What is Strategic Sourcing?
Strategic sourcing is a supply chain management process that ultimately helps organizations obtain the maximum value from their purchasing decisions by gathering and organizing all helpful data in a way that aligns with their business goals and purchasing strategy.
Strategic sourcing aligns your purchasing power with strategy by considering factors like contract negotiation, supplier development, and outsourcing models. It differs from traditional sourcing which involves finding a supplier on simple criteria, like price and location. This is also known as supply chain management.
You may be interested in the difference between these two procurement processes because they vary by cost, effectiveness, and functionality. Any time strategy is involved, the price tag can be higher. However, the more time and money you put in, the greater the payout. Simple sourcing takes less time but can cost more down the road.
One example is if you negotiate a longer vendor contract with a lower rate. This is a strategic move because although you are locked into a bigger commitment, it ensures your company will save money over time—typically at much lower prices than market rates. It’s a win-win for every party involved.
Here’s a quick review of how the procurement process has evolved into strategic sourcing and dynamic purchasing strategies:
What is Procurement?
To understand how strategic sourcing works, you should have an idea of the procurement process and what sourcing is in general.
Procurement is the same thing as purchasing and the corporate responsibilities of this department have evolved over the years. As recently as the 1980s, procurement departments were only viewed as “order placers.” The role was fairly simple and didn’t’ require much strategic planning. It was not a cerebral process by any means.
Procurement started by issuing purchase orders with zero thought on implementing corporate goals. Today, the methodology of purchasing is defined as a transaction-oriented function and a subset of procurement.
In the bigger picture, procurement is viewed as a corporate management function that involves a variety of factors, including:
- Selecting prospective suppliers
- Negotiating contracts and payment terms
- Enforcing regulatory compliance requirements
- Executing the contract
It is the umbrella term for which purchasing and sourcing are two distinct parts of the acquisition process.
What is Sourcing?
As purchasing is a subset of procurement, so is sourcing. This is the process of locating a “source” to procure your goods and services. Simple sourcing strategy involves finding the most cost-effective supplier of goods. It’s carried out in many different areas and for a variety of business needs. One of the most common forms of sourcing is known as supply chain management.
A Holistic Approach
As procurement strategies have developed, highly sophisticated purchasing departments evolved. Usually under the aegis of “corporate finance,” these teams began initiating in-depth sourcing reviews and market research.
Sourcing plans involved comprehensive agreements with suppliers and service providers who were identified as having the greatest impact on a company’s bottom line. These are the brands that procurement departments were seeking to forge long-term relationships with.
Strategic sourcing is highly successful and very different from regular sourcing. Strategic sourcing considers all cost elements of a company’s operation that involve outside suppliers, not just purchase price. Over the years, it has become an institutionalized part of procurement that focuses on contract management, spend analysis, and continuous improvement.
Strategic sourcing is a critical component to the life cycle of your cash flow. It helps to consistently reevaluate corporate purchasing activities in all spend categories, including your supply chain, service delivery, and final product.
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How is Strategic Sourcing Different than Sourcing?
The main difference between strategic sourcing and regular sourcing is that strategic sourcing has evolved into a dynamic process whereas general sourcing keeps it simple. It just focuses on supplier prices. The idea is that you are looking for something with the lowest total cost of ownership.
Strategic sourcing looks at cost as only one piece to a larger puzzle. It’s one component of a hierarchy of corporate needs. A sourcing team considers a variety of other components that can affect your relationship with the “source” i.e. supplier. This includes assurance of factors like:
- Regulatory compliance
None of this should ever be sacrificed for price alone. That is the general thought process behind strategic sourcing.
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
The Nuances of Procurement Terminology
Procurement terminology can be confusing. Understanding the nuances of the naming convention is tricky. The term “procurement” is not synonymous with “sourcing.” There are important distinctions between the two functions.
For example, most companies view procurement as being strategical and more near-term focused. Whereas sourcing is seen as a long-term process. The existence of this difference is reinforced by the fact that the KPIs (key performance indicators) of a procurement task are far different than those for sourcing.
