Strategic Sourcing

Publication Date :

25 Feb, 2023

Blog Author :

Edited by :

Reviewed by :

Table Of Contents

What Is Strategic Sourcing?

Strategic sourcing is identifying, evaluating, and selecting suppliers for a business's procurement needs. Its purpose is to analyse a company's spending patterns and supply chain to determine the most cost-effective and efficient approach to acquiring goods and services.

Strategic sourcing is vital as it aims to optimize procurement by reducing costs, improving supplier performance, and increasing the quality of goods and services. This involves identifying potential suppliers, negotiating contracts, and establishing long-term relationships with the chosen suppliers.

What Is Strategic Sourcing?

Strategic sourcing is a proactive and comprehensive approach to procurement that aims to identify opportunities for cost savings and supplier performance improvement.
It involves several key steps: spend analysis, supplier identification and evaluation, negotiation and contracting, and ongoing supplier relationship management.
By implementing a strategic sourcing approach, organizations can achieve greater cost savings and supplier performance improvement over the long term while mitigating supply chain risks and improving operational efficiency.
Strategic sourcing differs from other procurement approaches, such as procurement and tactical sourcing, in terms of its focus on long-term partnerships and its comprehensive analysis of spending data, market trends, and supplier capabilities.

Strategic Sourcing Explained

Strategic sourcing involves a comprehensive approach to acquiring goods and services that aligns with a company's goals and objectives. The process includes the evaluation of suppliers, negotiations of contracts, and long-term supplier relationship management.

The primary objective of strategic sourcing is to maximize the value of goods and services acquired while minimizing costs. To achieve this, companies analyze their spending patterns and supply chain operations to identify cost reduction and process improvement opportunities. The process involves various departments within a company, including procurement, finance, and operations.

The key benefits of strategic sourcing include cost savings, risk reduction, and improved supplier performance. Companies can save costs by negotiating better prices, optimizing their procurement processes, and reducing waste. Additionally, strategic sourcing helps manage supplier risk by ensuring suppliers comply with regulations and quality standards. Finally, by fostering long-term relationships with suppliers, companies can improve supplier performance and ensure a stable supply of goods and services.

The process typically involves cross-functional teams to ensure the sourcing decisions align with the company's overall goals and strategies. The ultimate goal of strategic sourcing is to improve a company's bottom line by reducing costs and increasing the value of the goods and services acquired.

Steps

The following are the typical steps involved in the strategic sourcing process:

#1 - Spend Analysis

This involves the evaluation of the company's procurement history and spending patterns to identify areas for improvement and cost savings opportunities.

#2 - Supplier Identification

Potential suppliers are identified and evaluated based on their ability to meet the company's procurement needs.

#3 - Request For Proposal (RFP)

The RFP is a document that outlines the company's procurement requirements and invites potential suppliers to submit proposals.

#4 - Bid Evaluation And Supplier Selection

Suppliers' proposals are evaluated based on price, quality, and delivery times. Then, the supplier who meets the criteria and offers the best value for money is selected.

#5 - Contract Negotiation

Once a supplier is selected, negotiations take place to finalize the terms and conditions of the contract.

#6 - Supplier Relationship Management

After the contract is signed, the company manages the supplier relationship to ensure that the supplier meets the agreed-upon terms and delivers the goods and services as expected.

#7 - Continuous Improvement

The strategic sourcing process is ongoing, and companies should regularly evaluate their procurement processes and supplier relationships to identify further areas for improvement and cost savings opportunities.

Types

Let us have a look at its types.

Single Sourcing: In this type, a company selects a single supplier for its procurement needs. Hence it assists in establishing a long-term relationship with the supplier and reduces the time and resources needed to manage multiple suppliers. However, it can also pose a risk if the supplier fails to meet the company's needs.
Dual Sourcing: involves selecting two suppliers for a company's procurement needs. Thus, it helps to mitigate the risk of supply chain disruption and provides an opportunity to compare suppliers' performance.
Global Sourcing: This approach involves sourcing goods and services from suppliers located in other countries. It can provide access to new markets and cost savings but pose language barriers, cultural differences, and political instability risks.
Outsourcing: Outsourcing involves the transfer of a company's business functions to an external provider. This approach can provide cost savings and access to specialized expertise but can also pose risks related to quality control and loss of control over the process.
E-procurement: E-procurement involves using technology to automate the procurement process. Thus, it helps to reduce costs and improve efficiency by streamlining the procurement process and providing real-time data on procurement activities.

Examples

Let us take a look at the examples to understand the concept better.

Example #1

Consider that a firm called Amacon Manufacturing Ltd. makes electronics for several industries. They want to optimize their supply chain to save expenses and boost profits due to growing competition and production costs. They will use strategic sourcing to attain these goals.

Amacon Manufacturing Ltd. performs a spending analysis to find purchase patterns and areas for improvement. They realize that they have been utilizing various vendors for the same component, which has raised expenses owing to duplication and shipping. They also observed that some vendors frequently delivered defective components, resulting in many work and production delays.

Amacon Manufacturing Ltd. finds suppliers based on their analysis. These providers receive an RFP with their specifications. They choose the best-value supplier based on price, quality, and delivery time. Then, they establish a supplier contract that covers pricing, delivery schedules, quality requirements, and consequences for non-compliance.

The company then evaluates the supplier's procedures and quality tests their components to guarantee they fulfill their requirements. To resolve difficulties quickly, they establish explicit supplier communication routes. As a result, Amacon Manufacturing Ltd. reduces costs, improves product quality, and streamlines supply chain processes using strategic sourcing. They focus on their core expertise while their trusted supplier procures components. This creates a more efficient and cost-effective supply chain that helps the company compete.

