• 8 min read

Strategic Sourcing 101

Procurement services, one of the essential functions of any business, can directly impact its bottom-line performance. As per a recent study, many businesses spend over 60% of their revenue on purchasing goods and services from different suppliers.

With procurement transforming every day, it has become crucial for businesses to adopt better-aligned measures to reduce costs and improve the quality of the final product. Furthermore, various factors like technological disruption and political volatility have caused fierce competition within the market. Therefore, organizations need to adopt an efficient strategy to improve their performance and maximize efficiency with strategic sourcing skills.

What is Strategic Sourcing?

Strategic sourcing is a collaborative and organized approach for identifying an organization’s expenditure profile while improving the supplier base. This is to ensure better business requirements that align with suppliers. Strategic sourcing would further help with an organized approach to ensure an enhanced customer-supplier interface.

Strategic sourcing requires an in-depth review of the expenditure within an organization. It identifies the inclusion of different vendors and suppliers and how they can contribute to bringing savings while improving the productivity and performance of the organization.

Strategic sourcing comprises various sub-concepts that often make it difficult to understand. However, we will be simplifying it here for you.

People often confuse strategic sourcing with being the same as tactical sourcing. While both are essential driving forces in an organization, it is necessary to identify the differences between the two. These include:

Strategic SourcingTactical Sourcing
1. Involves a proactive, holistic continuous approach to bring improvements.1. It is a short-term, traditional, reactive approach.
2. It aims to achieve the lowest total cost of ownership considering the minimal risk to the supply chain.2. It aims to achieve the lowest cost without considering other factors like the supply chain.
3. It aims to foster long-term relationships with supplier partners to understand how their core abilities can help meet the organizational needs.3. There is no aim at fostering long-term relationships with supply partners. Instead, the focus lies on collaborating with supply partners only when a problem arises.
4. It is a long-term process where the customer-supplier loop is constantly analyzed to ensure that the demands of the organizations are met.4. It only brings short-term gains, thereby limiting strategic implementation for the sustainable growth of an organization.

Benefits of Strategic Sourcing

Organizations must work towards implementing strategic sourcing to get a more transparent approach to business. Some of the common benefits of implementing strategic sourcing for businesses include:

Benefits of Strategic Sourcing

1.     Cost reduction

Implementing strategic sourcing can play an important role in saving against higher costs. If an organization has identified and selected suppliers that provide better value at lower prices, it will be wise to work with them and save on business expenses.

2.     Optimize ideal supplier

It is crucial to know about the suppliers, their work, and their abilities to ensure the maximum efficiency of an organization. Once businesses identify these basic things, they can work with their ideal suppliers - - helping create value for businesses at the lowest cost possible.

3.     Alignment of sourcing and business needs

Sourcing activity alignment with business goals is crucial. It forms the basis or foundation of strategic sourcing. With better alignment, businesses can work towards achieving improved efficiency with lesser risk to the supply chain.

4.     Foster a long-term relationship with the supplier

The trends of procurement are changing. Therefore, it is crucial to maintain a long-term and healthy relationship with the supplier. Strategic sourcing helps identify an ideal supplier and foster a long-term relationship with them.

Strategic sourcing helps to identify the core abilities of the supplier. Furthermore, this helps create a bond between suppliers and organizations, fostering a long-term relationship. Continuous updates and improvements are undertaken to optimize the performance of suppliers in various sourcing decisions to help meet organizational demands.

5.     Lower supply chain risks

With the changing business requirements, meeting compliance standards is a must. However, due to the complexity of compliance, there remains a considerable risk in supplier relationships.

Information security is one of the most important factors to consider for businesses. With the world moving towards digitalization, sourcing can help improve the supplier business relationship, thereby focusing on protecting the data between supplier and manufacturer.

What Impacts Sourcing Strategy?

Businesses must improve their supplier collaboration strategy and bring changes to the existing vendor relationship program. For example, procurement must explain what business needs are when opting for spend analysis. This would play a crucial role in lowering the long cycle and cost while conforming to the changing regulations.

