Strategic sourcing is a procurement process that is continuously improving and re-evaluating a company’s purchasing/sourcing activities and channels of supply. Its purpose is to find ways and capitalise on opportunities on how to reduce costs, improve stability and plethora of other benefits. Strategic sourcing aims to achieve the lowest Total Cost of Ownership (TCO) as possible, along with minimising the supply chain risk. Strategic sourcing also aims to create long-lasting, collaborative relations with suppliers, viewing the suppliers as crucial value partners.
Strategic sourcing reflects an organisation’s relationship with its suppliers as a loop, rather than a one-way process, to continuously develop the relationship and align the supplier’s capabilities with one’s sourcing requirements. This loop is analysed at every stage of its lifecycle, ensuring that all the needs of the organisation are continuously and efficiently met. To achieve this, strategic sourcing involves leveraging spend analysis, supplier evaluation, detailed market research and supplier relationship management.
Strategic sourcing is in other words a continuously on-going process, requiring both skilled personnel and relevant high-technology platforms and tools to be successful.
Benefits of strategic sourcing
By implementing a strategic sourcing strategy, an organisation will be able to leverage a plethora of advantages in their purchasing/sourcing activities. Here we’ll outline the four key benefits of strategic sourcing and the reasons why it makes sense for an organisation to employ a strategic sourcing strategy.
- Cost savings: The most obvious benefit from adopting strategic sourcing is the higher level of cost saving. Through strategic sourcing, you’ll be able to identify and select the supplier providing the highest value services/products at the right price which allows an organisation to achieve higher cost savings.
- Alignment between sourcing and business objectives: An important part of strategic sourcing is to align your sourcing activities to organisational goals and objectives. Better alignment allows you to achieve higher business performance with higher efficiency and minimal supply chain risks.
- Identifying of ideal suppliers: Implementing a successful strategic sourcing strategy requires you to analyse suppliers, their profiles and core capabilities. This in turn allows an organisation to match their business objectives to their ideal suppliers, implying the highest value-creation at lowest-possible cost.
- Improved relationship building with suppliers: Strategic sourcing also helps an organisation build long-term relationships with suppliers. It helps create a synergy between you and your suppliers by reinforcing the focus on core capabilities of the suppliers and making sure the right suppliers are employed for the right sourcing objectives. Sustained supplier relationships also imply that when the suppliers are valued and chosen for various sourcing activities, they will try to optimise their performance to match your organisational objectives.
What is the difference between strategic sourcing and procurement?
Strategic sourcing and procurement are two very closely related terms that’s in some cases mistaken for each other. In this section of the article we’ll define the terms to make it clear what they mean and what activities they include.
Procurement refers to a range of activities that’s necessary for business to acquire their products and services. This technically includes both strategic and administrative responsibilities, but where a procurement department often focuses on day-to-day transactions such as purchase order, invoice and payments.
In contrast, strategic sourcing emphasises on the activities leading up to an actual purchase. While procurement usually looks for the lowest price option, strategic sourcing looks at the bigger picture by leveraging large sets of data to evaluate the value of factors such as vendor relationships and potential business risks to find the best option.
The process of strategic sourcing
Be aware that the following is a basic structure of the strategic sourcing process. There isn’t a single strategic sourcing process that matches the specifications and requirements of every organisation. While the strategic sourcing process has many variations, it is commonly broken into seven steps.
Step 1: Identify and categorise spend profiles
The strategic sourcing process begins by identifying existing spend across all the business areas within the organisation, followed by categorising them by how critical/non-critical their specific spend area is. The categorisation helps prioritise the sourcing activities for each spend area.
Step 2: Developing a sourcing strategy
After the initial strategic sourcing process steps of identifying and categorising spend profiles, you need to decide the strategy for how each categorised spend area will be approached. This involves identifying requirements of business units that necessitate spending, defining goals and a timeline to fulfil them. It’s also important to build a holistic communication workflow to make sure all relevant stakeholders have a clear visibility of the upcoming updates.
