Strategic sourcing is a methodology of supply chain management that improves the way in which information is both gathered and used so that an organization can leverage the data to consolidate purchasing power and identify the best possible values within the market place and then align a purchasing strategy accordingly with business goals.
This is something which is growing in popularity at a rapid pace due to the digital transformation of the supply chain becoming more and more essential. Strategic sourcing is something that requires a thorough analysis of what an organization buys, who said products are sourced from, and at what price / volume.
What is the difference between sourcing and strategic sourcing?
What is the difference between traditional sourcing and strategic sourcing? Strategic sourcing is different from the more conventional purchasing practices because this new and innovative method places great emphasis beyond the initial purchase price in order to focus on the total cost of ownership – thus optimizing the sourcing process through ongoing analysis in order to build greater, mutually beneficial relationships with suppliers.
What are the 5 core processes of strategic sourcing?
1. Evaluate, collect data, build a strategy
The first and fundamental step in strategic sourcing is making a thorough evaluation of what your sourcing requirements are. This includes:
- Solidify supplier relationships
- Spend analysis
- Project validation
- Data gathering
- Project strategy
2. Determine the right engagement model for you and your target suppliers
Next you need to determine which engagement model/s best suit your business and the kind of suppliers that you are going to be targeting. Look at things like:
- Low-complexity and high-value initiatives
- High-complexity and high-value initiatives
- Low-complexity and low-value initiatives
- High-complexity and low-value initiatives
Following that you must send out proposal requests to prospective suppliers. You will have to deal with multiple suppliers, many of which you likely won’t want to do business with. As such, you should be crystal clear about what you expect from them in order to reduce the number of irrelevant proposals offered.
Finally, shortlist your suppliers that you plan to carry through to the next stage of negations. Make sure you include:
- A summary of proposal responses
- Details of your shortlisted suppliers
- An evaluation of supplier viability
- Detailed plans for further negotiation
3. Research and award your chosen supplier/s
Next you will make a decision and award your chosen supplier/s. Here are some of the key qualities that you should be looking for:
- Great communication skills
- Supplier operations and fulfilment capabilities
- Supplier finances
- Supplier infrastructure
- The supply chain
- Ethics that match yours
- Good customer relations
- Solid disaster plans
- Highly competent
- Transparent and appropriate cost
If you evaluate all of the above and still cannot find an appropriate supplier for you then it’s back to the drawing board. Re-open the selection process for a small number of suppliers and encourage them to improve their offers in order to make them more competitive.
4. Contract implementation
Following the selection and final approval of your chosen supplier/s, it’s time to implement the contract. You must work closely with your new suppliers in order to devise a clear communication plan in order to implement the new goods that you have selected for your business.
Any and all potential risks must be identified and mitigated. These arrangements then need to be formalized with a formal contract signed by all parties involved.
Don’t forget to highlight KPI’s and objectives. Set and track them to hold your suppliers to account.
Once you have done all of this you are finally ready to transfer ownership of the supplier to the relevant team in your organization.
5. Invoice processing and monitoring
Finally, the invoices process must be established. Then, ongoing monitoring and tracking of your supplier performance should be put into place, including:
- Receiving deliveries on time
- The quality of products delivered
- Exceptional customer service throughout
- Correct invoicing and the proper payment
- The efficiency of communication between parties
- Stock availability
- Etc.
Similarly, you should track the overall value of the savings that you are making with the new supplier (if applicable) and report to the wider organization how these cost-saving measures have benefited the bottom line.
Why is strategic sourcing so important?
So, why is strategic sourcing so important? In a nut-shell, by adopting strategic sourcing, you can bring significant advantages to your business, the most notable of which being big cost savings.
Sourcing suppliers using this innovative method allows you to continually analyze the evolving market and ensure that you are always achieving the best cost savings across the board.
You can align your component sourcing with your business goals, both increasing the efficiency of, and minimizing the risks within the supply chain.
The process of analyzing your suppliers on more than just their initial product cost means that your business goals can be properly aligned with the best suppliers who can enable you to achieve said goals, thus creating higher value at lower cost.
At its core, strategic sourcing provides business owners the opportunity to build long-term, mutually beneficial relationships with quality suppliers. As you will be selected suppliers based on their capacity, compatibility, and competency in relation to your business needs, you will be better positioned to negotiate and establish a far more efficient transaction model.
This in turn will lead to a host of other benefits, rather than simply finding the right products in the time that they are expected.
By having stronger relationships in place, including a more comprehensive overview of the entire process, it will be much easier for you to identify risks, forecast sales, and remain afloat during difficult times and shortages.
Conclusion
It’s time to step away from the dated methods of doing business and embracing the rise of big data, digitalization, and automation. The benefits far outweigh the risks (of which there is none). Yes, it can be daunting switching up the way you operate, particularly when you are set in your ways and feel comfortable with your methodology and existing relationships. However, by adopting a new and innovative approach, you can identify a great number of ways in which the overall sourcing process can be improved.
