Strategic sourcing is a procurement process that continuously improves and re-evaluates the purchasing activities of a business in order to reduce costs, improved stability and provide a host of other benefits.
How does strategic sourcing work?
The process involves businesses working in-house or outsourcing their procurement model to professionals, to create the best strategic sourcing model based on what has been provided. Through this, businesses are able to focus on their revenue-generating activities with more attention.
As part of the sourcing process, what the organisation buys, from whom, at what price and what volume are all analysed. Strategic sourcing differs from conventional purchasing as it places emphasis on the entire life-cycle of a product, rather than its initial purchase price.
What are the benefits of strategic sourcing?
- Improved guidelines for the future – The strategic methods let businesses gather data and make informed choices with a better idea of the outcome, which allows them to reassess current contracts.
- Improved relationships within the supply chain – When businesses need to work with an extensive list of enterprises, it allows them to improve their relationships with all of them. Strategic sourcing can, therefore, ensure that future procurement needs are laid out ahead of time so they avoid situations that may harm the business financially or otherwise.
- Better organisation – Strategic sourcing increases the focus on long-term planning, and allows business leaders to step away from time-consuming leadership duties so they can place attention on more pressing challenges that could affect them in the immediate future.
- Risk management – Close supplier relationships can help businesses identify and resolve potential problems quickly. For example, if a strategic supplier is having cash flow problems, a business may advance some working capital to allow it to continue operations.
- Cost management – Strategic sourcing allows suppliers to sell a significant portion of their output, so they can improve planning and provide management with long-term cash flow visibility.
- Greater stability – Depending on the buyer, strategic sourcing may lead to supplier consolidation. If a retailer chooses to use one supplier instead of several, it allows for a greater degree of stability in the supplier’s day-to-day operations
- Use eTenders and eAuctions – Electronic tendering lets buyers automate and standardise how tenders are created, distributed, collected and stored, allowing for greater efficiency when compared to manual tender management.
- Use contract management software – Contract management software can help you manage any number of contracts, integrating details of preferred suppliers from eTender or eAuction events with the use of custom fields to capture contract-specific data. Without the right management tools, supplier agreements can roll over into the next year, locking you into poor pricing and service terms.
- Track spend and savings – Instead of relying on spreadsheets to measure and report savings, a savings tracker solution can enable you to easily build up saving forecasts, create tracking documents and deliver reports that illustrate your deliverables and value.
What does the process of strategic sourcing look like?
- Step 1: Profile the category – Define the category and commodities of the spend category. What is the current quantity used? Who are the users and where are they located? What are the processes used and who is involved in the supply chain?
- Step 2: Supply market analysis – Identify the potential global and local suppliers. Study the cost components of the product or service, and analyse the suppliers’ marketplace for risks and opportunities. Variables like key raw material prices, labour and transportation need to be priced, along with calculations of the suppliers’ cost elements.
- Step 3: Develop the strategy – The next step involves deciding where you’ll buy while minimising risk and costs. With the stakeholders onboard, alternative suppliers and market competition needs to be considered.
- Step 4: Select the sourcing process – Next, a business needs to develop a sourcing strategy. The most common process for soliciting bids is typically a Request for Proposal, and will include product/service specifications, delivery and service requirements, pricing breakdowns, along with legal and financial terms.
- Step 5: Negotiate and select suppliers – As negotiations begin and the valid bids are chosen, suppliers will ask for clarifications and more detail where needed. Conduct multiple rounds of negotiations, form a short list of your suppliers, before selecting them as per your business’ approval process.
- Step 6: Implement and integrate – Notify the successful suppliers and ensure they’re involved in the implementation process. Your strategic sourcing strategy will include improvements to specifications or process, changes in delivery or service requirements.
- Step 7: Benchmarking and tracking results – The final step is the beginning of a continuous cycle that starts with benchmarking the current status of the commodity or category, monitoring the results and ensuring that full value is being achieved. A business then goes back to Step 1 to review the supply market again and restart the process.