Example #2

Medium-sized IT services provider TechGo Corp. intends to streamline procurement to cut costs and boost efficiency as part of its expansion strategy. They use strategic sourcing to attain these goals. After a cost study, TechGo finds they spend a lot on software licensing, hardware, and IT services. Therefore, they prioritize reducing software license fees.

TechGo Corp. releases an RFP to software vendors who can match their licensing needs. They choose the most cost-effective provider based on pricing, quality, and delivery time. TechGo Corp. estimates strategic sourcing cost savings before switching vendors. For example, this vendor's lower software licensing rates will save them $100,000 yearly. They aim to save $50,000 per year.

TechGo Corp. negotiates a contract that covers pricing, quality, and delivery schedules by streamlining procurement and minimizing administrative costs after selecting a vendor. They also monitored the vendor's performance with regular process audits and software quality reviews.

Strategic sourcing saves TechGo Corp. $100,000 in software licensing payments and $50,000 in procurement costs. In addition, this saves TechGo Corp. $150,000 annually, allowing them to reinvest.

Advantages And Disadvantages

Advantages	Disadvantages
1. Cost savings through lower purchase prices, reduced transactional costs, and more efficient processes.	1. Implementation costs, including time, resources, and technology.
2. Improved supplier performance and quality through closer collaboration and ongoing monitoring.	2. Limited supplier options, as strategic sourcing often involves selecting a single supplier or a small pool of preferred suppliers.
3. Reduced supply chain risk through better management of supplier relationships and diversification of suppliers.	3. Potential for reduced innovation and flexibility, as strategic sourcing may limit the ability to respond quickly to market changes or take advantage of new opportunities.
4. Increased efficiency and productivity through standardization of procurement processes and consolidating supplier relationships.	4. Dependency on suppliers, as strategic sourcing may result in a greater reliance on a single supplier or group of suppliers.
5. Better alignment of procurement activities with organizational goals and objectives, resulting in a more strategic approach to procurement.	5. Possible impact on supplier relationships and reputation, as strategic sourcing may result in reduced business for suppliers who are not selected.

Strategic Sourcing vs Procurement

Strategic Sourcing	Procurement
1. A proactive approach to procurement that seeks to identify and mitigate risks, reduce costs, and improve supplier performance.	1. A reactive approach to procurement that focuses on fulfilling immediate purchasing needs.
2. Involves a comprehensive and strategic process for selecting suppliers, negotiating contracts, and managing supplier relationships.	2. Involves the more transactional activities of purchasing goods and services, including requisitioning, ordering, and payment processing.
3. Prioritizes long-term relationships with suppliers and seeks to establish partnerships based on mutual benefits and value creation.	3. Focuses primarily on the transactional aspects of supplier relationships and does not necessarily prioritize long-term partnerships.
4. Includes a thorough analysis of spending data, market trends, and supplier capabilities to inform supplier selection and negotiation strategies.	4. It Does not necessarily involve a detailed analysis of market data and supplier capabilities and may rely more heavily on supplier relationships and historical purchasing patterns.
5. Aims to optimize the total cost of ownership (TCO) of goods and services by considering all costs associated with procurement, including transactional costs, supply chain costs, and quality costs.	5. Focuses primarily on the purchase price of goods and services, with less consideration given to other costs associated with procurement.

Strategic Sourcing vs Tactical Sourcing

Strategic Sourcing	Tactical Sourcing
1. Takes a long-term approach to procurement, focusing on establishing partnerships with key suppliers and optimizing the total cost of ownership (TCO) of goods and services.	1. Takes a short-term approach to procurement, focusing on finding the best deal for immediate needs.
2. Involves a comprehensive and strategic process for selecting suppliers, negotiating contracts, and managing supplier relationships.	2. Focuses primarily on identifying the best price and delivery terms for a specific purchase.
3. Prioritizes long-term relationships with suppliers and seeks to establish partnerships based on mutual benefits and value creation.	3. Prioritizes the transactional aspects of procurement and does not necessarily prioritize long-term supplier relationships.
4. Includes a thorough analysis of spending data, market trends, and supplier capabilities to inform supplier selection and negotiation strategies.	4. It May involve a more limited analysis of market data and supplier capabilities, with less emphasis on long-term trends and relationship building.
5. Seeks to mitigate supply chain risks and reduce costs over the long term through improved supplier performance and reduced transactional costs.	5. Focuses primarily on immediate cost savings and may not consider the long-term impact of purchasing decisions on the supply chain.

Frequently Asked Questions (FAQs)

What is strategic sourcing in supply chain management?

Strategic sourcing is a process that involves identifying, evaluating, selecting, and managing suppliers to obtain the best value for a company. This helps optimize procurement decisions and enhance the overall efficiency of the supply chain.

What is strategic sourcing, and why is it important?

Strategic sourcing is analyzing a company's procurement needs and identifying the best suppliers to meet those needs. It is important because it can help companies reduce costs, improve supplier relationships, and enhance the quality of their products and services.

What does a strategic sourcing specialist do?

A strategic sourcing specialist is responsible for managing the procurement process for a company. They identify the company's procurement needs, evaluate potential suppliers, negotiate contracts, and manage supplier relationships to ensure the company gets the best value for its money.

What is strategic sourcing in recruitment?

Strategic sourcing in recruitment involves proactively identifying and attracting the best candidates for job openings. This includes using social media, online job boards, and other tools to find qualified candidates and building relationships to encourage them to apply for open positions.