In today's fast-paced business world, supply chain management professionals always look for innovative ways to trim costs, ensure top-notch product quality, and speed up the time required to bring products to market. One effective way to achieve these objectives is to implement strategic sourcing.
Sourcing is a significant part of procurement because it involves identifying and selecting suppliers who can provide the goods or services that an organization needs. It is essential to be strategic in sourcing because the choices made can significantly impact the organization's cost structure, quality of products or services, and overall supply chain efficiency.
Strategic sourcing not only aids in reducing costs but also involves evaluating the total cost of ownership. It includes factors such as delivery times, payment terms, and the risk of supplier disruption. It is also essential to consider the supplier's reputation, financial stability, and ability to meet the organization's needs in the long term.
What is Strategic Sourcing?
Strategic sourcing identifies, evaluates, and selects suppliers based on predetermined criteria. It involves analyzing an organization's needs, researching potential suppliers, negotiating contracts, and establishing long-term relationships with preferred suppliers. Strategic sourcing aims to find the best combination of quality, price, and service to meet the organization's needs and achieve its procurement objectives.
Effective strategic sourcing requires a thorough understanding of the organization's business needs and the various factors that can impact the procurement process, such as market conditions, supplier capabilities, and the organization's budget and resources.
It also involves a proactive approach to managing the supplier relationship, including ongoing communication, performance monitoring, and continuous improvement efforts. By being strategic in sourcing, organizations can improve their cost structure, enhance the quality of their products or services, and optimize their supply chain efficiency.
Organizations can apply strategic sourcing to a wide range of products and services critical to a business's operation. Some examples of strategic sourcing include:
MRO (maintenance, repair, and operations) Supplies: A company may use strategic sourcing to identify the best suppliers of MRO supplies, such as spare parts, tools, and equipment, to reduce costs and improve the efficiency of its operations.
Software and IT services: An organization may use strategic sourcing to identify the most suitable and cost-effective software and IT service providers for software development, website design, or data management tasks.
Marketing and Advertising: A company may use strategic sourcing to identify the most effective and cost-efficient marketing and advertising channels and agencies to promote its products or services.Tactical vs. Strategic Sourcing
Tactical and strategic sourcing are procurement approaches that focus on different time frames and objectives. Here are some of the differences between the two procurement approaches:
- Tactical sourcing
Tactical sourcing is focused on short-term goals and involves making decisions based on immediate needs. It is often used for smaller, less complex purchases that do not require a long-term commitment. For example, suppose an organization needs to purchase office supplies for the next few months. In that case, it may engage in tactical sourcing by evaluating several suppliers and selecting the best price and delivery terms for the required quantities.
- Strategic sourcing
On the other hand, strategic sourcing is focused on long-term goals and involves a more comprehensive evaluation of an organization's procurement needs. It analyzes the organization's overall business needs, researches potential suppliers, and establishes long-term relationships with preferred suppliers.
For example, suppose an organization is planning a significant expansion and needs to purchase a large quantity of raw materials over the next several years. In that case, it may engage in strategic sourcing by evaluating multiple suppliers and selecting the best combination of quality, price, and service for the long term.
Why You Need Strategic Sourcing?
Consider a company that manufactures automotive parts. By engaging in strategic sourcing, the company can identify and select suppliers who offer high-quality raw materials at competitive prices, helping the company produce more cost-effective parts.
The company can also negotiate long-term contracts with these suppliers, providing stability and predictability in its supply chain. Additionally, by establishing solid relationships with suppliers, the company can improve its supply chain efficiency and reduce supplier risk.
Here are some reasons why you should choose to engage in strategic sourcing:
Cost savings: By thoroughly evaluating potential suppliers and negotiating long-term contracts, organizations can often secure better pricing and terms than they would through tactical sourcing, leading to significant cost savings over time.
Improved quality: Organizations can improve the quality of their products or services and increase customer satisfaction by carefully selecting suppliers who can meet the organization's quality standards.
Increased efficiency: By streamlining the strategic sourcing and procurement process and establishing solid relationships with preferred suppliers, organizations can improve their supply chain efficiency and reduce the risk of delays or disruptions.
Risk management: By diversifying the organization's supplier base and establishing contingency plans, organizations can reduce their risk of supplier disruption and protect against price fluctuations.
