convenient rate.

Risk Management

The strategic sourcing team considers many factors like origin and nature of the sourced items, mode of transportation, customer requirements, and data sensitivity to mitigate the risk in the supply chain. 

Procurement stability

Strategic sourcing ensures that all future supply needs are estimated and planned. So, you will never be in a situation where you lack the proper resources. 

Some other benefits of strategic sourcing include:

• Increased visibility into the supply chain
• Reduced risk of disruptions in the supply chain
• Enhanced customer service
• Optimize Total cost of ownership (TCO)
• Find a supplier who matches your company ethos.

Steps to Implement Strategic Sourcing

Let’s build a basic outline for implementing strategic sourcing in your business.

Understanding your spend profile

The first step is to identify all the spend profiles and the categories you can put them into. Your company will most likely have different Spend Profiles across various business areas. Define the criticality of each profile; this will help you prioritize sourcing for each area. You can define other categories more suited for your business needs, like Domestic/International Spend.

Analyzing business needs and risks

Analyze and understand your business needs and legacy spending to help you choose a suitable supplier. After the analysis, you will better understand potential risks and necessary strategies.

Building the strategy

Now that you have all the business goals, risk profiles, and spend profiles, you can use this to build a suitable sourcing strategy. Define your goals, set timelines, and enable a communication line between all the relevant stakeholders.

Supplier market research

Analyze the supplier market based on the suppliers’ performances, market revenue, and capabilities. Use the sourcing strategy you built before to find a supplier by matching the supplier profiles.

Contacting the suppliers

Next, it is time to send out requests for information (RFI), requests for proposal (RFP), and requests for quotation (RFQ) as needed to the suppliers. Make sure the suppliers have a clear idea of the business requirements and timelines.

Select your supplier and pull up a contract

You can invite bids from your selected supplier list. Choose the best supplier that suits your requirements and has the most cost savings. Once selected, notify your supplier and perform a risk assessment and reference checks. Now it is time to formalize your business relationship with a contract. 

Periodic evaluations of performance

Strategic sourcing is a dynamic process, meaning there should be constant re-evaluations of the supplier’s performance. Making sure they meet the company’s goals and timelines and analyzing their performance helps identify any risks in the supply chain. 

Building and maintaining a partnership

Strategic sourcing focuses on building a long-term relationship to help the business meet its requirements most efficiently. Implementing a Supply Relationship Management (SRM) will ensure that both parties are equally invested in optimizing the sourcing activities and needs of the business. The partnership represents a loop with constant feedback and necessary updates, enhancing the process.

Factors That Affect Strategic Sourcing

Here are a few factors that can affect your strategic sourcing process.

Demand Analysis

It would help if you had an accurate understanding of the sourcing demands of your company. You can use legacy data and prediction charts to uncover trends, estimate your requirements, etc. This analysis is important because if you overestimate your requirements, this can tie up capital. On the other hand, understocking can slow down your business and cause issues in production.

Getting the right price

You need in-depth market research data to get the most lucrative cost-saving deal. This data will help you have an edge in the competitive market and negotiate a better price.

Managing purchase and manual processes

Handling administrative and manual processes of large numbers or complexity is always susceptible to errors. This can result in a loss of profits and customer relationships. Automating procurement can help mitigate a lot of these issues. eSourcing helps streamline strategic sourcing processes.

Dealing with suppliers

Getting an accurate supplier profile during research may not always be possible. Superficial or sloppy market research can result in you choosing an unsuitable supplier, causing tensions in the partnership or a loss in profits. But because of the constant re-evaluations in strategic sourcing, you can reassess and choose a better supplier in this process!

Examples of Strategic Sourcing

Let’s look at some examples to help you understand strategic sourcing better.

• One example is if you have backup suppliers and closely monitor factors like product quality and quantity, tax rates and regulations, etc., to minimize and mitigate future risks.
• If you are confident about your supplier’s services, you can negotiate a contract for a longer period at a lower rate. This will ensure that you always have a supplier and save money over time.
• You can reduce the risks and dependency on environmental conditions by sourcing goods that are readily available in the location or are easily transportable.
• If your business or supplier locations are susceptible to geopolitical risks, there are chances that it may impact the sourcing activities. Reduce these risks by developing backup plans for those in unstable regions and diversifying supply locations.

Why Should Companies Consider Strategic Sourcing?

When considering the benefits of strategic sourcing, you can see if it is your best choice. Big companies with complex processes usually benefit from strategic sourcing.

• It helps in reducing the cost without compromising the quality of the services.
• It helps plan for any future risks that may arise.
• By considering the overall requirements of the business while choosing the supplier, strategic sourcing provides a systematic and holistic approach. This ensures that the supplier’s capabilities are aligned with the company’s goal.
• It helps build a long-term and synergic collaboration between the supplier and business. This is useful for both parties.

However, strategic sourcing may not be necessary if you are a small business. Depending on your needs, traditional or tactical sourcing can be a better option.

Frequently Asked Questions (FAQs) 

Why is strategic sourcing important?

Strategic sourcing helps companies make the most informed sourcing decisions. It enables you to choose suppliers with the highest cost savings without compromising quality. It is a holistic approach that minimizes the risks in the supply chain and maintains long-term relationships with the suppliers.

What is the difference between strategic sourcing and procurement?

Procurement involves daily activities like issuing purchase orders to suppliers, inspecting the items, keeping track of the items, and such. At the same time, strategic sourcing encompasses various activities like supplier market research, risk and cost analysis, contract negotiations, periodic performance evaluations, supply relationship management, etc. It is the overall process of selecting and implementing the supplier’s services.

What is Total Ownership of Cost (TCO)?

TCO is a value that includes the direct and the hidden costs behind all the stages of acquiring that asset. TCO consists of the cost of every ownership phase- research, acquisition, maintenance, and use.

What are the elements of the strategic sourcing process?

The elements of strategic sourcing are-

• Understanding and categorizing your organization’s Spend Profiles
• Analyzing business needs and risks
• Building Strategy
• Market Research
• Contract Negotiations
• Supplier Management at a macro level
• Regular assessment of supplier performance
• Implementation of Supplier Relationship Management

What is the main focus of strategic sourcing?

Strategic sourcing aims to reduce the Total Cost of Ownership, maintain an excellent supplier-organization relationship and minimize risks. It considers the overall requirements of the company when making sourcing decisions.

Can Sourcing strategies improve performance?

The procurement teams in big companies can benefit from implementing strategic sourcing. In this highly competitive market, it can help you in sourcing with cost savings and quality services.