Strategic sourcing is a procurement process that connects data collection, spend analysis, market research, negotiation, and contracting. It stops short of the actual purchase and payment for goods and services.
Strategic sourcing can be customised to meet a customer’s specific needs, but its main goal is to leverage a single, integrated system to enhance profitability.
The process can be broken down into four steps:
01
Data collection and spend analysis
02
Supplier discovery
03
Negotiations and contracting
04
Implementation and optimisation
Strategic sourcing is an approach to supply chain management that formalises how information is gathered and used so an organisation can use its consolidated purchasing power to find the best possible values in the marketplace and align its purchasing strategy to business goals. It requires analysis of what an organisation buys, from whom, at what price and at what volume. Strategic sourcing differs from conventional purchasing because it emphasises the initial purchase price to focus on the total cost of ownership and optimise the sourcing process through ongoing market analysis and building relationships with suppliers. Businesses can use strategic sourcing to make their procurement processes less shortsighted and focused on price.
A sourcing plan can instead allow them to develop an adaptable system that contributes to the overall value of the business long term. The process begins with analysing business needs and historical spending, outlining a strategic plan, and then conducting data collection and market analysis that guides the selection of a roster of suppliers. Once selection and negotiations have taken place, strategic sourcing also involves continually measuring performance and improving the process. Large organisations with many suppliers generally practice strategic sourcing. Outsourcing providers for strategic sourcing exist for organisations that wish to delegate the function to a specialist.
Strategic sourcing process steps
Most commonly broken into seven steps popularised
by consulting firm A.T. Kearney.
01
Analyse product categories used by the business, spending patterns, and the processes and departments involved.
02
Develop a sourcing strategy based on business goals.
03
Analyse the supplier market and create a supplier portfolio.
04
Define request for proposal criteria and templates.
05
Negotiate with and select suppliers.
06
Integrate suppliers into existing processes, onboarding any new vendors or outsourcing providers.
07
Track performance metrics and optimise the sourcing plan, as needed.
The most obvious advantage of strategic sourcing is reduced total cost, but the benefits of rethinking the sourcing process can be far-reaching.
According to Gartner’s Magic Quadrant for Strategic Sourcing Application Suites, the top reason for investing in a strategic sourcing suite is to transform sourcing within the organisation, at 74%. Businesses also reported increased productivity through automation (65%) and increased savings (61%) as top drivers for pursuing strategic sourcing.
The increased understanding of supplier markets can help identify potential risk factors and help businesses develop sourcing plans that mitigate them. In addition, the emphasis on continuous improvement and sustainability of the supply chain provides increased flexibility and the ability to adapt to external factors.
Longer-term, implementing strategic sourcing can facilitate strong relationships with suppliers and outsourcers, identify potential improvements, and justify changes to improve efficiency throughout supply chain processes.
Procurement
Procurement refers to the range of activities and procedures necessary for businesses to acquire products and services. While this technique involves strategic and administrative responsibilities, procurement departments often focus on the day-to-day transactions and processes involved in e-procurement, such as purchase orders, invoicing and payments.
VS
Strategic sourcing
In contrast, strategic sourcing emphasises the activities leading up to an actual purchase, including analysing business needs and the marketplace at large. While procurement generally looks for the lowest-priced option, strategic sourcing keeps the big picture in mind, employing large data sets to evaluate the value of other factors, such as optimal vendor relationships and reduced risk to the business.
Software products
Strategic sourcing software can facilitate the approach by standardising techniques involving sourcing requirements and providing a platform for collecting information about suppliers, products, markets and business needs. This software is sometimes part of larger procurement systems, procure-to-pay platforms, ERP systems or supply chain management systems.
However, products labelled “strategic sourcing application suites” are growing in popularity. These typically include functionality and have separate software modules for e-sourcing, spend analysis, contract management and supplier relationship management. Major players, according to Gartner, include Coupa, GEP, Ivalua, JAGGAER, SAP, Synertrade and Zycus. Their products are delivered primarily via multitenant SaaS, but some offer on-premises or private cloud versions, as well.
Vendors are integrating advanced analytics and AI to make the sourcing process more effective. These capabilities can make recommendations based on past performance and current metrics and offer predictive models based on market conditions, time of year and geopolitical factors. Blockchain integration into the supply chain also increases visibility and accuracy in some cases.