Strategic Sourcing in supply chain management defines the strategy for how and why companies procure and includes the constant evaluation of purchasing activities within an enterprise. It is a crucial phase in the procurement lifecycle. It improves time and cost management by re-evaluating the purchasing activities of the organization.
The purpose of Strategic Sourcing goes beyond just procurement, including the definition and assessment of procurement strategy as well as the proactive identification of organizational needs. Strategic Sourcing is differentiated from Procurement based on the proactive approach – defining strategy, establishing and managing organizational spend categories, forecasting requirements and needs, and analyzing past purchases. Some might say that procurement processes are simply carrying out the tactical steps that are defined by the sourcing strategy.
In general, the need for (and value of) Strategic Sourcing as a dedicated function will grow linearly with the size of an organization. However, even small companies – especially those with complexity along the supply chain – should be putting some thought into their sourcing strategy as early as possible.
7 Steps to Build Strategic Sourcing in Supply Chain Management:
Understanding the advantages of strategic sourcing brings us to designing a process to implement strategic sourcing in an organization. While a single strategy might not match the specifications and requirements of every organization, we can outline a basic structure that can guide the strategic sourcing process:
1. Identification and Categorization of Spend Profiles
To initiate the strategic sourcing in supply chain management and procurement, identify the spend areas existent across all the business areas in the organization and categorize them based on how critical/non-critical the spend area is. Categorization will help prioritize the sourcing activities for each spend area.
The groups of similar goods or services, such as marketing, facilities, IT, etc. can be categorized and managed together. Categorization also includes defining how budget centers for different organizational needs. If required, other categorization criteria that better suit the business requirements can also be developed (e.g., domestic/international spend, direct/indirect spend). In such cases, it is essential to do a risk analysis of the chosen spend categories to help prioritize and develop strategies.
2. Building a Sourcing Strategy- Need Recognition and Cost Analysis
The second step includes building a strategy on how each categorized to spend area will be approached. This involves proactively assessing sourcing need recognition of the business unit/spend category. It necessitates spending and defining goals, objectives, total current cost analysis, and corresponding timelines to fulfill the requirements. This also necessitates building a communication workflow so that all stakeholders relevant to the respective sourcing projects have clear visibility of upcoming updates.
3. Analysis of the Supplier Market
The third step of Strategic Sourcing in supply chain management is having a clear understanding of who supplies what. This is critical not only for the procurement of new goods and services, but also with the consolidation of vendors who may have overlapping offerings.
A key part is to analyze the current and future suppliers in-depth to understand and evaluate relevant supplier profiles. This includes analyzing suppliers’ revenue or market share to understand their market standing and industrial performance, along with the risks and opportunities surrounding the supplier market.
4. Request for Supplier Information and Identification of Selection Criteria
Once the supplier market research is completed, the fourth step is to request RFIs/RFPs/RFQs from suppliers. It is essential to communicate the exact requirements of the organization and the end-goals and performance expectations so that the suppliers have a clear understanding of what the organization needs. This is important so that they provide an accurate roadmap and develop strategies to fulfill the business’s objectives.
The submitted information will provide insightful data—the pricing structure, delivery timeline and warranty provisions, product/service specifications, etc. After collating the submitted data, the selection criteria can be identified for supplier selection.
5. Selection of Suppliers and Execution of Contracting Process
After the selection criteria are identified, the fifth step is choosing the suppliers that can offer the highest level of cost savings and deliver quality. After supplier selection for the relevant spend areas, the contracting process starts to onboard the suppliers.
6. Measurement and Periodic Tracking of Supplier Performance
The process of strategic sourcing in supply chain management doesn’t end at choosing a supplier. Instead, the sixth step is to effectively measure how suppliers perform vis-à-vis the requirements and objectives of the organization. Therefore, it is vital to engage in periodic tracking of supplier performance and identify areas for improvement. This can significantly help organizations understand supplier risks and design strategies to mitigate all possible supply chain disruptions.
Like how the annual forecast is regularly revisited, all elements of the strategy and associated operations should be regularly assessed: historical purchases, historical performance against forecast, etc. Continued analysis of the spending strategy is one of the defining characteristics of Strategic Sourcing.
7. Implementation of Supplier Relationship Management (SRM)
While procurement generally handles the tactical, day to day encounters with suppliers (purchase order management, for instance), Strategic Sourcing in supply chain management is generally responsible for the management of suppliers at the macro level. Categorizing, consolidating, negotiating, etc.
The seventh step is factoring in Supplier Relationship Management (SRM) in the strategic sourcing process, making the relationship between the organization and suppliers a loop instead of a one-way function. SRM enhances collaboration between an organization and its suppliers by transforming a mere customer-buyer relationship into strategic value partners. Both parties participate in building propositions and innovative strategies that optimize the sourcing needs of the organization. The relationships arising from such synergized collaboration are long-term and can be leveraged to improve supplier performance further. In addition, more than just being the final step in the strategic sourcing in supply chain management, SRM links suppliers and organizations so that both current and future requirements are met in the most efficient and value-maximizing manner.
Best Practices of Strategic Sourcing in Supply Chain Management
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.
Key Take Aways
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.
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