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Strategic Sourcing: Definition, Process & Benefits

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Sourcing Strategy is a procurement process where total sourcing cost including logistics, warehouse etc. is optimize instead of only maximizing purchase margins.

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Strategic Sourcing Process

In today’s highly competitive business environment, supply chain managers are constantly on the lookout for innovative ways to cut costs, improve and assure quality, and reduce overall time to market for their final product. Strategic sourcing is one such approach to formalize information and extract valuable insights. It is a product of rapid digital transformation and technological innovation to perform a data-driven analysis of all organizational purchases.

In this post, we will discuss everything that you need to know about strategic sourcing!
Supply Chain Components

What is Strategic Sourcing

Strategic sourcing analyzes the total cost of ownership (TCO) with reference to the market trends and aims to optimize the sourcing process by building long-term, mutually beneficial relationships with suppliers.

Essentially, it has three main components, namely, the business’ spend profile, market conditions, and supplier base. Strategic sourcing processes attempt to align these three elements for an effective sourcing strategy that meets maximum business goals.

In a nutshell, it analyzes what a company buys, from whom they buy it, at what price, and in what volumes.
What is Strategic Sourcing

Difference Between Tactical Sourcing & Strategic Sourcing

At first glance, procurement through strategic sourcing and tactical sourcing may appear similar. However, they vary from each other in the following ways:
Strategic SourcingTactical SourcingIs a long-term sourcing solutionIs a short-term sourcing fixAdopts a proactive stanceFollows a reactive trendRequires continuous evaluation and revaluation of the organization’s sourcing strategy that may affect all the dependent strategic sourcing processesCalls for immediate action in response to a particular requirement and has no impact or influence on any other procurement activity or strategyNurtures long-term collaborative and sustained relations with sourcing partners and suppliersRuns on minimal communication with suppliersMitigates long-term supply chain risksFocuses on the problem at handUtilizes an array of tools and platforms to analyze spends, suppliers, supplier relationship, etc., which requires relevant skilled personnel and capital investmentDoes not necessitate capital investment in building or developing tools and skillsets
Thus, one can see that strategic sourcing is more holistic, while tactical sourcing is more niche for an organization’s needs.

Key Benefits of a Sourcing Strategy

Strategic sourcing, by its definition, streamlines business operations to make them cost-effective and highly productive. Apart from this obvious advantage, here are some far-reaching advantages of strategizing the sourcing process discussed at length:
  1. Improved Cost Saving
    Having a formally adopted and well-defined sourcing strategy can save organizations money in several ways. First, you can identify select suppliers that offer maximum value. Next, you can negotiate lower unit prices against high-volume purchases. And finally, the procurement is carried out against external factors, such as market conditions, which maximize profits and offer you a competitive edge.
  2. Risk Mitigation and Minimization
    Supply Chain Risk Mitigation
    Strategic sourcing follows a cost-focused approach to offset potential risks. By analyzing the total spending and value delivered by suppliers, businesses can carry out quality, financial, supply, and customer support risk assessment. Upon identifying these potential risks, one can have a strategy to mitigate and minimize these. Fostering close relations with your suppliers can also keep you a step ahead of possible disruptors in your supply chain.
  3. Room for Continuous Improvement
    Strategic sourcing is not a one-off activity. It calls for continuous evaluation and revaluation of the strategic sourcing processes. Resultantly, it is a sustained cycle of improvement, where managers or executives can identify areas of improvement and build on these. Further, it allows stakeholders to make informed decisions for items such as the future development of the business model, capitalizing on market opportunities, and staying competitive.
  4. Better Alignment of Business Objectives and Sourcing Processes
    Naturally, the sourcing activities must fall in line with the business objectives. Procurement strategic sourcing revolves around the alignment of business objectives and sourcing processes. As a result, organizations will deliver improved performances and greater efficiencies, along with minimal risks.
  5. Optimization and Recognition of Ideal Suppliers
    Apart from focusing on the cost of procurement, strategic sourcing also highlights analyzing the suppliers and their core capabilities to profile them. Through this process, organizations can recognize the suppliers that are best suited for their requirements for the highest value addition or creation at the lowest cost.
  6. Stronger Supplier Relationships
    When organizations invest in building stronger ties with their suppliers, they lay the foundation for trust. By involving the suppliers in sourcing decisions and making them feel valued, businesses would be motivating suppliers to deliver as per the organization’s objectives. Read more about stronger Supplier Relationship Management.

