Strategic sourcing helps procurement professionals fulfill their dual roles of supply and cost management. Rather than taking a reactionary or fulfillment approach to procuring what a company needs, strategic sourcing takes a proactive, information-guided approach to procurement.
Maximizing value while minimizing cost is a business imperative across every discipline within organizations. Procurement management is an area of particular opportunity for cost control, as well as significant risk for overruns.
As a procurement professional, you seek the tools to ensure your organization obtains the supplies and services it needs to operate efficiently, whether it’s shipping and packaging materials, product for resale or a service contract for commercial equipment.
STRATEGIC SOURCING IS THE DIFFERENCE BETWEEN:
“We need 100 widgets, now let’s find the best price,” versus
“Last year we needed 100 widgets in Q3. Here’s what we spent on it. In Q1, let’s negotiate the best price and ensure the same quality and value.”
Strategic sourcing achieves efficiencies by formalizing the way spend information is gathered, analyzed and factored into the procurement process. It is a continuous process that considers factors far beyond just cost of a product or service. Driven by experience, evidence and fact, strategic sourcing eliminates the potentially high cost of opinion- or emotion-based procurement decisions.
This approach allows procurement professionals to consolidate purchasing power in order to secure the best value available in the marketplace.
CRITICAL ELEMENTS OF STRATEGIC SOURCING
To effectively implement strategic sourcing in your organization, it’s important to understand the critical elements that constitute a successful strategic sourcing plan.
SPEND ANALYSIS In the initial data-gathering phase, an organization pulls together information on its past, current and anticipated needs; historical spend data; realized value and ROI of previous procurement activities.
SUPPLIER QUALIFICATION This stage of the strategic sourcing process combines an assessment of the marketplace for the required product or service, and information gathering on possible suppliers or vendors. Once potential vendors/suppliers have been identified, it’s time to assess their quality, service, reputation, capabilities and price.
NEGOTIATION After receiving initial bids from qualified suppliers, negotiation begins with a conventional or online process that helps secure the optimal price.
SUPPLIER PERFORMANCE MANAGEMENT Strategic sourcing formalizes the process of assessing vendor (or supplier) performance, and helps ensure they are consistently living up to their half of an agreement, including timelines and budgets. Strong management of suppliers incorporates a scoring process to measure specific performance areas such as product quality, delivery time, customer service and more. Additionally, periodic meetings with the suppliers help assess performance and develop improvement plans.
BENEFITS OF STRATEGIC SOURCING
While strategic sourcing is widely practiced in larger organizations, fewer small and mid-size operators have discovered its value, or explored how to implement this strategy in their own organizations. Large operators are not the only ones who can stage and sustain a strategic sourcing initiative; smaller organizations stand to benefit as well.
However, smaller organizations may face significant obstacles to successfully implement strategic sourcing programs, including:
However, smaller organizations may face significant obstacles to successfully implement strategic sourcing programs, including: • In-house expertise to accurately and efficiently analyze spend. • A lack of resources to implement the process. • Fewer long-standing supplier relationships. • Less bargaining power to negotiate contracts. • Fewer resources to manage contracts and suppliers. • Less capital to invest in technology.
Yet the benefits of strategic sourcing make it well worth it for smaller to mid-size operators to seek out ways to overcome these challenges. Strategic sourcing can help operations: • Reduce or control procurement costs. • Maximize the value of every dollar of spend. • Streamline procurement operations. • Build strong, trustworthy relationships with existing and new vendors. • Retain, gain or regain a competitive advantage in their marketplace
THE BENEFITS OF A STRATEGIC SOURCING PARTNER
Although strategic sourcing can be a significant time-saving and cost-reduction tool, if an organization lacks in-house resources and expertise, strategic sourcing will be less effective. A proven method of expanding an organization’s capacity beyond its in-house resources is working with a third party which can allow even the smallest operation to tap the benefits of strategic sourcing.
Benefits of working with a third party for your strategic sourcing operations include:
• Having a dedicated partner allows in-house personnel to remain focused on other profitbuilding functions. • Securing access to a depth of expertise the organization might not have in-house. • Gaining access to specialized procurement software, including e-sourcing, which might be too costly for operators to purchase on their own. • Extending the capabilities of an existing sourcing or procurement team. • Creating the ability to complete more projects and source more items in budgeted time. • Enhancing ROI of strategic sourcing programs.
A strategic sourcing partner should function as an extension of an operation’s in-house capabilities, enriching your expertise and enhancing the cost-effectiveness of your procurement program. It’s critical to carefully evaluate potential strategic sourcing partners to ensure they have the industry expertise and vendor network that will help optimize your strategic sourcing program.
THE BENEFITS OF A STRATEGIC SOURCING PARTNER
When evaluating a strategic sourcing provider for possible partnership, key elements to consider include:
• Experience — How many years of experience does the company, and its sourcing professionals have in your industry? In the category where you require expertise? Are they certified sourcing professionals?
• Do they have a structured sourcing process that has proven successful? For example, their process should include market analysis, needs assessment and price negotiation.
• Do they expertly employ e-sourcing tools? Industry-leading software and web-based sourcing tools facilitate a faster sourcing cycle which leads to faster savings throughout the procurement process. What’s more, being able to reap the benefits of this type of software tool without incurring the costs is one of the key selling propositions for outsourcing strategic sourcing.
• Is the sourcing provider able to leverage the volume of spend with similar companies to benefit the client company?
• Does the provider sustain an extensive supplier data base, giving you broader access to more vendors? A larger network of vendors means increased competition among them, and better access to the best possible pricing for client companies.