Step 3: Performing a supply market analysis
Perform a supply market analysis, identifying potential global and local suppliers, study cost components of the product or service and analyse the risks and opportunities of the supplier’s marketplace.
Every variable like key raw materials, labour and transportation need to be priced, and calculations need to be done revolving around the suppliers different cost elements.
Step 4: Request for supplier information and identification
Request RFIs/RFPs/RFQs from suppliers. Remember to communicate the exact requirements of your organisation along the end-goals and performance of expectations to make sure the suppliers have a clear understanding of what you need. This allows the suppliers to provide an accurate roadmap and to develop strategies matching your needs and expectations.
All your submitted information is very important and will provide insightful data for pricing structure, product or service specifications, etc. Once the data has been collected, the selection criteria can be established for the supplier selection.
Step 5: Negotiating and selecting suppliers
When the selection criterion has been established, it’s possible to find the suppliers offering the highest level of cost saving alongside delivery quality.
As the negotiations start (with both new and existing suppliers), the suppliers will often ask for clarifications and additional details where needed. Multiple rounds of negotiations is often performed to create a short list of the suppliers before choosing between them as per your standard business approval process.
Step 6: Implementing and integrating suppliers
Notify your chosen suppliers and make sure they are closely involved in the implementation and integration process. Your company’s strategic sourcing strategy should include improvements to specifications or process, alongside changes in delivery or service requirements.
Step 7: Performance tracking
But strategic sourcing does not end at the choosing and implementation of suppliers, it’s just the beginning. Step 7 is to effectively measure how the chosen suppliers perform according to the requirements and objectives of your organisation. This is a continuously on-going process to track supplier performance and identify areas for improvement, and is an essential part of strategic sourcing. This may help you understand associated supplier risks and to design and implement strategies to mitigate potential supply chain disruptions.
A business may then return to Step 1 and start anew to review the supply market again and further improve their sourcing activities.
Best practices of strategic sourcing
Strategic sourcing and procurement are complex processes. They require research, knowledge and experience to be successful. For these reasons, we thought it would be beneficial to learn about some of strategic sourcing best practices to make the most out of your strategic sourcing process and save both time and money.
- Total Cost of Ownership vs. Purchase Price: Stop thinking in terms of the price of acquiring a new contract. Think instead about the bigger picture and frame all costs in terms of the total cost of ownership of the contract across a complete lifecycle. Account for all relevant costs like operation, maintenance, training, storage/warehousing, transport, etc., and you will get a clearer picture of where your money is going, and where the potential cost savings are.
- Optimise your inventory: Understocking can increase supply chain risk and threaten your profit, while overstocking can cost you unnecessarily. Find the sweet spot of your inventory where you neither have too much, or too little. But this sweet spot applies to all areas. Storing inventory is not free where the costs of warehousing, insurance and taxes slowly but surely add up.
- Make use of technological tools: Leverage technological tools to streamline the process of your strategic sourcing and procurement to handle complex markets, data and spend analysis tasks that strategic sourcing demands.
- Take your social responsibility: The focus of the industry world has slowly but surely changed. As today’s consumers values sustainability more and more, your cooperation needs to take social responsibility and sustainability initiatives seriously if you want to stay competitive. Without real green initiatives, a company risks drawing a lot of criticism from its customers and might start losing substantial business.
How can Prognos support my strategic sourcing?
Strategic sourcing relies on data to identify the most profitable areas as well as compare between suppliers to find the ideal partner for an organisation. It is also leveraged in negotiations to compare between suppliers prices and market prices to make sure they are reasonable and fair.
But manually having to search, extract and compile this data takes time, time better spent on other activities. By leveraging Prognos platforms Prognos Tailored and Prognos Online you get easy access to all data and reports you need to be able to successfully perform continuous strategic sourcing of your purchasing/sourcing processes, while simultaneously giving you the upperhand in supplier negotiations.
Contact us for more information about how we can help you perform strategic sourcing, learn more about strategic sourcing best practices and to book a demo of our solutions.