7 Steps to Create an Effective Sourcing Strategy

Given the benefits of strategic sourcing, it would be tempting to implement a sourcing strategy for your organization at the earliest. However, it follows a systematic 7-step plan, which flows as follows:
  1. Analyzing Business Spends
    Business Spend Analysis
    The first stage of strategic sourcing process-building pertains to identifying the key spend areas prevailing across the organization and categorizing them into critical/non-critical, domestic/international, direct/indirect spendings, etc. By using these categories, businesses can carry out risk analysis and prioritize the sourcing activities to develop the sourcing strategy.
  2. Developing a Sourcing Strategy
    Now that you have all your spending categorized and prioritized, you can map the corresponding business requirements that necessitate the spending, timelines for fulfilling these requirements, and the communication workflow for keeping all stakeholders on the same page. This document acts as your backbone and blueprint for the sourcing process and strategy.
  3. Researching the Supplier Market
    After carrying out all the homework internally, it is time to step out and analyze the market. Take stock of the current and future suppliers and record their profiles. Get an in-depth understanding of their market standing, historical industrial performance, revenue or market share, and any other risks or opportunities.
  4. Collecting Supplier Information
    To support the information collected in the previous stage, you will need complete supplier information. For this purpose, you can request for RFQs/RFIs/RFPs from suppliers. Ensure that you explicitly state your business requirements so that suppliers can submit accurate information relating to it. Collect and collate this data in a master list so that all the information is readily available.
  5. Selecting and Contracting Suppliers
    Signature
    By now, your business must already have a few selection parameters to select the ideal supplier. Apply those as filters to shortlist the prospective suppliers from your master list. Ideally, you will want someone delivering high quality and maximum cost savings. When you narrow down on the ideal supplier, initiate the onboarding and contracting process.
  6. Measuring Supplier Performance
    Strategic sourcing does not end merely at choosing the supplier. It is a sustained ongoing process that also delves into measuring the supplier performance with respect to the organizational requirements. Identify the areas of improvement and track the supplier performance periodically to locate sourcing risks and potential disruptions.
  7. Introducing Supplier Relationship Management
    Finally, having a Supplier Relationship Management (SRM) tool can be highly effective in maintaining cordial and fruitful relations between businesses and suppliers. It opens up a two-way process where both stakeholders benefit from the association. SRM lays the groundwork for collaborative action and adds more value to the otherwise dry customer-buyer relationship.
  8. Effective Sourcing Strategy

Key Drivers for Automation of Strategic Sourcing

It may have become evident by now that strategic sourcing calls for a proactive approach to supply chain management. However, businesses cannot waste valuable resources for constantly monitoring and managing supplier performance.

Enter Automation

eSourcing helps overcome the standard hurdles of manually managing supplier relations and procurement. The automation of strategic sourcing has been heavily in vogue for the reasons cited below:
  • Improved Data Visibility
    Strategic sourcing tools and platforms churn out useful and insightful data on spending activities, supplier performance, and supply chain risk assessment. This data presented in the form of reports allow the holistic assessment of all the sourcing activities. Further, these findings can also automatically trigger other processes depending on the business flow and regulatory framework.
    Data Visibility
  • Hands-On Management
    Automating the strategic sourcing processes allows the rule-based sorting and segmentation of various spending activities into categories. Moreover, this process can take place in real-time and shall reflect in the records immediately. Hence, you can have a centralized dashboard that contains up-to-date, categorized spends of the entire business!
  • Data-Driven Risk Assessment
    Every supply chain is susceptible to risks and failures in its myriad forms. Whether this risk is in the form of disruptions or quality or availability, businesses must be prepared to respond to them. To offset the damages caused by the internal and external risks, one needs a reliable risk assessment model, and an automated strategic sourcing process delivers to these requirements.
  • Greater Accountability
    eSourcing platforms have a defined workflow mapped onto them and display the flow of the sourcing process and the bottlenecks if any. The greater transparency allows room for greater accountability and higher compliance by all the stakeholders present in the sourcing projects.

Final Thoughts

In this post, we have had an in-depth look at strategic sourcing, its definition, advantages, and the 7-step process. We have also touched upon how it varies from tactical sourcing and why automation in strategic sourcing is a must. By now, it must be obvious that strategic sourcing is instrumental to a business’s success.

Organizations that follow a refined sourcing strategy are better at managing their sourcing requirements, more equipped at handling disruptions, and enjoy loyalty from their suppliers. Additionally, companies can harness the power of automation to make strategic sourcing more high performing, data-driven, and effective.

Strategic sourcing manages cost, continuity, and quality so that you can focus on the core competencies of your business!
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