Strategic sourcing is a global supply chain and procurement process that evaluates a company's acquisition of goods, supplies, equipment, and services to maximize value. This rigorous, strategic process involves numerous touch points with extensive data gathering and evaluation to select the most suitable suppliers. Organizations today utilize strategic sourcing to unlock value across the global supply chain for more effective procurement.
Sourcing refers to all the activities involved in identifying the best potential suppliers to prepare the groundwork for effective procurement. Strategic sourcing, as the name implies, is a sourcing strategy that involves continuous improvement of sourcing processes through collaboration between all the stakeholders in procurement. It is a pivotal activity for organizations that want to improve how they acquire goods and supplies and requires in-depth knowledge of the supply chain.
The sourcing process entails the following key activities:
- Evaluating the supplier landscape
- Developing a procurement strategy
- Data gathering and analysis
- Developing a supplier selection process
- Contract negotiation and management
A well-developed strategic sourcing service is part of an organization's larger procurement strategy. The following are critical elements of strategic sourcing:
Continuous: strategic sourcing is a constant process that covers the various spend categories of goods and services and invites suppliers to participate.
Systemic: strategic sourcing involves a systemic approach driven by data and analytics. Contextual data drives the continuous improvement process across various departments through regular reviews to incorporate new tools, market opportunities, benchmarks and practices.
Collaborative: strategic sourcing teams are cross-functional, enabling suppliers to interact with decision-makers who bring data to the table and look beyond price. Strategic sourcing teams uncover new opportunities to connect managers and supply chain stakeholders to high-value suppliers.
Strategic sourcing has numerous benefits, such as improved supply management, reduced consumption volume, and cost per unit, reduced importation and storage costs, and improved operating efficiency. These all contribute to increased savings. Let's discuss a few of these benefits of strategic sourcing in detail below:
Cost savings is easily the most significant benefit of strategic sourcing. This reflects the fact that reducing costs is a top priority for most procurement managers and is always a top priority for procurement teams. The core goal of reducing spend starts with identifying current costs that procurement managers can optimize. Managers must then conduct market research to explore stakeholder needs, gather data and issue detailed requests for proposals (RFPs) to select the most suitable vendors.
Due to the level of detail involved with strategic sourcing, all parties must be equally invested in building a long-term partnership that would be mutually beneficial. The collaborative, ongoing relationship grows and ultimately helps reduce costs across the organization's supply chain.
Strategic sourcing is equally effective for avoiding bad partnerships and finding suitable vendors. Because of the detailed process, you consider every factor, such as vendor experience and success rate, co-develop contingency plans, and set up processes for communication. Collaboration is a core component of strategic sourcing and managers should look for ways to improve vendor information sharing as part of their risk-management strategy.
Strategic sourcing focuses on partnership, allowing you to provide your vendors with regular feedback. Likewise, vendors will have a platform to proactively alert you to trends, keep you competitive and collaborate on innovative initiatives.
It won't surprise you that neither your procurement department nor the vendor's proposal team relishes the prospect of opening up a new request for proposal. The detailed RFP process could last months or even years for complex, high-value sourcing projects. By leveraging strategic sourcing, you can rest assured that you've accounted for every critical factor, selected the right vendor partner, and are both ready to meet your goals together.
For any strategic sourcing initiative to succeed, an active commitment by top executives is crucial. Such a commitment includes regular meetings and investment in high-quality sourcing tools and software to manage the process well.
Following are the various challenges organizations face when implementing strategic sourcing:
- Involving top management in the strategic sourcing process.
- Attracting and retaining the necessary sourcing talent.
- Convincing the stakeholders to invest in the right tools for strategic sourcing initiatives.
- Building trust with the supplier base enhances information sharing and fosters mutually beneficial buyer-supplier relationships.
- Explaining the importance of operating with fewer suppliers and selecting, contracting, and monitoring them in a disciplined way.
- Coordinating meaningful dialogue across business functions to ensure the selected suppliers deliver value for the business.
Unlocking value in strategic sourcing depends on the successful adoption of a collaborative mindset across all departments of an organization. Companies must embrace innovation to shift from a traditional sourcing paradigm that focuses only on cost reduction through supplier competition to one that emphasizes internal and external collaboration to drive innovation.
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