Strategic sourcing is an important element within procurement and category management. Historically, a strategic sourcing may have focused on driving cost reduction (using a total cost of ownership approach), but now considers wider procurement and business objectives including continuity of supply, minimising operational and commercial risk, achieving sustainability goals and innovation through supplier development.

The terms procurement and sourcing are often used interchangeably. Procurement refers to the entire acquisition process of products and services, including sourcing, contracting, purchasing, goods receiving and inspecting and keeping records of all transactions. Sourcing, whether tactical or strategic, is a key part of the procurement process. Strategic sourcing includes various activities from opportunity identification and analysis as part of a sourcing strategy, through the implementation of the supply-side (involving the go to market activities and tendering) and demand-side initiatives (demand planning and management), through contract award and implementation to supplier management (involving contract management and supplier relationship management). Operational procurement, or traditional purchasing, refers to tactical or transactional activities such as purchase ordering and invoice handling.

 

What is Strategic Sourcing?

It is critical that organisations possess a clear way of thinking and targeted strategic approach to their procurement activity focused on maximising the value suppliers can deliver when providing products or services.

Strategic sourcing is a long-term process and requires continuous re-evaluation of sourcing activities, a clear understanding of business requirements, analysis of the market/supply chain and aligning the focus of your activity to ensure these are delivered in an optimal manner. It is important because it can help you save costs and maximise value for money through sourcing from the right suppliers who are best placed to deliver your business and procurement objectives. It also acts as a way to develop and maintain long-term relationships with suppliers, where appropriate, whose way of working are aligned with your own organisation.

The strategic sourcing process can be a complicated one, as it is an organisation-wide process which requires inputs from all departments and teams. Organisations should form a strategic cross-functional sourcing team aligned with the business and procurement strategies. Key stakeholders should be engaged at the front-end of the process to ensure business buy-in and support throughout the process.

Organisations may have strategic sourcing processes consisting of steps ranging in number from four to ten. While the 7-Step Processes developed by AT Kearney is widely recognised and may be considered as best practice, regardless of the number of steps a best practice strategic sourcing process should contain the following key activities:

  • Step 1: Definition of Business Needs and Spend Analysis
    At the very outset make sure to engage a cross-functional team to clearly define the sourcing category or commodity and determine the specific needs of organisation. The spend analysis involves gathering, cleaning, categorising, and evaluating spending data to inform strategic options and ultimately reduce procurement costs, enhance efficiency and ensure compliance.
  • Step 2: Supply Market Analysis
    After the analysis of internal demand (spend and contracts), it is important to analyse the supply market, suppliers and extended supply chain from which you will source your requirements.
  • Step 3: Develop a Strategic Sourcing Strategy
    Selecting how and where to purchase the product/service while maximising value, reducing risk and price is a key challenge for procurement professionals. The identification of strategic options should be informed by your prior activity.
  • Step 4: Undertake a Sourcing Exercise to Identify Potential Suppliers
    The implementation of the sourcing strategy is the heartland for procurement professionals and the most frequently adopted ways to identify a potential supplier is through the effective use of RFx (RFI, RFP, RFQ and possibly an e-Auction).
  • Step 5: Supplier Selection and Negotiation
    A cross-functional internal team conducts a comprehensive and objective evaluation of the submitted proposals short-listed suppliers may have to go through multiple rounds of negotiations. The selection of the supplier in these negotiations, like the initial shortlisting, should be based on a robust process with assessment based on pre-agreed criterion.
  • Step 6: Contract Award and Implementation
    The contract drafted and finalised should be read and signed by all relevant parties. Once signed, the contract formalises the relationship.
  • Step 7: Contract Management and Performance Improvement
    The strategic sourcing process does not end at selecting and onboarding the supplier. Supplier performance management avoids supply chain disruption or other risks and identify areas for improvement to ensure success.

To find out more about, read our guide, ‘What is Strategic Sourcing?’

 

Role of Procurement in Supply Chain Management

The management of supply chains is a complex process that involves the coordination of numerous activities and stakeholders to ensure the smooth flow of products and services throughout the supply chain from upstream suppliers to end customers. Procurement is fundamental to this process as it plays a critical role in sourcing and acquiring the necessary materials, products, and services needed for businesses to operate effectively.

Effective procurement practices help organisations optimise their supply chains, reduce costs, improve quality control measures, ensure risk and resilience, provide sustainable solutions and enhance overall business performance.

At its simplest, the procurement process can be divided into three key activities: market research and analysis, supplier selection, and contract negotiation/execution:

  • Market research and analysis involves organisations looking for information on products or services that meet their specific needs and in addition to consulting market intelligence sources this may involve surveys, focus groups, supplier/market engagement sessions, or interviews with industry experts.
  • Supplier selection involves the key procurement activity of going to the market to identify and select the suppliers best placed to deliver the business requirements.
  • Contract negotiations/execution involves the final evaluation of supplier responses and the contract award to the supplier who offers the best value for money offering (in line with the business requirements). Suppliers typically provide products/services for a fixed period of time, during which contract management may take place and after which the contract may be renewed or terminated as appropriate.

