Spending prudently can make or break any business. For finance and procurement leaders, it is an age-old foundational tenet. But, what is new is how they decide what judicious spending looks like. As organizations shift their focus on reducing costs while maximizing productivity, the procurement team's concern now is how to deliver outcomes. For many, the answer is strategic sourcing.
Strategic sourcing is one such approach, which is transforming the way organizations see buyer-supplier relationships.
Strategic sourcing is an evolving practice that examines the total cost of ownership (TCO) regarding the industry trends and attempts to optimize the sourcing procedure by forging long-term, mutually beneficial relationships with vendors.
In essence, it factors in three key elements – the business’ spend analysis, market conditions, and data-driven supplier base. Strategic sourcing aims to align these three aspects for a robust sourcing strategy that fulfills maximum organizational goals.
As a leading global provider of procurement intelligence and supplier compliance solutions, Beroe’s experience and expertise in strategic sourcing will help you boost your procurement operation’s effectiveness and efficiency. Now adopt a more functional strategic sourcing process that enables your procurement teams with actionable insights into the supply chain. For more information about our procurement intelligence solution, get in touch with us today.
The Benefits of Strategic Sourcing
As mentioned, taking a structured and collaborative approach to strategic sourcing better aligns procurement strategy with supplier operations, ensuring long-term cost savings alongside other business benefits. Let’s discuss some far-reaching benefits of strategizing the sourcing process at length:
Reduce Direct and Indirect Costs
Having a formally adopted and well-defined sourcing strategy can save organizations money in several ways. Indeed, a recent survey reveals that cost-cutting is a key priority for about 8 out of 10 chief procurement officers (CPOs).
The entire strategy hovers around the goal of curbing expenses. First, the procurement team identifies the existing costs overdue for optimization. Then, they collect insights, determine shareholder needs, research the current industry, and ultimately produce a comprehensive request for proposal (RFP) to examine and choose the suitable supplier.
As the selection process is more meticulous than a conventional strategic procurement project, both parties are engaged in creating a mutually rewarding and long-term collaboration. As such, the partnership is progressive and synergistic, eventually saving lots of cash.
At its heart, strategic sourcing is just as much about preventing an ineffective collaboration as it is about searching for a good supplier. Again, thanks to the in-depth process, organizations can look into every facet, dig into the supplier’s experience, explore their contingency plans, and build a framework for existing communication. They then can carry out financial, quality, customer support, and supply risk analysis. Upon spotting these possible risks, businesses can have a strategy to mitigate - and minimize - them.
A study shows that ¾ of CPOs report better supplier insight sharing as their top risk-management strategy. Furthermore, strengthening close ties with the vendors can keep businesses ahead of potential disruptors in their supply chain.
Room for Continuous Improvement
Strategic sourcing is not a one-time thing. Instead, it calls for an ongoing assessment and review of the strategic sourcing processes. It is a sustained circuit of improvement that enables executives or managers to spot the growth areas and cash in on them. Furthermore, it lets shareholders make sound decisions for items, such as capitalizing on market prospects, the further evolution of the business model, and staying competitive.
Longer Collaboration, Fewer RFPs
No surprise, neither the procurement team nor the supplier’s proposal division relish the opportunity of extending a new RFP. For sophisticated, high-value sourcing projects, the process can last months or even years. With strategic sourcing, businesses can rest assured that they have covered every critical factor, chosen the suitable partner, and both are up to fulfill their respective goals together.
When businesses invest in fostering relationships with their vendors, they lay the groundwork for trust. By including the vendors in sourcing decisions and making them feel valued, organizations are encouraging vendors to deliver as per the business’s objectives.
Strategic Sourcing Process: 7 Steps
Considering the benefits of strategic sourcing, it would be enticing to carry out a sourcing strategy for your business as quickly as possible. That said, it follows a broadly put 7-step blueprint, which flows as follows:
Understand Internal Requirements
The first step of strategic sourcing pertains to spotting the key spend areas existing across the business and sorting them into domestic/international, critical/non-critical, and direct/indirect spendings. With this categorization, organizations can implement risk analysis and prioritize the sourcing processes to create the sourcing strategy.
