What is Strategic Sourcing and How to Improve Strategic Sourcing in Supply Chain?

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What is Strategic Sourcing and How to Improve Strategic Sourcing in Supply Chain?

“Opportunity arises for the prepared mind” –by Louis Pasteur.

New technologies in strategic sourcing in supply chain & procurement are modifying the way companies do business – and allowing them to overtake the competition in their industries. Sourcing is a crucial activity used at both tactical & strategic levels. It’s bothered with what needs to be purchased, when, why & where. The notion is developed to assist supply chain managers & practitioners to enhance, develop and implement strategic sourcing.

Strategic Sourcing & Procurement

Sourcing is the process of finding, assessing & involving suppliers to provide goods and services to a business. Sourcing involves the management of all essential inputs required for an organization to run and lead a successful organization transformation.

Procurement is the process of buying goods & services. In B2B, the procurement function will generally manage both the sourcing & the procurement functions.

  • In sourcing, a product or service, businesses will generally conduct a thorough analysis of their requirements, assessing the material, financial & service requirements. Next, the company will research potential suppliers, understanding what offerings exist in the market & how well they seem to match with the company’s requirements.
  • Often companies choose suppliers based on existing relationships or their analysis result. Other times the company may decide to go to a competitive bid & seeking proposal from various firms.
  • Even if it’s done via any method, the supply chain team will evaluate the capabilities of potential suppliers & develop a sourcing strategy. The company may choose a single supplier or work with several suppliers to take benefit of different capabilities. Then the team will negotiate contracts with the suppliers that align with the business requirements.

      strategic sourcing in supply chain

      Ways to Improve Strategic Sourcing

      There are 5 important traits & a sourcing strategy should have these traits to consistently drive positive outcomes. Described below are 5 characteristics:

      1. Transparency

      Providing detailed information and updates on the sourcing process, opportunities, challenges, and performance incentivize collaboration and loyalty to the sourcing initiative. If used correctly, transparency also exposes opportunities in the market & generates healthy competition.

      2. Scale

      It involves terminating conventional barriers between categories, modes, business units, geographies & other constructs to develop the most extensive picture of demand. If you provide the supply base a combined view of the needs of your stakeholders, then it provides suppliers an opportunity to align their strategic goals & strengths with that of your organization in VUCA.

      3. Accuracy

      Accuracy is an obvious requirement, but it can be very difficult to attain. Data require considerable effort & iteration to prepare for sourcing. Having inaccurate data undermines a sourcing and decision process swiftly, but accuracy does not end there. You have to be able to capture proposals in the right level of detail and expression to quantify the costs of service, preferences & relationships as well as the scope of impact.

      4.Flexibility

      Adapting sourcing & decision-making efforts to stakeholders as well as to the needs of the organization is necessary for developing operationally viable award scenarios, and it takes flexibility. Additionally, suppliers have performance goals, needs, and alternative methods to meeting the demand. Good to involve sourcing strategies in supply chain management, stakeholder & supplier requirements in analysis requires flexible sourcing.

      5. Speed

      If the process extends, stakeholders and suppliers will get fatigued & time-to-value will be delayed. A speedy and thorough analytics process and implementation are a must.

      Also See: 7 Key Steps to Develop an Effective Procurement Strategy.

      For instance, Hewlett Packard (HP) developed a framework for assessing & managing suppliers known as the TQRDC framework. Supplier evaluations highlighted 5 parts: Technology, Quality, Responsiveness, Delivery & Cost. By arranging supplier contracts with goals identified for each of these 5 areas, and evaluating performance, HP was able to engage more conjointly with its suppliers to constantly improving processes, relationships & results.

      Key Steps to implement Strategic Sourcing in your Organization

      Pandemic has changed everything now. Companies have had to negotiate unmatched supply & demand chain challenges; they’ve had to perform Supply Chains Transformation to meet the needs of today and for the next six months. There are some key steps for implementing strategic sourcing.

      Assess, Gather Data & Develop a Strategy: 

      The first step begins with commencing on a disciplined & organized evaluation of your sourcing needs. It consists of the following processes:  Ensuring you have the right relationships with the suppliers you work with. Note down exactly how much your organization spends on what, where it is spent, and seeking areas where spending needs to be improved. Gather the requirements and initial data you need, like Existing contracts with suppliers — including terms and conditions, supply market analysis. Now, develop your project strategy describing the scope & scale of your project also the types of suppliers to choose.

      Determine Key Focus Areas: 

      Find your important cost drivers in operating your business.

      Choose the Right Supplier: 

      A key element of developing your sourcing strategy lies in choosing correct sourcing events, such as an eAuction or a detailed Requests for Proposals (RFQ). Both provide advantages but several considerations should be contemplated carefully to determine the right approach for your business.

      Next, you’ll need to send out requests for proposals (RFPs) to inform chosen suppliers of the initiation of a sourcing process. Ensure to describe correctly what you need from them. Prepare a shortlist of suppliers to take them through to the next level of negotiations, where you’ll operate your Sourcing activity.

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      Award the Supplier: 

      During the process of supply chain transformation, keep some points in mind such as: How has the communication been with your supplier so far? Were they interested and able to answer your questions? If you needed to increase the volume of one item, would your suppliers’ supply chain be able to assist this?  Does your supplier have a vast relationship with another customer?

      Acknowledge Supplier Progress:

       It’s important to acknowledge the high performers and incentivize future investments in sustainability and responsible business practices in lean transformation.

      Final Word

      Strategic sourcing is a complicated process that requires a new viewpoint & improvement each time it’s done. You can’t expect to get a distinct & better outcome using a similar approach frequently. You have to glance at the sourcing challenge individually each time to improve upon it. Evaluating these traits of the sourcing process and improving upon them generates both opportunity and value.

      Frequently Asked Questions

      “4 Best Supply Chain Books”

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