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Strategic Sourcing is a systemic process that continuously re-evaluates a company's purchasing activities to acquire goods or services that are of strategic importance to a company.
For years, the procurement department has been viewed and managed as an administrative function, with sourcing at arm's length. But, in the past decade, changing competitive landscape has subjected companies to undergo remarkable changes. Today, companies across the globe are under tremendous pressure both in regards to quality and cost.
These demands have increased the interest and made it explicit for organizations how important strategic sourcing is to competitiveness.
Besides meeting these needs, strategic sourcing initiatives do much more. When implemented effectively, strategic sourcing offers tremendous benefits as it consolidates purchasing power, improves partnerships with suppliers, enhances responsiveness, boosts sustainability and innovation efforts, and aligns the work and information flow like teamwork.
But still, strategic sourcing represents a significant and largely untapped opportunity for many companies.
What is Strategic Sourcing
Strategic Sourcing is a process designed to purchase the best products and best services for the best value. It is not a one-time effort but a systemic process that continuously re-evaluates the company's purchasing activities (activities involving acquisition or direct buying of goods, commodities, and services).
According to Reyes-Moro et al. (2003), Strategic sourcing can be defined as a sequence of actions to be performed in order to acquire goods or services that are of strategic importance to a company.
As per Rudzki (2006), it's the practice as "a fact-based, rigorous process that involves substantial internal data gathering and evaluation, and extensive external data gathering and interactions, to select the most appropriate strategy and negotiations approach and ultimately select the right supplier."
Thus, strategic sourcing can be seen as a decisive activity for procurement and supply chain professionals to reduce the total costs of externally purchased materials, products, and services while maintaining or improving levels of quality, service, and technology. This continuous improvement process also integrates customer needs, organizational goals, company culture, and market conditions to answer the most critical sourcing questions of:
- What do we buy?
- Who do we buy from?
- What quantity to buy and from whom, when, where, and how?
- Is our supply base resilient to accommodate future needs/demands?
- How well are our suppliers performing?
- What will be the best strategy to buy?
To fully understand the concept of strategic sourcing, it is important to draw the lines between what different types of sourcing are, viz. tactical, reactive, and strategic.
In simple terms, sourcing means identifying the new or potential supplier. As a prelude to an opera called procurement, sourcing involves all the activities needed to find the best suppliers for goods and services to prepare the groundwork for effective procurement.
The sourcing process entails the following key activities:
- Evaluation of supply market,
- Development of procurement strategy,
- The RFx process or Go-to-market strategy/process,
- Supplier selection,
- Contract negotiation, and
- Contract management.
Categories of Sourcing
- Reactive sourcing: As the name suggests, no proactive strategies are set in place for this type of sourcing. So, this sourcing function occurs in an entirely reactive mode, for example, fulfilling the requisition demands or requirements from business as and when they arise. Though unsustainable, some organizations still operate on this method of sourcing. However, this is a transactional level sourcing and doesn't promote any real relationship with the suppliers.
- Tactical Sourcing: This means a routine and, at times, reactive approach to sourcing to cover business requirements that cannot be planned in advance. Tactical sourcing is short-term and transactional and is usually practiced in small- and medium-sized manufacturing firms. Though tactical sourcing aims to ensure the availability of the right material at the right cost and time, it does not attempt to establish deep supplier relationships that can support the company's broader goals.
- Strategic Sourcing: It's the core and pivotal activity for procurement and supply chain professionals and thus, requires in-depth knowledge and competence.
There are six rights involved in strategic sourcing:
- Right Price- To buy goods and services at the right price
- Right Quantity- The supplier must supply goods and services in the right quantity
- Right Quality- Goods and services must fulfill the quality requirements
- Right on Time- The supplier must supply goods and services on time.
- Right Source- To source the goods and services from the right suppliers.
- Right Place- To source the goods and services from the right geographical location or place.
Key Elements of Strategic Sourcing
Following are the key elements of strategic sourcing:
- Organized: Strategic sourcing is an ongoing process that covers all spend categories of goods and services and invites suppliers to be a part of the process.
- Systemic: Strategic sourcing is driven by data and analytics and follows an agreed-upon or systemic approach. This continuous improvement process also undergoes regular reviewing to incorporate new tools and strategies, market opportunities, best practices, and benchmarking.
- Collaborative: Collaboration is the essence of strategic sourcing. In this process, teams are cross-functional, and thus, suppliers get to interact with people who bring facts to the table and look beyond price. Moreover, the sourcing teams also connect department managers and company stakeholders to suppliers to uncover new opportunities.
Strategic Sourcing vs. Traditional Sourcing
Strategic sourcing differs a lot from traditional sourcing; some of those ways are listed below:
- Consolidating purchasing power: With strategic sourcing, organizations consolidate purchasing power to realize maximum benefit from the total volume sourced from each supplier—this further helps to reduce the overall costs.
- Promoting better supplier relationships: Limiting the number of suppliers creates lucrative and mutually beneficial contracts for both parties. It further helps in standardization and improves cost, quality, and time factors. Such strong relationships eventually help identify and eliminate any redundant or unnecessary costs, limitations, or lags.
- A focus on total cost, not just purchase price: As mentioned earlier on the page, strategic sourcing isn't just about the price, but quality, service, delivery, and all the aspects that comprise the total costs or value.
- Organized processes and information flow: Strategic sourcing alters the process and information flow to erase redundancies, reduce the frequency of purchasing orders and the time required for sourcing goods and services.
- Spotlighting long-term organizational goals: Strategic sourcing plans, implements, evaluates, and controls purchasing decisions to direct all the activities toward opportunities that are consistent with a company’s capabilities and long-term goals.