Research Supplier Market
After doing all the homework internally, it is time to step out and examine the market. Check out the current and future vendors and record their profiles. Get a holistic understanding of their past industrial performance, market standing, revenue share, and any other opportunities or risks.
Collect Potential Vendor Details
To support the data gathered in the above step, businesses will need complete vendor insights. For this, they can request for RFPs/RFQs/RFIs from vendors. First, organizations need to clearly define their business needs so that vendors can submit accurate and relevant insights. Then, gather and compile this information in a master list to make all the data readily available.
Develop a Sourcing Strategy
Now businesses can decide on the type of strategic sourcing process that will do best for them. While doing so, they must consider the objectives and goals of their company and which sourcing strategy has a previous history of being successful within the industry. Developing the strategic sourcing management will offer the complete picture of the specifications of the services and goods, a breakdown of all the involved expenses between the business and the vendor, as well as the expected delivery time.
Select and Negotiate with Vendors
By now, you have all the relevant data to compare which suppliers align the most with your business’s needs. Take time to mull over a master shortlist in an open discussion with the procurement department on the potential vendors and squeeze out a few selection parameters to choose the suitable vendor. Then, apply these as filters to shortlist the potential vendors from the master list.
Once you have boiled down the parameters to the final shortlist, you can negotiate with each vendor to close the best deal for the costs involved. After the negotiations, select the finalized vendor and send them off for approval from the relevant divisions in the company.
Measure Vendor’s Performance
Strategic sourcing does not end merely at selecting the vendor. It is a continuous process that also digs into measuring the vendor performance as per the business needs. Therefore, it is crucial to communicate with other organizational divisions to see how they are searching for the vendor as a source. In case of any scope for improvement, the procurement team and the vendor should engage in an open dialogue to fix these issues.
Leverage Supplier Relationship Management
Finally, having a supplier relationship management (SRM) solution can be considerably effective in maintaining amicable and fruitful relations between businesses and vendors. It unfurls a two-way street where both parties benefit from the collaboration. SRM lays the foundation for concerted efforts and drives value to the otherwise dry buyer-supplier relationship.
Strategic Sourcing vs. Procurement
Judging by their surface meaning, anybody would think that strategic sourcing and procurement are synonyms for getting supplies for a business. They are not. While both are related and play crucial roles in a company’s supply chain, they are pretty different and must be implemented in distinct ways to ensure success.
Strategic sourcing is just one element of procurement but represents a plethora of sourcing activities, including supplier development, strategic planning, and contract negotiation.
On the other hand, strategic purchasing is a comprehensive array of processes that includes purchasing and sourcing.
While small businesses can combine the two, having them as independent entities often evens out processes and minimize errors.
Beroe: Enabling Strategic Sourcing for Swifter Business Growth
How can you be more tactical in your strategic sourcing approach? How can procurement leaders improve cost-effectiveness while adding value to the business?
Beroe has answers to these questions. Every year, it helps hundreds of companies effectively implement their sourcing strategies to save millions in spending. With experienced category specialists, Beroe’s strategic sourcing consultants hit the ground running and deliver sustainable results from day one.
More than 17,000 companies worldwide – including 400 of the Fortune 500 companies – trust Beroe’s innovative solutions that align with their business goals. These clients benefit from:
- Actionable market intelligence across 400+ categories
- Leading-edge analytical and sourcing solutions
- Dedicated supply market intelligence and analytics teams
- A rapidly expanding database of over 4 million global suppliers
- An arsenal of best-practice processes, methodologies, and specialized templates
2021 Strategic Sourcing Updates
NelsonHall awards TCS the title of “Leader in Procurement Transformation”
As a leading global IT services, consulting, and business solutions firm, TCS has made into the NelsonHall NEAT for Procurement Transformation as an industry leader.
