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.

== Strategic Sourcing Process No matter the purchasing size, the 7-step strategic sourcing practice, originally developed by A.T. Kearney, has been tested and proven effective for sourcing products and services. The final results could be cost-saving, greater value-added and time saved.

• Step 1: Profile The Category: The first step is to identify the sourcing category or commodity, including the volumes (quantity, types and sizes) spent on products and services, current prices and suppliers, and specification details. Also, don’t forget to analyze your users – who they are, where they are located – and departments involved in the supply chain.

• Step 2: Supply Market Analysis: Understand your buyer power and category critically to position the sourcing strategy by performing market analysis. Then, you determine what strategy approach better fits with the type of service you’re sourcing.

Kraljic’s Matrix is seen as one of the most effective ways to segment the vendor base. This two-by-two matrix is mapped against two key dimensions: risk and profitability. Risk demonstrates the likelihood of unexpected events occurring that may disrupt the operations. Profitability describes the possibility of impacting the bottom line of the organization.

Once you identify the segmentation of a product and service, you’ll have a clear vision of how the product and service impact the overall business, then be more confident about what strategy and partner relationship you should implement.

• Step 3: Develop a Strategic Sourcing Strategy: It is a critical step in deciding where and how to buy while minimizing the risk and cost. To get the best of our supplier pool, you should consider both existing and potential suppliers. Establish your business’ goal and the minimum requirements for suppliers, then list the selection criteria that are most suited to your requirements, capabilities and resources. A cross-functional team with critical stakeholders is highly recommended.

• Step 4: Select The Strategic Sourcing Process: Time to solicit bids! The most common method that many businesses are using is Request for Proposal (RFP). If you’re not familiar with the term, RFP is a document that solicits proposals, which is often used through a bidding process, written by an organization interested in acquiring a product or service from vendors for their project. The document outlines the details of product or service specifications, requirements, pricing breakdown, legal and financial terms and conditions, and evaluation criteria.

• Step 5: Negotiate with and Select Suppliers: Now you may have many suppliers that respond to your RFP. Your next task is to shortlist the most potential suppliers, then interview for clarification or asking more details if needed. The more information you have from each supplier, the better decision you will make. To do that, you need to form the best possible team that knows the product or service you want to purchase, which helps ask the right questions to potential suppliers.

• Step 6: Implementation and Integration: Communicating with suppliers is an integral part of strategic sourcing. After negotiation, you may have the decision of what suppliers you want to partner with. Make sure you notify those successful suppliers that are going to be involved in the implementation stage. The more complex your product is, the tighter your cooperation and partnership should be. It’s critical to integrate suppliers into your meetings or discussions included in the implementation stage, making sure they’re up-to-date on the most recent changes and updates.

Step 7: Benchmarking: Many people underestimate this step, but it’s a huge mistake to skip it. It’s essential to measure the supplier’s performance over time – starting with benchmarking the current status of the product, continuously monitoring the results and ensuring the goal is being achieved. By doing so, you can quickly identify the problem during the implementation and notify your supplier to address the issue with the lowest business impact.

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.