This guide introduces the key activities in strategic sourcing and focuses on the key steps to follow to ensure it can be successfully implemented within organisations.
It is important to understand these steps so that procurement professionals can understand how strategic sourcing, if adopted effectively by your procurement team within your organisation, can enhance value and drive cost savings, promotes supplier collaboration, improves supply chain resilience, and fosters sustainability, all of which contribute to an organisation’s long-term success.
The development of a sourcing strategy will help you to formalise the way you understand your business requirements, gather information on your internal demand and the external supply market and extended supply chain, so you can find the best possible strategic options and value levers that aligns with your organisation’s long-term goals and objectives. Once identified you can implement the selected strategic sourcing approach to select the supplier(s) to deliver the required products or services to deliver your business needs. Once the contracts are set-up and implemented, the ongoing management of the contracts and suppliers may take place as dictated by the contract classification and supplier segmentation.
What is Strategic Sourcing?
It is critical that organisations possess a clear, focused way of thinking and targeted approach to their procurement activity focused on maximising the value suppliers can bring when sourcing products or services from third parties.
Strategic sourcing is a long-term process and requires continuous re-evaluation of sourcing activities, analysis of the market/supply chain and recognising your organisations goals and aligning the focus of your activity to ensure these are delivered. It is important because it can help you save costs and maximise value for money through the research and analysis of the market and sourcing from the right suppliers who are best placed to deliver your business requirements. It also acts as a way to develop and maintain long-term relationships with suppliers, where appropriate, whose way of working are compatible with your organisation’s procurement and business objectives.
To find out more about, read our guide, ‘What is Strategic Sourcing?’
What is a Best Practice Strategic Sourcing Process?
The sourcing process can be a complicated one. Strategic sourcing 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 strategy. Key stakeholders should be engaged at the front-end of the process to ensure business buy-in and support throughout the process.
How many steps is best practice? 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. 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.
Step 2: Supply Marketing Analysis
After the analysis of internal demand (spend and contracts), it is important to analyse the supply market and suppliers from which you will source your requirements. This will include analysis of the supplier’s marketplace for risks and opportunities and factor in all the costs, from raw materials through the manufacturing process including transportation. Researching the price aspects that make up the product or service (i.e. the raw material costs and other elements such as labour, energy and logistics) will inform the understanding, analysis and subsequent evaluation of total cost of ownership within proposed bids from suppliers. Go the extra mile to research the marketplace to find potential suppliers locally and globally along with the risk and opportunity factors.
Conducting a thorough analysis of your current and potential suppliers allows you to understand and evaluate critical supplier profiles. This process includes assessing suppliers’ revenue or market share to gauge their market (and supply chain) position and industrial/commercial performance, as well as identifying the risks and opportunities within the wider supply market. This also informs the strategic analysis in the next phase to help you understand how attractive your prospective business will be the supplier – one element to consider in understanding the balance of power in buyer-supplier relationship you will seek to create.
Step 3: Develop a Strategic Sourcing Strategy
Choosing how and where to purchase the product or service while maximising value, reducing risk and price is a key challenge for procurement professionals. The development of the sourcing strategy and identification of strategic options should be informed by your prior activity and internal analysis (of spend and contracts) and external analysis (supply market, supplier and supply chain analysis) supported by strategic analysis using such thinking as portfolio analysis, supplier positioning analysis and power and leverage analysis.
If you already have an existing supplier who deliver your requirements without issue and your sourcing option is to extend the relationship, then re-negotiation could also be an option to enhance the value for money you receive. The sourcing strategy you create should align with your organisation’s business objectives and corporate goals along with available capabilities and resources. It is critical that a cross-functional sourcing team develops this sourcing strategy that involves stakeholders, subject matter experts, and end customers from across the business.
Step 4: Undertake a Sourcing Exercise (RFI/RFP/RFQ) to Identify Potential Suppliers
The implementation of the sourcing strategy is the heartland for procurement professionals. The most frequently adopted ways to identify a potential supplier is through the effective use of RFx (RFI, RFP, RFQ and possibly an Auction). For example, using RFPs (Request for Proposal) provides a well understood process for soliciting bids including product or service-related specifications, cost breakdown and analysis, delivery and service requirements, and financial/legal terms and conditions. In some scenarios, evaluation criteria can also be included.