- Improved teamwork: Strategic Sourcing involves an in-depth understanding of the products, markets, and the buyers' and sellers' needs. With the deep collaboration of teams with internal and external stakeholders, strategic sourcing transcends the traditional communication barriers to sourcing.
The Benefits of Strategic Sourcing
Strategic sourcing, when implemented well, offers tremendous benefits like:
- Increased Cost Savings
- Reduction in time-to-market cycle
- Supplier Optimization
- Alignment of Sourcing to Company Objectives
- Better Relationships With Supplier
- Enhanced operational performance
- A resilient organization with the ability to exploit or adapt to market changes
What Challenges Do Organizations Face While Implementing Strategic Sourcing
For any strategic sourcing initiative to succeed, an active commitment by top executives is crucial. Such a commitment includes regular meetings as well as investment in high-quality sourcing tools and software to manage the process well.
Following are the various challenges organizations face when implementing strategic sourcing:
- Involving top management in the strategic sourcing process.
- Attracting and retaining the necessary sourcing talent.
- Convincing the stakeholders to invest in the right tools for carrying strategic sourcing initiatives.
- Building trust with supplier base to enhance information sharing and foster mutually beneficial buyer-supplier relationships.
- Explaining the importance of operating with fewer suppliers and selecting, contracting, and monitoring them in a disciplined way.
- Coordinating meaningful dialogue across business functions to ensure the selected suppliers deliver value for the business as a whole.
Why Organizations Need Strategic Sourcing
According to sourcing theories — Gadde & Håkansson, 2001 and Burt, Dobbler, & Starling, 2003 — supply strategy is becoming more and more critical for organizational success in many industries. This demand is further intensified with digitization, technology calls, and market liberalization.
Therefore, continuously harmonizing sourcing strategies is pivotal for organizations to factor in the following key advantages:
- Enhanced reporting
- Increased visibility into sourcing
- Supply chain risk assessment
- Persistent and firm management of primary spend categories
- Greater stability and reduced risks
Besides these, a successful sourcing strategy will also provide:
- cost reductions,
- improved controls and quality,
- responsiveness, and
- better service levels to internal and external clients.
The Strategic Sourcing Process
Strategic sourcing is a powerful and necessary process. It's how you can ensure that you're getting the best deals on what you need, and it's how your company can ensure that it's getting the right amount of products and services at the right price.
But strategic sourcing is hard! If it wasn't, everyone would be doing it. But they're not because it takes time and effort to do it right.
So what can you do? How can you make sure your strategic sourcing process is working?
The best way to ensure success is to follow a proven process that ensures you tick the following bullets:
- Enable fact-based, data-driven decision making
- Gather all documentation of the sourcing process at one place. Enhance transparency by setting your teams free from Excel and e-mails
- Automatically identify sourcing opportunities by leveraging Ignite's spend analytics module
- Make it easier for suppliers to give quotes
- Conduct robust supplier selection, including performing pre-qualification
- Boost team efficiency through collaboration, both internal — with the right resources at hand — and external — with transparent and efficient association with bidders.
- Standardize methodology
- Save time by reusing previous sourcing event
- Quickly provide proper feedback to all suppliers participating in the event
Strategic sourcing requires the right mix of skills, expertise, and the right tool to successfully manage the process and magnify results.
There are many ways to approach sourcing strategically, but there's no one-size-fits-all solution. The key is finding a way to identify and leverage your organization's unique strengths while still working within your budget constraints.
6 Simple Steps of the Strategic Sourcing Process
The first step for the strategic sourcing team is to gather as much information as possible about the spending or analyze the spend to find:
- what's bought,
- from whom,
- in what quantity,
- what are the goods/service characteristics or specifications,
- what's the current cost, and
- how the spend is managed.
Furthermore, market trends and dynamics that impact these purchases must also be brought to the supplier negotiation table.
For setting the stage for an effective sourcing event, you need to reveal those unique capabilities of your organization that are critical to revenue and offering a competitive advantage. Besides having full visibility about your company's needs, a thorough spend analysis lets you assess your total buying power and the extent to which you can leverage that power for meaningful negotiations.
After this invaluable preliminary step comes the task of setting the actual sourcing event. Keeping the entire procurement value chain into perspective, you can follow the following step-by-step approach:
- Create sourcing event with all the required information
- Invite suppliers - both new as well as the ones you have used before - to the bidding process. To ease the first step, choose suppliers based on your needs and how they match against other suppliers.
- After receiving an invitation to participate in a sourcing event by you, set a stipulated time-frame for bidders to confirm their interest.
- Give bidders get a single page view of all the information required for the RFx. Sellers find this an easy and cost-free way to respond to your requirements.
- Have a complete overview of the bids received and compare them side-by-side. Thus, making it simple for you to pinpoint the best offers, save time, and follow fact-based decisions.
- With the list of winners at hand, you can select your winners and award contracts. Many organizations face the challenge of contract inaccessibility; quite often, contracts remain in the email inbox of negotiators, and no one else in the organization gets to know about it or how to use it. This complexity can be overcome by feeding contracts to Ignite's contract management feature you can not just solve the contract accessibility issue but connect contract metadata to spend data and enable tracking of contracts, including the alerts feature.
There are plenty of different ways to approach strategic sourcing. The best way to capitalize on the many benefits of strategic sourcing is to explore how it can work best within your organization: identify your organization's unique strengths, leverage those strengths in your bidding exercises, and then use them to deliver wins.
If you ask us, a strategic sourcing process requires the right technology—the right software, data and analytics—to be effective. By approaching strategic sourcing with an open mind, you'll maximize opportunities for success—and that's something that's worth considering.