All you need to know about Strategic Sourcing

What is strategic sourcing?

‍

In conventional sourcing and procurement models, sourcing of goods and services is done by maintaining an optimal balance between price and quality.

However, Strategic sourcing is a holistic approach. Strategic sourcing is the process of developing channels of supply at the lowest total cost and thus reducing the total cost of ownership as a result. It takes into account several other factors in addition to price and quality.

Strategic Sourcing vs Tactical Sourcing

‍

Let’s start by delving deeper into the nuances of strategic sourcing. However, before we do that, let us understand why we don’t rely on tactical sourcing?

Tactical sourcing is more or less a temporary solution to procurement woes. It is reactive in nature and demands quick action to resolve a procurement or a sourcing problem. It does not task the decision makers to undertake extensive analysis of spend, inventory, asset, and payment and fix chronic procurement problems. Also, it does not task the buying organization to hold extensive dialogue with suppliers. In other words, tactical sourcing is a short-term strategy to acquire quality goods and services.

As we have already gone through the core principles of procurement and tactical sourcing, let us move on to steps involved in strategic sourcing.

Steps in Strategic Sourcing

‍

 The very first step is: ‍

       Assessment of a company’s current spending

      Spend analysis gives a clear idea of your company’s current spend. You can study       the details of goods and services that your organization requires. It helps in       understanding your purchases better by keeping you aware of the various       sources and the deviations in the price patterns of the goods and services. You       can determine the direct and indirect spend distinctly and differentiate the       purchase based on the category of products and services. Also, you can deduce       capex and opex spend through spend analysis. Through spend analysis, you can       identify the categories of products that are replaceable with low value       alternatives.

      Now, you have a fair idea about your organization’s sources and the likely prices       for those items. It is now time to understand whether the market is ready for the       constant supply of goods and services. Hence, we do:‍

     Assessment of the supply market

     At this stage, you identify the markets that may offer you a steady supply of goods      and services in the long run. You analyze them for several factors. For instance, you      determine how the market is suitable to meet with your benchmarks for quality and      cost of goods and services. You zero in on the logistical advantage or disadvantage      for sourcing goods and services from a particular market.

    Total cost analysis

    This is one of the intricate tasks. You have to determine the cost of purchasing, using     and finally retiring the goods from usage. Thus, you will be calculating the cost of     purchase for your product’s complete lifecycle. Though these costs are fixed, you     need to visualize different scenarios and their implications. For instance, if your     supplier informs you that he would be unable to maintain the quality of cement that     used to supply then you would be tasked to determine:

    1. What is the alternative?

    2. What is the cost of the alternative?

    3. What is the quality of the alternative?

    4. How will the usage of the alternative impact the quality of the construction?

    5. Will sourcing of the alternative impact your project timelines and escalate the         project cost?

    Identification of suitable suppliers‍

    Suppliers are strategic partners. As eventual success or failure largely depends on     them, you need to verify suppliers credentials and check the past record thoroughly.     You need to check the suppliers for their past financial records, peer review,     adeptness at complying with an array of regulations, and relations with other buyers.     Based on these inputs, you can decide their suitability. As strategic sourcing is a     continuous process, this task of identification will also help to drop off the suppliers     with unsatisfactory performance from the network.

   Development of a sourcing strategy

   By the time you reach this step, you would have zeroed in on the set of suppliers you    will be willing to work with. As a next step, you can define a sourcing strategy that    includes several key performance indicators. First, you can set KPIs for your internal    processes. For instance, cycle time from PR to PO. Similarly, you can create a set of    KPIs that align with your business goals to measure the performance of your    suppliers. The suppliers’ performance can be measured based on the quality of    goods they provide, delivery time taken, accuracy of invoices in terms of cost and    quantity of delivered goods, consistency in the delivery of goods, and compliances    they followed while doing so. Once created a set of KPIs to monitor internal    processes and the performance of your suppliers, you can decide the ways to    procure goods and services. The end goal of having these KPIs is to reduce the total    cost of ownership. Based on the nature of goods and services needed to be    acquired, you can opt for RFI, RFP, or RFQ or you can create rate contracts with    your suppliers. Reverse auctioning is also an option to exercise and that creates a    healthy    competition among your suppliers.

   Negotiation with suppliers

   As a buyer, you need to be specific about your requirements and convey the same in    writing to the potential suppliers. You should clearly convey the specifications for the    required goods and services and the terms and conditions that you would follow    while acquiring the same. Also, you should clearly specify to the suppliers the    timelines and any penalties in case of the delay in the delivery. As the end goal is to    reduce the total cost of ownership, you should leverage pricing data and cost    structure adhered by the suppliers. Empowered with all these inputs, you can ace    negotiations.

   Implementation of a new supply structure

   To achieve the goals of strategic sourcing, a mere announcement of its    implementation would not be enough. You need to deploy the solutions that would    automate the repetitive tasks and eliminate the reliance on the paperwork. However,    for the adoption of such solutions, a change management needs to be undertaken    and all stakeholders need to take training.

   Track results and restart assessment

   As stated previously, strategic sourcing is a long term process and involves    continuous improvement. Hence, you need to analyze the data relevant to the KPIs    set for your internal processes and transactions with the vendors. The inputs will help    you analyze the change occurred after implementing strategic sourcing    methodology. You may make changes in your internal workflows, or replace your    existing sourcing tools to attain the business goals and make your sourcing process    more efficient.

