What is . . . Strategic Sourcing?

Too often, Procurement is viewed as a necessary evil – relegated to processing purchase orders on an as-needed basis. This perception limits Procurement’s ability to proactively and strategically impact a company’s purchasing behavior and ultimately, the bottom line. Enter Strategic Sourcing.

In the simplest terms, Strategic Sourcing is about approaching procurement and spend in an effective, efficient, and holistic way. As the Institute for Supply Management describes it: “Strategic Sourcing is an organized and collaborative approach to leveraging targeted spend across locations with select suppliers that are best suited to create knowledge and value in the customer-supplier interface.”     

How an organization defines the Strategic Sourcing process and methodology can vary. Introducing a more strategic practices might be as simple as working to have more productive conversations with suppliers, or as complex as restructuring the supply base. Typically, the Strategic Sourcing process includes:

1.      Performing a Spend Analysis

2.      Conducting research of the market to identify suppliers

3.      Developing a sourcing strategy

4.      Going to market in the form of an RFx

5.      Assessing the contending supply base

6.      Negotiating and implementing a contract

7.      Monitoring compliance

While Strategic Sourcing has numerous benefits from cost savings to supplier-introduced innovation, its effect on a given organization will depend on their placement within the Procurement Maturity Model.

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What is Strategic Sourcing to your company?

Tactical

As of right now, your company probably is not looking at Procurement as an opportunity for profit growth at all. In this section of the Procurement Maturity Model, Strategic Sourcing begins with a shift in the perception of Procurement’s capabilities. In an elevated position, beyond that of a purchase order processor, Procurement teams can target areas of spend with upcoming contract renewals. Rather than simply auto-renew, they can take the time to assess current spending and forecast future needs. They can also conduct in-depth research into available suppliers to gain a better understanding of the market. This will help keep you from making a poor purchasing decision by increasing transparency in your engagements with providers. .

Operational

While you see the value of going to market, the exercise is probably done to fulfill a “three-bid-and-buy” corporate mandate. Procurement organizations at this stage are committed to the status quo - reliant upon what they know and have known for years. They may explore other, more strategic options, but they rarely act on them. As a result, it becomes too easy to fall into the trap of staying with an incumbent supplier and simply negotiating annual markups when the time comes for a contract renewal. 

If this sounds like you, start looking for a broad spectrum of supplier options, consider convenience, price, quality, and service. To improve strategic sourcing further at this level, start having effective, sometimes tough conversations with suppliers to reach more mutually beneficial relationships. Where possible, seek out soft dollar value-adds. After all, a strategic approach to sourcing and supplier engagement is about much more than price. 

Strategic

Companies with strategic Procurement departments understand the importance of having close  partnerships with both suppliers and internal business units. While cost reduction may be a priority for their sourcing efforts, it is just one of their many goals.

The real focus for a Strategic Procurement team is maximizing stakeholder value. Strategic Procurement organizations must enable their peers from other units to reach their goals by helping them by providing for supply chain visibility and fostering effective supplier partnerhsips. This organization likely utilizes a few eSourcing tool,  but their integration of Procurement technology can generally be classified as “not quite there”. To best serve internal customers with an efficient Strategic Sourcing process, Strategic Procurement groups should consider equipping themselves with eProcurement tools that free up their resources to focus on more strategic initiatives and reduce the time it takes to go to market and award business.

Best-in-Class

A company with best-in-class Procurement operations knows Strategic Sourcing in and out. They leverage the approach to continually deliver their organization a competitive advantage. Internal stakeholders recognize Procurement as a strategic adviser and an asset in securing the goods and services they need to fulfill their role. However, Best-in-Class status doesn’t mean there’s no room for improvement. Rather, Best-In-Class organizations embrace the mindset of continuous improvement and are constantly looking for ways to streamline their processes, optimize their supplier relationships, and boost their return on investment. With the proper processes and policies in place, Best-in-Class organizations seek to complement their operations with technology suites that drive their long and short-term objectives.

Regardless of where your company falls on the Procurement Maturity Model, embracing Strategic Sourcing is an important step in becoming a leader. Don't wait. Start thinking about how a more strategic approach to purchasing can benefit your organization today.