What is strategic sourcing and why is it important?
Strategic sourcing is a procurement process that creates ever-greater value for a business by focusing on the entire life-cycle of a product and continually re-evaluating purchasing decisions. It promises a range of benefits to both buyers and suppliers, and has become increasingly popular over the years for that reason.
How does strategic sourcing work?
Strategic sourcing developed from a simple insight: the lowest total cost of an item is not the same as the lowest purchase price. There are many additional - often hidden - costs to take into consideration, and this means a truly cost-effective approach to buying needs to take a broader view of the equation than traditional procurement has used.
In strategic sourcing, the procurement team uses detailed data to analyse what the organisation buys; who and where from; at what price; and at what volume. They then research the global market and compare each element of their purchasing with all available vendors.
This gives them a most robust view of the entire life-cycle, allowing them to see inefficiencies and opportunities for greater growth or increased value which a traditional cost calculation might overlook.
Generally speaking, the process is cyclical, repeating regularly to ensure that the initial data, analyses and decisions continue to be optimal.
What are its benefits?
There are numerous potential gains to be had from switching to a strategic sourcing model. By its very nature, however, the process will be unique to the specific organisation – its suppliers, its business needs, its legacy decisions.
While no single benefit is guaranteed, many of the world’s largest and most successful businesses use strategic sourcing. Here are a few of benefits businesses can expect from it:
Improved long-term planning
By gathering extensive data, analysing that data and using it to map the entire buying equation, strategic sourcing allows businesses to plan far more effectively for the future. It helps them form clear, reliable expectations and make more informed decisions to guide future outcomes.
It also lays the groundwork for future teams to understand performance in proper context.
Better cost management
The strategic sourcing approach often helps businesses manage their finances better. This isn’t just a case of saving money – which it almost always does – it’s a case of understanding the flow of capital and being able to make longer-term financial projections with greater accuracy.
Improved relationships with suppliers
Because strategic sourcing involves laying out future procurement needs ahead of time, it can massively improve the relationships a business has with its suppliers, providing them with a sense of stability and helping them manage their own costs more effectively.
Clearly, a more nuanced knowledge of your suppliers helps with the risk identification and analysis process. But the closer supplier relationships which strategic sourcing helps forge bring about greater transparency, and will often lead to risks and related issues being resolved more quickly and effectively.
Leverage in contract negotiations
Because strategic sourcing introduces a large research and data collecting element to the sourcing process, many businesses find it helps them negotiate with both current and new suppliers more effectively. This is because they have a clearer sense of both their own position and that of their negotiating partner.
Time saving for leaders
By facilitating long-term strategizing, many leaders find that strategic sourcing frees up time they might otherwise have spent assisting with procurement and allows them to focus on more immediate concerns.
The strategic sourcing process in nine steps
Different businesses and teams will have their own specific process – based on the specific needs of their organisation. However, we believe these nine steps will help provide a highly effective structure to your strategic sourcing:
1. Define and categorise
You need to begin by understanding your own organisation’s needs. The best way to do this is by breaking down spend into clear categories – these could be defined in any number of ways, which is part of the challenge.
You may need to consult expertise from many different internal departments to fully understand what goes into the product, and different organisations will need different degrees of granularity in their categories.
It’s also worth mentioning that serious care should be taken over these categories – to ensure gaps are avoided and that each category is clear and distinct from the rest. This is because
2. Analyse those categories
With your categories determined, you need to analyse each category rigorously: what quantity of each is used? Who uses the commodity and where? What kind of risks are associated with the category?
This gives you a clear picture of what is needed and how you can go about altering the process without creating unnecessary risks and compromising quality.
3. Supply market analysis
Extensive research must be carried out to identify all the potential global and local suppliers. Clear visibility is vital for this stage, as you need to get a real sense for the risks and opportunities attached to each vendor.
A huge number of considerations are relevant here: how much is the raw material? What labour and transportation costs would be incurred? How much negotiation leverage would you have?
4. Analyse your current sourcing
With the overview you now have of the market, you can make a clear, data-driven comparison between your current sourcing practises and what’s available in the market at large. You will need to carefully go through each category and subcomponent, establishing benchmarks to fully understand the cost equation.
There are various factors you’ll need to include in your comparison, not least: geographic location; batch size; transit time; and overall cost.
The ultimate aim is to establish the clearest points of departure – the places where you can clearly improve your sourcing and make it more efficient on macro-scale. You’ll usually find these through gaps or anomalies in the data – something will look obviously off, and you’ll discover, ‘oh, we’re buying in bulk from a far more expensive vendor’.
5. Develop a new sourcing strategy
Using all of the information and analysis you’ve accumulated, you now need to decide exactly how you wish to change your sourcing.
Determine who you will buy from and how it will be integrated into the overall process, taking care to consider everything we’ve discussed – overall value, risk and long-term opportunities.
6. Negotiate and select suppliers
Once your strategy is clear, you need to communicate with the suppliers you wish to work with. A Request For Proposal will be particularly effective here, as you can be extremely specific about what you need from a supplier and what the market has shown you can reasonably expect.
At this point, some businesses find they can use their data – and their willingness to change suppliers – to renegotiate with their existing partners, essentially creating a bidding war for their business.
7. Implement and integrate
With your strategy established and your suppliers chosen, you now need to implement the changes and integrate them into your business’s process. Your new partners should be intimately involved in this, both to ensure the switches are seamless and to jump-start your relationship with them.
It’s also extremely useful to build future improvements and assessments into the operating model as early as possible, to ensure things runs smoothly in the future, too.
8. Designate category leaders
While it is not necessary for every business, most procurement teams will benefit from ensuring that every category is designated a team member who is responsible for overseeing that category.
This does two things: first, it ensures every member of the team has an important role. But more importantly, it means that every aspect of the process is given special attention, and that somebody is answerable for any issue in the future.
9. Benchmark, Track, Repeat
Once the new process is implemented, all that’s left is to begin the whole thing over again. You’ll need to create clear benchmarks to make repeating the process smooth, and you’ll need to continually monitor your performance results in order to determine when re-evaluations and adjustments should happen.
Ultimately, the goal is to optimise the process continually, responding to changes in the market and ensuring the business is always creating the maximum possible value.