These differences also extend to other procurement-related terms like “strategic sourcing” and “supply chain management.” While all refer to points around the same process continuum, the terms should never be used interchangeably. The strategies, dynamics, and implementations all differ on a massive level.
These processes are all interrelated corporate functions that relate to a company’s prospective and existing supplier network.
Strategic Sourcing and Supply Chain Management
Procurement and supply chain management are closely related and thus, so is strategic sourcing. While procurement is the act of getting the goods and services a business needs, supply chain management is the management of the infrastructure and services required to get those things. A supply chain consists of everyone involved in getting a product or service into the hands of a consumer (either internal or external).
The term “supply chain” generally refers to the post-contractual phase of the procurement process. This covers logistical issues and matters related to all suppliers, ranging from Tier 1 to Tier 3.
While procurement is about all pre-contractual analyses and supplier negotiations up to the start of the contract, supply chain management is about what happens POST contract consummation.
So, can you see how both are related but actually quite different?
Procurement professionals are now looking at strategic sourcing for the optimization of supply chain management decisions with the intent to create a competitive advantage.
One key mission of strategic sourcing is to enhance the buyer-supplier relationship. The goal is to leverage these interactions to further understand a supplier’s true capabilities and what they can offer your business. An organization accomplishes this by integrating and complementing the core competencies with various partners in the supply chain.
The migration of major corporations to strategic sourcing has been a powerful change agent for large fleet management in the supply chain. It forces change for things like:
- Vehicle sourcing
- Contract negotiations
- Supplier selection
- Service level agreements
- Fleet supplier reviews
- Fine-tuning supply chain management
By fully understanding these processes, it will help the procurement function and fleet management fulfill a common goal. That is habitual and arbitrary buying by stakeholders and field operations. It encourages the innovation necessary to obtain optimal value when utilizing assets.
The Benefits of Strategic Sourcing
So, why go through all the rigors of developing a strategy for your sourcing process? There are a variety of advantages to thinking carefully about supply chain management. For example:
Strategic sourcing comes with a variety of cost savings and can have a serious impact on your bottom line. Reducing costs comes with immediate returns and frees up resources to expand your business and focus on profitability.
Studies have shown that while businesses spend over 60% of revenue purchasing goods/services, an estimated 70% of potential procurement savings can be achieved through strategic sourcing. It streamlines procurement operations, controls costs, and maximizes every dollar you spend.
Strategic sourcing helps to mitigate supply risk that goes well beyond a compliance check. While many organizations have a pre-vetting process for the review of a supplier’s financial stability, there are broader risks to think about.
A number of factors can impact risk like:
- Nature of items sourced
- Country of origin
- Mode of transportation
- Sensitivity of intellectual property
- Customer-specific requirements
Using a sourcing strategy helps a business prioritize goals and performance metrics. It ensures ongoing risk management across key procurement activities. This includes elements beyond cost like a supplier’s sustainability, innovation, and flexibility.
Considering supplier operations and capabilities will open up new opportunities for nurturing supplier relationships. A vendor can influence a customer’s buying experience and expectations but is not usually held accountable for possible problems or quality issues.
With strategic sourcing, there is a higher level of accountability. Closer relationships result in faster lead times, more reliable fulfillment, and a higher quality product/service. There’s also more flexibility when it comes to contract negotiation. Strategic sourcing creates a competitive advantage by aligning vendor goals with buyer goals.
The Future is Strategy
We have the tools and technology now to implement strategy into every business process, including procurement. Corporate purchasing has come a long way. Supply chain management and strategic sourcing take into consideration a dynamic set of factors that range from supplier behavior to competitive analysis and contract negotiations.
When done right, you can set up a network of trusted suppliers that will align with your operations for the lowest, most efficient price. Strategic sourcing is about strengthening business relationships and ensuring the best quality products, at an affordable cost.