The essential steps to researching, shortlisting and selecting potential suppliers include: ensure you understand your existing supplier base, research the supply market and additional suppliers, and develop clear supplier qualification and assessment criterion based on your business requirements. To achieve this, throughout each stage of the RFx process, the procurement team must collate, analyse, and understand supplier feedback and submissions. Based on these key data points, the team may adjust and modify their sourcing strategy.
Step 5: Supplier Selection and Negotiation
Select your supplier once all proposals are in and ask for clarification on key points where needed. After reviewing and analysing supplier responses, organisations may select a shortlist of suppliers for final negotiation rounds. During this phase, the organisation conducts a comprehensive evaluation of the submitted proposals, considering factors such as pricing, quality of goods or services, compliance with specifications, innovative solutions, ways of collaborative working, sustainability and social value, etc. The use of scorecards, which are based on the business requirements and criteria to select the strategic options will allow the objective assessment of each proposal.
The process of selecting a potential supplier may require a cross-functional internal team and involve talking to different suppliers and conducting appropriate meetings with short-listed suppliers with 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.
Effective commercial negotiations involve several critical activities. First, thorough preparation is essential, which will include researching the other party, understanding their needs, and defining your own objectives. Next, active communication during the negotiation process is crucial, with clear and respectful dialogue helping to build trust and find common ground. Additionally, flexibility and creativity are vital—being open to alternative solutions can lead to win-win outcomes. Finally, documenting agreements and following up promptly ensures that both parties honour their commitments.
Step 6: Contract Award and Implementation
Based on the outcome of the sourcing exercise and negotiations, the subsequent contract drafted and finalised should be read and signed by all relevant parties. Meticulous attention to detail is essential to accurately represent all aspects of the agreement. An organisation’s legal team may play a crucial role, ensuring that the contracts align with relevant laws and regulations while safeguarding the company’s long-term interests. Negotiations fine-tune the specifics, clarifying any ambiguities and making necessary adjustments to create a fair and balanced agreement that fosters a strong, collaborative relationship with the supplier. Once signed, the contract formalises the relationship.
When executing and integrating the contractual relationship with the supplier it is important to ensure it is fully set-up for success. Make sure that the supplier, internal end customers, and other stakeholders who are affected by the process and have (hopefully) been involved in the design of the solution are involved in its execution. Internal stakeholders should be involved from the front-end of the solution, but it is important to recognise that the smooth execution is only possible with a transparent contract start-up process and extensive communication across the relevant organisations.
Step 7: Contract Management and Performance Improvement
Your strategic sourcing process does not end at selecting and onboarding the supplier. The regular benchmarking and tracking of performance are essential to manage supplier performance, avoid supply chain disruption or other risks and identify areas for improvement to ensure the success of any strategic sourcing project.
Leading-edge technological solutions applied to the tracking of performance (including cost savings) can ensure full value is being achieved and help in finding when and where the supplier is adding additional value. Automated reporting can provide faster and precise feedback for supplier performance management and improvement and also contribute to optimised supplier relationship management (SRM).
The ongoing sourcing process undoubtedly plays a critical part in assisting organisations meet their business goals and requirements. An ineffective sourcing process can delay your organisation in achieving its goals and objectives so while organisations can have a variety of procurement requirements and sourcing processes in place, the aforementioned steps can certainly be customised to guarantee success. Also given the dynamic business environment with constantly changing market conditions, it is important to plan ahead before the contract expires. You will need to re-evaluate your commercial position and follow the strategic sourcing process once again.
Get In Touch with Our Strategic Sourcing Experts
With very busy workloads, procurement and sourcing professionals often struggle to find the time to rise above the day-to-day tactical purchasing ‘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 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), innovation, security of supply, quality, delivery, sustainability, social value, etc.
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, get better support, and save money.