Strategic Sourcing: Advantages and Implementation

"Maintaining proper relationships with vendors is very crucial in bringing down the cost of your products and sourcing the perfect raw materials."

- Pooja Agnihotri

 

Effective sourcing of services and goods from suppliers is now essential as organizations today continue to use the power of globalization to improve their performance. 

 

A more strategic function that is in line with the company's objectives and goals is also emerging in procurement. Additionally, factors like technological disruption, political and economic unpredictability, etc. have made the industry extremely competitive. 

 

Therefore, to improve corporate efficiency and performance and to distinguish themselves from their competitors, organizations must embrace efficient strategic sourcing procedures and abilities. In this blog, you will learn more about Strategic Sourcing.

 

What is Strategic Sourcing?

 

For a company to leverage its combined purchasing power to discover the best prices in the market and match its purchasing strategy with business objectives, strategic sourcing formalizes the usage and information gathering usage process.

 

As supply chain and procurement procedures change as a result of digital transformation, strategic sourcing is becoming more and more common. Analyzing what an organization purchases, at what cost, from whom, and in what quantity is necessary. 

 

Strategic sourcing is different  from conventional purchasing in the way that it optimizes the entire sourcing process by continual market study and connections with suppliers, and placing emphasis on total cost of ownership along with the original purchase price.

 

Also Read | Guide to Market Research Analysis

 

Difference between Strategic Sourcing and other Sourcing Terms

 

The key differences between Strategic Sourcing and other commonly used Sourcing terms are given below.
 

1. Strategic Sourcing vs Tactical Sourcing

 

In order to construct a comprehensive, proactive, and ongoing examination and re-evaluation of an organization's sourcing efforts, it is necessary to use strategic sourcing. Strategic sourcing aims to achieve minimal supply chain risk along with the lowest Total Cost of Ownership (TCO). 

 

Because of this, it shows the organization's connection with its sourcing partners as a loop rather than a one-way process; a detailed profile of the suppliers along with their fundamental skills is created and periodically matched to the organization's sourcing needs. 

 

Strategic sourcing strives to establish long-lasting and cooperative relationships with suppliers, who are seen as essential value partners. In order to make sure that the demands of the organizations are effectively and consistently satisfied, the customer-supplier loop is evaluated at every point in its lifespan. 

 

Strategic sourcing makes use of supplier appraisal, expenditure analysis, supplier relationship management and thorough market research in order to achieve this.

 

Tactical sourcing refers to a conventionally reactive and short-term strategy to manage an organization's sourcing efforts. Without taking into account other elements like supply chain risk mitigation, supplier relationship management, etc., it seeks to obtain the lowest cost possible. 

 

As a result, since communication with suppliers only happens when issues arise, less importance is placed on establishing long-term relationships with them and understanding how their core competencies may change the business. 

 

While tactical sourcing can result in profits in the short term, it prevents the organization's sourcing activities from being optimized. Tactical sourcing also doesn't require significant expenditures in many cutting-edge technological platforms and human resource skill sets, unlike strategic sourcing.

 

2. Strategic Sourcing vs Procurement

 

The variety of actions and processes required for firms to obtain services and goods is referred to as procurement. Although this theoretically entails both administrative and strategic duties, procurement departments frequently concentrate on the routine e-procurement operations and transactions, such as invoicing, purchase orders, and payments.

 

Strategic sourcing, on the other hand, places more emphasis on the actions taken before making a purchase, such as researching the market and your company's needs. 

 

Strategic sourcing employs vast data sets to assess the value of other criteria like less risk to the organization and ideal vendor relationships, and keeps the larger picture in mind whereas procurement often focuses on the lowest-priced alternative.

 

Benefits of Strategic Sourcing 

 

There are several additional advantages that an organization can enjoy while employing strategic sourcing. They are given below.

 

1. Increased Savings in Costs

 

Increasing cost reductions are what firms will enjoy through strategic sourcing. A business can consistently achieve larger cost savings by choosing and discovering suppliers who will offer the best value at the right price.

 

2. Improved alignment between Sourcing and Business Goals

 

The core of strategic sourcing is to match a company's sourcing efforts to its organizational goals and objectives. Higher company performance can be attained with fewer supply chain risks and greater efficiency thanks to better alignment.

 

3. Selection of the Best Suppliers

 

Analysis of the suppliers, their core competencies and their profiles is required in order to successfully adopt strategic sourcing inside your company. A corporation will then be armed with knowledge that will allow them to match their ideal suppliers with their business objectives. This will result in maximizing value while minimizing expense.

 

4. Building Long-Term Relationships with Suppliers

 

An organization can establish good connections with its suppliers with the use of strategic sourcing. Strategic sourcing aids in the creation of a bond between organizations and their suppliers by reiterating the importance of the suppliers' core competencies and ensuring the right suppliers for the correct sourcing target. 

 

Maintaining a relationship with the suppliers also means that the suppliers are appreciated and taken into account when making different sourcing decisions. As a result, they feel motivated to enhance their performance in order to meet the organization's objectives.

 

Also Read | What is Procurement Analytics?

 

Implementation of Strategic Sourcing

 

A basic structure can be outlined to guide the process of implementation of strategic sourcing.