Benefits of Strategic Sourcing

‍

We have already discussed all the key steps in strategic sourcing. It is equally important to know the benefits of using strategic sourcing as a sourcing methodology.

Cost Saving

We know that Strategic sourcing is all about reducing the total cost of ownership. The outcome of implementing this methodology will be cost-saving at each stage as you source goods and services from the suppliers who offer discounts, ensure consistent supply of quality goods, and meet your timeline.

Improved risk assessment and mitigation

As you are driven by the goal to reduce the total cost of ownership, you have to visualize all business scenarios that would hamper product cost. Thus you analyze risks holistically and envisage contingency plans to mitigate any supply chain related risks. The outcome is improved risk assessment and mitigation.

Well-aligned workflows with business objectives

Right at the planning stage, you zero in on the processes that are inefficient and impact the bottom line eventually. With strategic sourcing in practice, your well-defined and seamless workflows allow you to attain business objectives.

Optimization of ideal suppliers

Supplier analysis is a crucial step in envisioning a strategic sourcing plan. With in-depth analysis, you set your organization for sourcing quality goods from top-notch suppliers. As strategic sourcing follows the core tenet of continuous improvement, you can tap in the best among your pool of suppliers with elaborate KPI measurement.

Better supplier relationship management

As suppliers are strategic partners, you deploy tools and create practices to hold more meaningful dialogues with ease. These tools and practices lead to better supplier relationship management and keep you aware of the potential threats that would impact your sourcing activities.

So far we discussed the steps for practising strategic sourcing and benefits of applying the methodology. Now, we have to face the bigger question and that is which tools will help us to make the transition from the conventional approach to this holistic methodology.

What are the key ingredients for an ideal strategic sourcing solution?

We know that Strategic Sourcing is an intricate methodology and you may need an ‘n’ number of tools. To simplify things for you, we have zeroed in on the tools that you will need the most.

Analytical Tools and Analytics Builder

As we know, spend analysis is the very first step towards strategic sourcing. It’s no wonder that you need in-built tools to analyze spend and understand how your organization made business decisions in the past. Apart from spend analysis, you need to analyze asset, inventory, and payment and you need analytical tools for the same. However, having in-built analytical tools for different processes is not enough. For instance, if you need to analyze the data in a different way or have KPIs that are not mainstream. Then you need to create a gamut of functionalities and filters. To this end, an analytics builder would help. Using the analytics builder, you should be able to create such filters and functionalities and analyze the spend you want. Select KPIs that make sense to you as an organization.

Supplier Discovery

Strategic sourcing can be practiced in a successful way only if you have trustworthy suppliers who never fail to deliver the quality goods and services on time. To discover such suppliers, you need a powerful in-built supplier discovery tool. This tool must divulge all essential and critical details about the suppliers and make you aware of their past record with other buyers. It should also make you aware of the cost structure and quality of goods and services offered by the vendor.

RFX Management

‍

RFX documents can get pretty complicated. Here’s where RFX management tools will come to your rescue. These tools will allow you to gather requirements from other stakeholders in your organization and create RFIs or RFPs or RFQs. It will allow you to collaborate with other stakeholders so that you can review and edit the RFX if needed. Also, there should be an option to launch a reverse auction if you choose to make the buying process more competitive and seek to gain the most economical bid.

Dedicated Vendor Portal

‍

Usually suppliers have a not so memorable experience of dealing with procurement professionals and AP teams in the buyer organization. Getting to an AP team member or procurement professional is no less than a challenge as there is no medium of communication. With a dedicated vendor portal, a vendor should be able to know the status of his payment, issue an invoice and communicate any issues 24 by 7.

Collaboration Tools

‍

Dialogue with internal and external stakeholders is critical for the success of strategic sourcing. Collaboration tools should help you to interact and share documents, images, and videos. The ease of interaction and sharing would help you to eliminate inefficiency and opacity from the process of sourcing.

We have discussed the tools you need to exercise strategic sourcing methodology. However, our efforts to build a resilient and diligent supply chain will fall short if we disregard the power of Artificial Intelligence. Let us discover how AI can help us in numerous ways.

Quick PR to PO process

‍

While it may appear simple and a no brainer, procurement professionals have to spend a considerable amount of time to create purchase requests, get approvals, and convert the PR to a PO. With AI-powered bots, you can have more information at your fingertips while creating a new PR. Today’s bots can make suggestions from previously exercised options for the suppliers and goods and services. PRs can be created on the fly and made through to POs after being made to pass through approval workflows.

Negotiation

‍

Negotiations can be tricky! However, AI-powered bots can suggest the best option based on pricing of goods and services, transaction history of suppliers, and comparisons with other sourcing options available in the market. When empowered with these data points, procurement professionals can negotiate better.

In the discussion so far, we touched upon the differences between strategic sourcing and other methodologies, steps in strategic sourcing, tools you need to implement this methodology, and finally how AI can be the game changer for you. We understand that though strategic sourcing is yet to become a trend, it is a holistic approach to stay resilient in the event of any disruption. With that said, we will like to discuss other aspects of it in our next article.

Next Post →

‍