At the same time, businesses must spend on visibility requirements. And, filter out data considering cost reduction. The sourcing team must understand the baseline of market data and cost rationalization for businesses.

Procurement must aim to lower the spend-related data from external and internal sources and determine better saving opportunities. Some of the common factors that can have a direct impact on the sourcing strategy include the following:

1.     Addressable spend

Ensuring the entities bring in a better portion of the expenditure as available for sourcing is crucial. It can impact the sourcing strategy, thereby resulting in higher savings.

2.     New enterprise strategy

Bringing changes to the existing enterprise strategy can help keep up with the sourcing demands. It will help in the realignment of strategies with increased proficiency in results.

3.     Disruptive technology

Technology is changing every day. While aligning the sourcing strategies, businesses must identify what new and disruptive technology will create a bigger and better impact. It calls for a reassessment of services.. More unique alternatives are easily available in the market, and the implementation of disruptive technology is essential for understanding the alignment.

4.     Newer programs

While newer technologies will affect the business' sourcing strategy, implementing more recent programs can also make an impact. These newer programs influence procurement decisions and options, bringing growth for businesses.

Strategic Sourcing - At a Glance

PHASES OF SOURCING - AT A GLANCE

Sourcing Strategy Best Practices

Some of the most efficient practices for seamless sourcing include

1.     Regular Communication

In any business, communication is the key. No matter what stage your business is in, communicate with the supplier. Let the supplier feel included and know what the sourcing process is.  

Communicate about the approval of RFX. Let them know once the RFP is sent. Ask suppliers if they have any queries or questions. Discuss each question and understand if you can bring any changes. Implement the changes in RFX and communicate.

Consult with the suppliers and implement the feedback efficiently. Work on building a long-term relationship with the supplier. Communicate if there is any risk or delay involved. Make sure to communicate with the supplier in each stage to ensure improved relations and efficient business.

2.     Discuss the requirements

Creating a requirement is a multi-stage event. Not all events need to be a part of the RFI. However, even when businesses have some prospective suppliers in mind, it is crucial to clarify the requirements in the initial stages. It helps ensure that no vital information is missed in the long run.

Also, describing the requirements in the initial stages will help make post-bid optimization easier. No business wants to have a negative reputation in the market. So, not clarifying the requirements in the initial stages and welcoming bids from all suppliers can have a massive negative impact if the criteria aren't met.

3.     Make a balanced scorecard

Balance in each stage is extremely crucial for businesses. The use of RFX ensures the elimination of suppliers or selecting the suppliers for negotiation.

Having a balanced scorecard for the requirement can help mitigate the constraints. Furthermore, it will also assist in making a logical and informed decision that will help add value to the business.

Output

Consolidating the supplier portfolio with category spends may often not be enough to cater to the business requirements. Furthermore, they may also not help with the product and service optimizations.

Every procurement organization must have a strong sourcing strategy to meet customer demands. With procurement changing every day, it is crucial to know customer expectations and optimize the services accordingly. In addition, businesses must work closely with suppliers to mitigate the product specification risk and provide customers with what they are looking for.

Procurement must also help with category and supplier management to establish a win-win relationship in order placement, fulfillment, and price demands. Various approaches in strategic sourcing can assist in implementing proper solutions for businesses. Some of the critical factors to consider include product substitution without compromising performance and inventory management.

A strong category and supplier relationship management can help bring changes to the business. At the same time, it is essential to focus more on the supplier selection process to create a high-value supply chain. Maintenance of the same is crucial to ensure that the value a business makes does not fade away with time.

Are you looking to implement better strategic sourcing solutions for your business? Aavenir RFPflow can ensure the exponential growth of your business with a comprehensive data-driven approach. It’s time to create a robust strategy and drive reliable solutions while reducing the supply chain risks. Get in touch with one of our procurement and sourcing industry experts today.

Schedule a Demo today to experience how Aavenir RFPflow can streamline your sourcing process seamlessly.

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