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What is Strategic Sourcing?

Whatever products, services, and resources your business needs, the sourcing process can be time consuming. As a result, an increasing number of businesses are recognising the benefits of strategic sourcing.

Strategic sourcing is a procurement process that focuses on the continuous improvement and re-evaluation of purchasing activities. This allows the organization to reduce costs and improve stability on an on-going basis.

It is a systematic, long-term approach to meet the current and future needs of the organization.

STRATEGIC SOURCING OBJECTIVES

The core objective of strategic sourcing is to conduct more sourcing activities using a defined methodology and criteria. This will enable the organization to:

  • Enhance supplier coordination

  • Standardize the competitor comparison process

  • Develop a clear understanding of what is being purchased, and who it is being purchased from

  • Minimize labor-intensive, time-consuming manual tasks

  • Reduce costs

  • Enable employees to use existing sourcing agreements

Importance of Strategic Sourcing in Procurement

Strategic sourcing is important because it allows organizations to build relationships with suppliers, rather than simply dealing with them through a series of transactions. And, by building these cooperative, long-term, and mutually beneficial relationships, suppliers become dependable partners.

Primary Benefits and Advantages of Strategic Sourcing

The main benefits of strategic sourcing are:

Reduce costs

Strategic sourcing takes into account the total cost of ownership of acquiring products and services, meaning organizations can focus on securing long-term savings and nurture meaningful relationships.

Optimize efficiency

When organizations implement strategic sourcing, suppliers are already pre-qualified for future projects. This reduces future sourcing timelines and helps build long-term, collaborative supplier relationships.

Analysis and intelligence

The intelligence gained from comprehensive market research and the analysis of the organization’s spend data, will help inform future purchasing and business decisions. It will also help identify potential risk factors, allowing purchasing teams to address and minimize risks before they become an issue.

Ethics 

Through strategic sourcing, procurement teams can identify suppliers whose values, ethos, and sustainability goals align with their wider corporate social responsibilities policies. 

Challenges with Strategic Sourcing

As with any process, strategic sourcing can pose a number of challenges. Here are some of the challenges faced by organizations as they try to implement strategic sourcing:

Total Cost of Ownership vs Invoice Price

It can be tempting to make a purchasing decision based purely on invoice price – after all, it’s easier to calculate. But the total cost of ownership takes into account other costs such as transportation and warehouse costs, which provides a much clearer picture of how much will be spent over the lifetime of the contract. This makes strategic sourcing more challenging, but more effective.

Forecasting Demand

Forecasting demand is a challenge and it’s important that organizations get it right because overstocking ties up capital while understocking risks losing customers. A lack of accurate data could lead to forecasting that’s based on educated guesses or randomly pulled past order information.

Strategic Sourcing Best Practices

Following these best practices will allow you to implement an effective and efficient strategic sourcing process:

Focus on Total Cost of Ownership

Rather than focusing on the purchase price, look at the costs in terms of the total cost of ownership over the lifetime of the contract. When you consider costs such as operation, maintenance, transportation, warehousing, administration, etc., you will get a clearer idea of how your money is being spent.

Optimise Inventory

Optimize your inventory to ensure that you have the right amount at all times and can locate inventory easily. Understocking can increase risk and threaten profits, while overstocking can jeopardize cash flow and increase costs. 

Contract Management

Once the terms of a contract have been carefully negotiated, the contract needs to be managed to ensure that the terms are communicated to everyone involved and enforced when necessary.

Embrace Technology

Embrace strategic sourcing tools to streamline workflows by automating manual tasks. This can help to eliminate errors, increase efficiency, and utilize data to make informed buying decisions.

Consider Social Responsibility

Sustainability and social responsibility are an increasingly central factor in consumer’s purchasing decisions. This means organizations must also focus on them if they want to remain competitive.  

Communication

Ensure open, honest, and regular communication between the team, as well as with suppliers and other stakeholders.

Difference Between Procurement and Strategic Sourcing

Procurement is the process of sourcing and using suppliers to acquire the goods and services the organization needs to deliver their products or services. The end-to-end process involves planning purchases, negotiating pricing, placing orders with suppliers, receiving the goods, paying for them, and handling inventory control.

A key part of the procurement function, sourcing is the stage that comes before any purchases are made.

Although procurement and strategic sourcing are similar in that they both involve the materials a business needs to operate, there are key differences, both in the processes themselves and the goals and outcomes.

Typically, the main difference is that sourcing focuses on direct goods and services, while procurement primarily focuses more on indirect goods and services. Sourcing is about finding and vetting suppliers, and finding the balance between quality and affordability, while procurement is acquiring the goods themselves.

How Basware can help

To learn more about how Basware can help, check out the following materials or contact us here.

Strategic Sourcing Solutions Page

Strategic Sourcing factsheet

Contract Management factsheet