The report reveals that TCS is continuously upping the ante and advocating procurement engagements with a consulting-driven approach while investing in digital solutions to drive future growth.
NelsonHall also highlighted the possibilities unfolding for TCS, empowering it to cross-sell procurement to other business services clients, with further avenues supported by the launch of Cognix plug-and-play solutions. The company’s range of patented source-to-pay tools makes it a prominent industry example. In addition, its broad portfolio of consulting-driven procurement solutions entails strategic sourcing, spend management, transactional procurement, and contract management.
“To meet changing consumer demands, manage supply volatility and drive cost and sustainability objectives, enterprises need to digitally reimagine their procurement operations, leveraging an AI-driven human-machine paradigm to deliver resilient supply networks, consolidate strategic spends and gain deep operational insights,” said Ashok Pai, Global Head, Cognitive Business Operations, TCS. “Our Leadership position in this assessment is a recognition of our vision, strategy and investments aimed at developing future-ready and differentiated offerings and our demonstrated ability to deliver superior business outcomes for our customers.”
Fueled by TCS’ Machine First™ Delivery Model (MFDM™), TCS Cognix™ is an AI-based human-machine collaboration suite that drives business procurement transformations. The proprietary solution pushes the digital transformation journey of CPOs with an environment of pre-made, adaptive, and reusable digital solutions known as Value Builders to address specific business imperatives - predictability, agility, supply assurance, spends optimization, and sustainability.
Moreover, the TCS Cognix suite comes with TAP™ and ignio™ Cognitive Procurement to help digitally reshape the procurement process.
Supply Chain Management Book Recommendations
Strategic Sourcing Management: Structural and Operational Decision-Making
Providing a deeper dive into purchasing and supply management, Strategic Sourcing Management covers how these processes help a business remain competitive, efficient, and effective.
Written (and edited) by Olivier Bruel (HEC Paris), along with the contribution from experts in both industry and academia, this book is enriched with explanations and ideas with solid examples of best practices. The chapters are self-standing, so delve into any section as per your need. Understand the explanations better with clear graphics and frameworks.
The book is split into four segments - strategic buying decisions, operational management of purchasing and related supply chain, organization and management of dedicated human resources, and monitoring of performance and change.
As the name suggests, this is a playbook packed with strategic and tactical perspectives that link with a corporate strategy to help anybody learn value creation mechanisms through strategic sourcing processes.
Furthermore, this book is a must-have for academics and practitioners in procurement and supply chain management. It has secured a rating of 4.3/5 on Amazon.
Check out the preview of this book here.
Frequently Asked Questions
What is strategic sourcing?
Strategic sourcing is a procurement approach that weighs the overall value delivered via a supplier relationship instead of the simple cost of the service or product provided by the supplier. The method is a part of supply chain management and focuses on tailored solutions and strategic collaborations.
Why is strategic sourcing important?
Strategic sourcing brings everything together – supplier analyses, industry trends, operations, and supply chain expenses – and lets businesses adopt agile approaches. Moreover, it provides a clear outline with invaluable information to help businesses spot possible risks and opportunities for cost savings.
How is strategic sourcing different from procurement sourcing?
One of the major differences between strategic sourcing and procurement sourcing is that the former focuses more on vendor relationships and risk mitigation while signing up new vendors. On the other hand, procurement sourcing includes purchasing and obtaining the materials required to develop goods for sale.
What are the steps included in the strategic sourcing process?
Strategic sourcing management includes the following steps:
- Evaluating business spends
- Creating a sourcing strategy
- Researching the vendor Market
- Collecting vendor data
- Choosing and contracting vendors
- Measuring vendor performance
- Using supplier relationship management
Drive sustainable value creation for every dollar spent with AI-powered strategic sourcing services, tools, and resources. Check out Beroe LiVE.Ai™.