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Implementation of Strategic Sourcing

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1. Data Collection

 

The first step in the strategic sourcing process is identification of spend areas that exist throughout the organization's business areas and classify them according to their level of critical or non-critical. The sourcing efforts for each spend area will be prioritized along with the aid of categorization.

 

Other categorization criteria that better meet the needs of the business can also be employed, for example, direct versus indirect spending. To help prioritize and create solutions in these situations, it is important to do a risk analysis of the selected spend categories.

 

2. Building a Sourcing Strategy
    

Developing a plan for how to tackle each category spend area is the second phase. This involves determining the business unit requirements that warrants expenditure as well as setting objectives, goals, and matching deadlines to meet the requirements. 

 

This calls for developing a communication workflow so that all the parties that are involved in the relevant sourcing projects are aware of impending updates.

 

3. Supplier Market Analysis

 

The third phase is doing a thorough examination of the present and potential suppliers in order to understand and rate prospective supplier profiles. 

 

In order to do this, it is necessary to examine the market share or revenue of suppliers in order to comprehend their level of industrial performance, their position in the market, and the threats and opportunities facing the supplier market.

 

4. Supplier Discovery

 

Requesting RFIs, RFPs, and RFQs from vendors is the fourth stage after finishing the supplier market research. 

 

For the suppliers to fully comprehend what the organization wants, it is important  to convey the precise requirements of the company as well as the performance expectations and the end-goals. This is crucial so that plans can be created to achieve the goals of the company and present an accurate roadmap.

 

The data you submit will give you useful information, such as the delivery, pricing structure, warranty terms, product or service details, etc. The selection criterion for choosing a provider can be confirmed once the submitted data has been compiled.

 

5. Supplier Selection

 

The fifth stage is to select the suppliers who are able to provide the maximum amount of cost savings while also offering quality according to the selection criteria that has been determined. The contracting procedure begins to onboard the vendors after supplier selection for the pertinent spend sectors.

 

6. Negotiations and Contracting

 

The selection of a supplier is just the beginning of the strategic sourcing process. Automated tools can simplify the digital signature process, speed workflows, and create an electronic directory of contracts which can be used by organizations to set renewal alerts. 

 

It is crucial to regularly monitor supplier performance and pinpoint opportunities for development. Organizations can use this information to better evaluate supplier risks and develop plans to minimize any potential supply chain interruptions.

 

7. Implementation and optimization

 

The seventh phase is optimization by incorporating Supplier Relationship Management (SRM) into the strategic sourcing process, which helps to transform the business relationship with suppliers into a two-way process rather than a one-way one. 

 

By conversion of a simple customer-buyer connection into strategic value partners, SRM can improve the level of cooperation between a company and its suppliers. Building novel ideas and ways to meet the organization's sourcing demands involves both sides. 

 

Such synergized collaboration will result in a long-lasting partnership that can be used to further boost supplier performance. SRM connects both suppliers and organizations in such a way that ensures that both the present and future requirements are met in the most effective way possible.

 

Also Read | Guide to Workflow Management

 

Automation of Strategic Sourcing

 

Procurement is quickly becoming more automated. Organizations are utilizing eSourcing to simplify the difficulties associated with strategic sourcing and to increase their sourcing operations. 

 

Apart from helping different business divisions in an organization work together on their sourcing initiatives, eSourcing also concentrates on locating the best suppliers for each specific sourcing need. This is essential because each department will have different sourcing needs. 

 

Companies that use eSourcing software give their customers the freedom to find their own suppliers keeping in mind all relevant procurement and compliance regulations. An organization's end users can easily utilize eSourcing tools to compare prices from available vendors with e-tendering and choose the best ones.

 

The factors giving rise to eSourcing are given below.

 

1. Enhancing Data Reporting and Increasing Project Visibility

 

eSourcing platforms produce valuable data on an organization's supplier performance, spending habits, and supply chain risk assessment. The information will increase transparency and allow for comprehensive evaluations of the many ongoing sourcing efforts, which enables the company to make better sourcing decisions.

 

2. Strong Management of Major Spending Categories

 

Strategic sourcing operations that are automated helps in identifying and classifying the many spend categories that can be found within an organization across business units. An organization can regulate and simplify its spend activities by increasing the visibility of expenditure categories.

 

3. Supply Chain Risk Evaluation

 

An organization can better manage compliance by using eSourcing to assess, recognise, and mitigate a variety of risks that obstruct the supply chain. 

 

This cuts wasteful spending caused by supply chain breakdowns, speeds up corporate operations, and aids businesses in adjusting to diverse environmental disruptions on the internal and external fronts. 

 

4. Greater Accountability while carrying out Sourcing Projects

 

The workflow of sourcing activities and the associated stakeholders can be displayed on an eSourcing platform. It raises the level of compliance, accountability, and visibility for all essential parties involved in specific sourcing projects.

 

Also Read | Supply Chain Management

 

Organizations have begun to implement strategic sourcing to create a comprehensive strategy for managing their sourcing needs and to develop a more proactive strategy for dealing with the different supply chain interruptions. 

 

Organizations can also maximize their performance and get an advantage over their competitors by matching the business requirements and objectives to the appropriate suppliers with the appropriate capabilities. Business units are also given the opportunity to optimize their sourcing by utilizing the power of newer automation technologies for strategic sourcing.