Competitive advantage: With the help of strategic sourcing, organizations can gain a competitive advantage by having a more efficient and cost-effective supply chain.
How to Implement Strategic Sourcing in Your Business?
To implement strategic sourcing in your business, you can follow these steps:
Define your procurement goals
Identify the key objectives you want to achieve through your procurement activities. By defining specific objectives for your procurement activities, you can ensure that your efforts are aligned with your organization's overall business goals and priorities.
Procurement goals also provide a way to measure the success of your strategic sourcing efforts and determine whether you are achieving the desired outcomes. Some common procurement goals organizations may include cost savings, improved quality, increased efficiency, risk management, and time to market.
Analyze your current procurement process
Conduct a thorough review of your current process to identify improvement areas. You may include evaluating your existing supplier base, analyzing your procurement spend, and identifying any bottlenecks or inefficiencies in your approach. Also consider dividing your supply chain into different categories and conducting a risk analysis to separate your categories into baskets based on their profit impact and supply risk.
It is essential to involve your team throughout the process and to choose your scope carefully to ensure that you have the right level of detail and that your categories are suitable for long-term comparison.
Draft a strategic sourcing plan
Once you have identified areas of improvement, draft a strategic sourcing plan focused on these areas. Your strategic sourcing plan must have the following elements:
- Supplier selection criteria: The criteria that will be used to evaluate and select suppliers, such as financial stability, reputation, track record, and capacity to meet the organization's needs.
- Supplier evaluation process: The process for evaluating and selecting suppliers, including any necessary research, negotiations, and contracts.
- Supplier relationship management
The processes and procedures for managing the relationship with preferred suppliers, including performance monitoring, continuous improvement efforts, and communication.
- Contingency planning: Plans for handling disruptions in the supply chain, such as identifying alternative sources of supply or establishing backup suppliers.
Identify potential suppliers
To identify potential suppliers and gather data on their capabilities and costs, you should first determine the scope of your supplier market and collect data on the supplier base that could potentially supply each category. You should also research current and potential suppliers beyond those you are already working with and record the supplier data.
Then, you should analyze your spend in each category, split it by supplier, and compare your spend to the supplier's revenue to determine your level of influence. You should also conduct supplier interviews, gather data from current suppliers, and evaluate each supplier based on availability, quality, finances, and cooperation level to determine whether working with them is worth the risk.
Evaluate potential suppliers
Conduct a thorough evaluation of shortlisted vendors by sending them to send requests for information (RFI) or requests for proposal (RFP) to determine which ones fit your organization best. Some options are reviewing their financial stability, reputation, and track record, negotiating contracts, and establishing long-term relationships with preferred suppliers.
You can create a scorecard to benchmark their scores against your requirements outlined in the strategic sourcing plan and set a threshold for qualification. This will help you to make informed decisions about which vendors to consider for your strategic sourcing efforts.
Monitor and review the strategic sourcing processOnce you have implemented the policies, it is time to measure their effectiveness. Ongoing monitoring and reviewing of the strategic sourcing process are essential to ensure that it meets your organization's goals and objectives. This may involve tracking key performance indicators (KPIs), such as cost savings, supplier performance, and supply chain efficiency, and making adjustments as needed.
The Easy Way to Streamline Your Strategic Sourcing Process
Manually streamlining your strategic sourcing process could take hours of effort and dedication. Evaluating the suppliers against set criteria is complex, and monitoring their performance is difficult. Strategic sourcing software like Kissflow can help organizations streamline their strategic sourcing process by automating and simplifying various tasks and activities.
Kissflow is a cloud-based procurement platform that can help you automate sending out RFPs and RFQs to potential suppliers and tracking responses, allowing you to evaluate and compare proposals quickly. Thus, you can identify the most qualified suppliers based on various criteria, such as cost, quality, delivery times, and other factors.
It can also assist with creating and managing contracts with suppliers, including tracking terms and conditions, expiration dates, and other essential details. Additionally, it helps you track your suppliers' performance and generate reports to help you identify areas for improvement and optimize your strategic sourcing process.
To know more about strategic sourcing and how Kissflow can help you streamline your procurement process, feel free to consult us.