As businesses aim for a competitive advantage and improved performance, a robust supply chain and an effective procurement management strategy have become a priority. Procurement managers are exploring innovative ways to reduce costs, improve the bottom line, ensure high quality and timely delivery as well cut short the time for the product to the market. Moreover, political situations and economic volatility make it rather more difficult. This warrants the need for an approach that aligns the procurement strategy with business goals, ensuring minimum supply chain risks and the lowest total cost of ownership. This is exactly what strategic sourcing is.
In this article, we will discuss strategic sourcing, how it is different from tactical sourcing, and how strategic sourcing can impact your business.
What Is Strategic Sourcing?
Data-driven decision-making and supplier relationship management have become a critical part of the purchase process. That is why strategic sourcing is here to stay.
Strategic sourcing can be defined as a collaborative process with internal stakeholders and suppliers that enables aligning purchase decisions with the business needs. Essentially, it analyses what a business is buying, from where it is bought, and at what price and volumes.
The three main components of strategic sourcing include:
- The spending profile of the business
- Market conditions and trends
- Suppliers base
Thus, it involves analysing the total cost of ownership (TCO) with respect to the market conditions to optimise the sourcing process by building strong and mutually beneficial relationships with the suppliers to meet the business goals.Most importantly, it is an ongoing process that helps improve efficiency, profitability, and sustainability.
What Is the Difference Between Tactical Sourcing and Strategic Sourcing
We discussed strategic sourcing in the earlier section. Unlike strategic sourcing, tactical sourcing is a transaction-based, short-term process that reactively handles the sourcing needs of small and medium-sized companies. Plus, it does not focus on the needs of the entire organisation or long-term supplier relationships and their capabilities.
Here are some major differences between the two.
Approach and Timing
Strategic sourcing is a more long-term and proactive approach to sourcing for the present as well as future needs of the organisation. Whereas, tactical sourcing is a short-term transactional approach.
Business Requirements
Strategic sourcing is a holistic approach that caters to the broader needs of the organisation and is planned in advance. This means it needs continuous evaluation and may also impact other interdependent sourcing processes. Whereas tactical sourcing is a routine, reactive process to meet immediate business needs and may not have any impact on the other sourcing processes.
Supplier Relationship
Strategic sourcing focuses on understanding vendor capabilities and maintaining mutually beneficial long-term relationships to ensure the lowest TCO and supply chain risk. Whereas tactical sourcing involves minimal interaction with the vendors and does not evaluate the entire vendor’s capabilities.
Tools and Skills
Because of the well-conceived approach, strategic sourcing relies on tools to assess business spending, supplier capabilities, and relationships. This means the need for the skillset that is capable of handling such platforms. Tactical sourcing on the other hand does not require skillset building or adoption of management tools.
In the end, we can conclude that while tactical sourcing is about meeting niche needs, strategic sourcing follows a more complete or holistic approach.
Top 6 Benefits of Strategic Sourcing on Businesses
Strategic sourcing offers numerous benefits to the business. Let us understand in detail.
Cost Management
Since strategic sourcing involves analysing spending and evaluating suppliers that offer the lowest TCO and maximum value, you can better negotiate for high volume deals. Moreover, during procurement market trends are also taken into account, so your team can maximise profitability.
Risk Management and Mitigation
Strategic sourcing helps manage and reduce potential risks by continually assessing the business spending and the value offered by the suppliers. This means you can access information based on the quality, cost, and supply risks to identify potential issues and plan a strategy to minimise the effect of such risks. Moreover, a robust vendor base can also help you leverage relationships to manage and avoid any disruptions in the supply chain.
Alignment with Business Goals
Usually, the purchasing and sourcing processes should align with the business needs and goals of the entire organisation to avoid unnecessary spending and inventory issues. It helps in improving efficiency and productivity as well as minimising risks. This is exactly what strategic sourcing does.
A Base of Valued Suppliers
Since in strategic sourcing you evaluate suppliers based on the value they offer and their capabilities, it helps you to pin down the suppliers that will help you meet your business needs. This means they can also offer you the best value at the best available price, reducing your cost of procurement.
Robust Supplier Relationships
With suppliers, it is important to have a mutually beneficial relationship. This helps them feel involved and valued in the purchasing or sourcing activities. You can, thus, utilise these strong ties to fulfil your business needs and deliverables on time.
Continued Improvement
Strategic sourcing is an ongoing process and not a one-time task. It requires timely evaluation to make sure your spending and supplier base is optimised to meet business needs. It helps you identify areas of improvement by involving both internal and external stakeholders through a collaborative process.
Steps Involved in Strategic Sourcing
Here are the steps involved in strategic sourcing.
#1 Identify Business Spends and Category
The first step requires identifying and analysing the categories of business spend. For instance, international or domestic, essential or non-essential, direct or indirect, and others. Define the quantity, location, processes, supplier, etc. for each category. You can also utllise these categories to perform risk analysis and develop a sourcing strategy.
#2 Collate Information Sourcing Strategy
After identifying and prioritising categories, you can map the business needs, timelines, and communication workflow to ensure you have all relevant information for stakeholders at one place. This will help you form the framework of your sourcing strategy.
#3 Analyse Market
This step is about analysing the market, i.e. collecting information on the current and future suppliers and their profiles. You can look into their market reputation and share, historical performance, as well as associated opportunities and risks to create a complete picture.
#4 Collate Supplier Information
This is the obvious next step. Make sure you have your business need stated clearly to help suppliers submit the right information. At this stage, you can request RFQ or RFP from the suppliers in your list to create a consolidated sheet with all the information on suppliers and the proposals or quotes submitted by the suppliers.
#5 Identify and Contact the Right Suppliers
Based on your predefined vendor selection criteria, shortlist the right suppliers. Your selection can be based on quality, deliverability, timeline, past performance etc. Ideally, you would want to shortlist suppliers who can offer maximum value and quality at maximum savings. After this, you can move on to the onboarding and finalising contracts.
#6 Measure Performance and Optimise
Strategic sourcing is a continuous process and that is why you also need to evaluate the performance of the suppliers so they are able to meet the business needs as defined in the contract. You need to also identify the area of improvement to avoid disruptions and minimise supply chain risks.
Final Words
Strategic sourcing brings numerous benefits to an organisation including improved productivity, efficiency, cost savings, as well as reduced risks. However, strategic sourcing requires the adoption of technology to streamline the procurement processes. This is where Induzbuy can help businesses. With our procurement management solution, you can automate a lot of your mundane tasks such as vendor management, contract management, reconciliation, etc. to gain a competitive edge. To know more, click here.