 

Difference Between Strategic Sourcing and Procurement

To fully understand the difference between procurement and strategic sourcing lets revisit simple definitions. Procurement evolved from purchasing over the years but as recently as the 1980s were viewed as ‘order placers’ with the role not requiring much strategic planning. Today, purchasing is widely recognised as a transaction-oriented function and a subset of procurement with procurement a corporate function focused on:

  • Identifying and selecting prospective suppliers
  • Negotiating contracts and payment terms
  • Implementing the contract

The key difference between strategic sourcing and regular sourcing is that strategic sourcing has evolved into a dynamic process which looks beyond price to cost as a piece to a larger more complex hierarchy of corporate needs and business requirements including quality, delivery and security of supply, service, innovation, regulatory compliance and environmental and sustainability requirements. None of these should ever be sacrificed for price alone. 

Procurement is, therefore, different to strategic sourcing. Procurement operations involve administrative and tactical, day-to-day transactions that include issuing purchase orders to suppliers. Whereas strategic sourcing represents a variety of sourcing activities including: strategic planning, contract and spend analysis, make-buy analysis, contract negotiation, supplier performance improvement and development all supported by appropriate procurement and supply chain infrastructure and tools.

Studies have shown that while businesses typically spend over 60% of revenue purchasing goods/services from third parties, an estimated 70% of potential procurement savings can be achieved through strategic sourcing. It streamlines procurement operations, controls costs and maximises the impact of your external spend.

The use of tools and technology supports the implementation of strategy into every business process, including procurement and strategic sourcing. These have come a long way and take into dynamic analysis of internal spend/contract analysis, external competitive market and supply chain dynamics, and strategic supplier behaviours and contract negotiations. When done right, you can develop a network of trusted suppliers that will deliver your business requirements for the lowest, most efficient price. Strategic sourcing is also about strengthening business relationships and ensuring the best value for money.

At the very outset make sure to engage a cross-functional team to clearly define the sourcing category or commodity and determine the specific needs of organisation. Key questions to address may include: Who are the end customers to these goods or services, where are they located, what kind of logistics are being deployed, what requirements will they place higher value on, is over-specification a problem, and are the full range of options from the supply market and supply chain understood? An efficient and effective sourcing process begins with understanding the category and commodities that an organisation needs in order to achieve its goals and spend visibility is the key to gain that understanding.

Spend analysis involves gathering, cleaning, categorising, and evaluating spending data to inform strategic options and ultimately reduce procurement costs, enhance efficiency and ensure compliance. It is a crucial tool for procurement teams to proactively identify cost optimisation opportunities, manage risks, and enhance purchasing power and leverage. By analysing spend and contracts across business areas, organisations can prioritize sourcing operations, identify costly suppliers, and streamline procurement to save money. For instance, consolidating related suppliers can lead to better deals and cost savings.

 

Benefits of Strategic Sourcing

Strategic sourcing extends the procurement team’s focus and influence away from the traditional tactical, clerical, back-office function into a more strategic role within the organisation. In extending its strategic impact the following benefits will be evident:

  • Increased Cost Savings
    Strategic Sourcing extends beyond purchase price and considers the total cost of ownership (TCO), which may support more significant long-term cost savings. These savings have a direct, positive impact on financial profitability, as opposed to sales revenue, which is reduced by commissions, overhead costs and costs of goods sold.
  • Increased Efficiency and Product/Supply Innovation
    The focus of strategic sourcing involves the identification and selection of suppliers for future improvement initiatives. This may shorten sourcing timelines and foster proactive and collaborative supplier relationships based on performance improvement and maximising innovation opportunities. Automation and the effective use of technology can also enhance the efficiency of the sourcing process.
  • Market and Supplier Intelligence
    Market, supplier and supply chain research and analysis informs robust strategic business decision-making. It also assists sourcing teams to identify the most significant risk and resilience factors and develop appropriate strategies for security of supply.
  • Improved Compliance
    Strategic sourcing the identification and selection of suppliers whose values and practices align with their organisation’s business and procurement goals. Compliance is necessary, not strategic – ensuring suppliers meet regulatory guidelines to help protect the organisation’s brand images and reputation.
  • Stronger Supplier Relationships
    Working closely with suppliers should develop collaborative, meaningful relationships with both parties having aligned objectives. This is a more desirable (and profitable) state than is customary with the traditional, transactional procurement model that is often adversarial and characterised by conflict. Stronger relationships with suppliers usually pave the way for more favourable contractual terms and an environment for performance improvement and innovation.

 

Procurement Solutions

Facing intense challenges and issues and having considerable workloads, procurement and sourcing professionals often struggle to find the time to rise above the day-to-day tactical procurement and sourcing ‘churn’ to think strategically.

If you need help with your strategic sourcing strategy please get in touch with 4C Associates today.

We can help you develop best practice procurement and sourcing strategies and generate immediate cost savings, while also identifying opportunities for long-term and sustainable improvement and value creation. Focusing solely on cost is not being strategic. Yes, there are times (when inflation is high) when cost reduction takes priority, but strategic procurement professionals know there are several other factors to take into account. This wider understanding of value includes a focus on: total cost of ownership (TCO), maximising innovation opportunities, ensuring security of supply, and delivery key quality, delivery, sustainability and social value objectives.

Being strategic with suppliers also involves recognising you will create more value in the long-term than you will achieve by focusing on short-term gain. Effective contract management (or a SRM program for appropriate suppliers) will improve quality of service, more timely delivery, increased customer satisfaction, unlock better deals and performance improvement, get better support, and save money.