Strategic Sourcing

Definition of Strategic Sourcing

SAP defines Strategic Sourcing as "a process that creates efficiencies across all spend categories, minimizes supply risks with improved supplier selection, and gives visibility into pricing and forecasting." Strategic sourcing is a procurement process that connects data collection, spend analysis, market research, negotiation, and contracting. It stops short of the actual purchase of and payment for goods and services. Strategic sourcing can be customized to meet a customer’s specific needs, but its main goal is to leverage a single, integrated system to enhance profitability.

According to Gartner, Strategic sourcing is a standardized and systematic approach to supply chain management that formalizes the way information is gathered and used. Strategic sourcing enables organizations to leverage their consolidated purchasing power to find the best possible value in the marketplace. To remain competitive, organizations should expand their procurement expertise beyond purchasing to include strategic sourcing and negotiation to optimize cost and risk.

Strategic Sourcing Vs. Tactical Sourcing

. Understanding Strategic Sourcing
Strategic sourcing involves developing a proactive, holistic, and continuous evaluation and re-evaluation of the sourcing activities in an organization. Strategic sourcing aims to achieve the lowest Total Cost of Ownership (TCO) along with minimal supply chain risk. Hence, it reflects the organization’s relationship with its sourcing partners as a loop instead of a one-way process—an in-depth profile of the suppliers and their core capabilities is developed and periodically aligned to the sourcing requirements of the organization. Strategic sourcing views suppliers as crucial value partners and aims to building sustained, collaborative relations. The customer-supplier loop is assessed at every stage of its lifecycle in order to ensure that the needs of the organizations are continuously and efficiently met. To accomplish this, strategic sourcing leverages spend analysis, supplier evaluation, supplier relationship management, and detailed market research. Strategic sourcing is, hence, a long-term process and for its successful implementation, it needs skilled personnel and relevant technology platforms and tools.

Understanding Tactical Sourcing
In contrast, tactical sourcing involves a short-term and traditionally reactive approach towards managing the sourcing activities of an organization. It aims to achieve the lowest possible cost without considering other factors like supplier relationship management, supply chain risk mitigation, etc. Consequently, the focus on building long-term relationships with suppliers and understanding how their core capabilities can meet the organization is minimal as communication with suppliers only occurs when problems arise. While tactical sourcing can bring gains in the short-term, it prohibits sustained optimization of its sourcing activities. Furthermore, compared to strategic sourcing, tactical sourcing doesn’t necessitate large investments in advanced technological platforms and personnel skillsets.

Strategic Sourcing vs. Procurement

Procurement is slightly different than strategic sourcing. Procurement operations involve tactical, day-to-day transactions that include issuing purchase orders to suppliers. Whereas strategic sourcing represents a variety of sourcing activities, including:

• Supplier development
• Strategic planning
• Contract negotiation
• Outsourcing models
• Supply chain infrastructure

How Strategic Sourcing Works

Businesses can use strategic sourcing to make their procurement processes less shortsighted and focused on price. A sourcing plan can instead allow them to develop an adaptable system that contributes to the overall value of the business long term. The process begins with analyzing business needs and historical spending, followed by outlining a strategic plan, and then conducting data collection and market analysis that guides selection of a roster of suppliers.

Once selection and negotiations have taken place, strategic sourcing also involves measuring performance and improving the process on a continual basis. Strategic sourcing is generally practiced by large organizations with many suppliers. Outsourcing providers for strategic sourcing exist for organizations that wish to delegate the function to a specialist.

Sourcing Business Models

Sourcing Business Models are a systems-based approach to structuring supplier relationships. A sourcing business model is a type of business model that is applied to business relationships where more than one party needs to work with another party to be successful. There are seven sourcing business models that range from the transactional to investment-based. The seven models are:

• Basic Provider
• Approved Provider
• Preferred Provider
• Performance-Based/Managed Services Model
• Vested outsourcing Business Model
• Shared Services Model and
• Equity Partnership Model.

Sourcing business models are targeted for procurement professionals who seek a modern approach to achieve the best fit between buyers and suppliers.

Why is strategic sourcing gaining prominence in procurement?

The concept of strategic sourcing isn’t exactly new. In fact, it started sometime in the late 1980s or early 1990s. Initially adopted by large companies to quantify and increase vendor return on investment (ROI), today, the practice is widespread among organizations of all sizes.

Regardless of size, businesses now have the ability to collect and evaluate extensive data between competitors. Indeed, while much of the value of strategic sourcing is derived from it’s in-depth approach, the multitude of factors also make it difficult to attribute procurement savings directly to a single factor. However, organizations that practice strategic sourcing report a number of benefits.