Strategic sourcing empowers you to align your procurement process with your larger business strategy. As a result, you'll maximize your purchasing power and minimize supply chain disruptions that affect your business.
By using this guide, you'll gain a better understanding of how sourcing strategies can improve your purchasing decisions and your business efficiency.
What is sourcing?
The sourcing process involves locating goods or services to satisfy your business needs. Traditional sourcing focuses on finding potential suppliers and using the most cost-effective purchasing method. Sourcing is therefore one of the most important elements of the supply chain management process.
Sourcing is related to the procurement process, though it isn't exactly the same. So what is the difference between sourcing and procurement? While sourcing allows business owners to track down the best suppliers, procurement involves negotiating contracts and seeking new ways to obtain the best prices for products and materials.
What is strategic sourcing?
Strategic sourcing is a type of supply chain management that empowers procurement professionals to improve efficiency while maintaining high standards of quality. By using strategic sourcing, your business can experience an increase in purchasing power while minimizing supply chain risk.
Strategic sourcing vs. sourcing
The strategic sourcing process is different from traditional sourcing. Ordinarily, the sourcing process looks at only one thing: supplier prices.
But a strategic sourcing strategy is far more dynamic and may involve such tasks as:
- Assessing supplier risk
- Negotiating contracts
- Diversifying the supply chain with alternative suppliers
- Building stronger supplier relationships
- Maintaining regulatory compliance
By implementing strategic sourcing, businesses are better able to align their business processes for greater cost savings and efficiency.
Strategic sourcing vs. procurement
What is the difference between strategic sourcing and procurement? Sourcing and procurement are closely-related activities, but strategic sourcing represents a broad approach to a company's internal processes.
Procurement professionals, on the other hand, focus more on the day-to-day transactions between businesses and their suppliers.
7 steps of the strategic sourcing process
How can you adopt a strategic sourcing plan for your organization? Companies that implement strategic sourcing commonly do so through the following seven-step process:
1. Create categories to analyze company spending
During your spend analysis, it's important to divide your expenses into discrete categories. Common examples might include distinctions such as:
- Materials vs. services
- Direct vs. indirect expenses
- Domestic vs. imported goods
At the very least, this level of categorization will help you understand how your money is being allocated to each piece of your sourcing process. And these categories can also help you divide and conquer by giving team members ownership of your most common spending categories.
2. Analyze the supplier market
Next, you'll need to carefully consider the supply market. Start by evaluating your own business needs based on the categories you created in the above step. For instance, if you serve a diverse, global marketplace, you'll need to find a supplier solution that enables you to maintain this focus. Alternatively, you may want to find suppliers who have adopted sustainable practices that align with your own company's values.
Similarly, your market research should consider such factors as supplier costs and risk management. But your market analysis might also compare your anticipated needs to the supplier's total revenue. Why is this important? Because if you can bring value to the supplier, you'll be in a better position to negotiate contracts and receive the best prices and service.
3. Align your sourcing strategy with your business goals
Evaluate your current sourcing strategy and pinpoint areas that are just not working. Are you really getting the best possible deal? Are there areas of inefficiency or waste?
After analyzing your current strategy, you'll need to develop a new plan that aligns with your broader business goals. This way, you'll have a clearer idea of your long-term objectives, and you'll be able to develop your strategic sourcing plan around these goals.
4. Develop your supplier pipeline
Now that you know your desired sourcing strategy, you'll be better equipped to select suppliers that align with your goals.
This also means that you'll have a basic screening process for prospective suppliers. You can build a supplier pipeline with a preference for vendors who help you reach your goals of achieving cost-effective solutions, sustainable practices, or other critical benchmarks.
You can also submit requests for information (RFIs) to learn more about individual suppliers, and this can help you make an informed decision about your supplier network.
5. Improve your technology stack
Many of your critical processes can be streamlined with the right software and tools. Spend analysis, for example, can help you analyze how much you're spending and with which vendor. The information you gain will keep your fingers on the pulse of your company and let you know how your spending patterns impact your bottom line.
You might also consider supplier relationship management tools, which often integrate into your Enterprise Resource Planning (ERP) platform. These tools create a centralized means of staying in touch with vendors, reviewing contracts, and optimizing your core processes so you stick with your preferred suppliers.
Cloud-based technology also helps you keep your most important data at your fingertips and gives you access to your business from anywhere.
6. Delegate to key personnel
Supply chain management can be everyone's responsibility. You can streamline these processes by delegating responsibilities to key company leaders.
One way to do this is to look back at the categories you created in step 1, then place key leaders in charge of each category. It will still be critical to collaborate between categories, but this method allows you to cover more ground and devote more attention to each category. Just make sure to maintain communication and collaboration to prevent details from being overlooked or missed.
7. Monitor performance metrics for continuous improvement
Pursue continuous improvement by tracking the key metrics of the strategic sourcing process. This process might start by analyzing the key metrics from your supply chain process. It may also extend to looking at external factors and making adjustments based on changes in the market or even global conditions.
The right data might also validate your decisions in the eyes of internal stakeholders and provide a baseline for evaluating new business initiatives, such as onboarding new suppliers.
Strategic sourcing example
The best strategic sourcing examples come from the recent supply chain disruptions.
One sourcing strategy example involves broadening your supplier network. Companies that build a diverse network of potential suppliers can quickly pivot to a different supplier if there's a delay in any one source.
Additionally, if suitable suppliers can be found in strategic locations (near a distribution center, for example), then a business can reduce transportation costs and keep customers happy.
A strategic sourcing plan won't fix the global supply chain, but it can help by protecting your reputation and bottom line.
The benefits of strategic sourcing
The strategic sourcing process offers companies a broad range of advantages, including the following.
By some estimates, procurement departments can reduce costs by as much as 70% by implementing a strategic sourcing strategy. For one thing, strategic sourcing allows businesses to locate the best prices for goods and services. But strategic planning also ensures that businesses find logistics solutions that can reduce transportation and inventory management costs and make their business processes more efficient.
Thus, a strategic sourcing process can reduce the costs associated with procurement processes. This money can then be reinvested into the business, providing an opportunity to scale and grow.
Improving supplier relationships
Improving your supply chain infrastructure also provides an opportunity for improved supplier relationships. Through strategic sourcing, supply chain managers will be able to hold suppliers accountable for issues related to shipping times or the quality of their materials and products.
Supplier relationship management can give businesses a competitive advantage thanks to improved speed, and it can also provide more room when it comes to contract negotiations. In short, strategic sourcing allows you and your suppliers to keep your business objectives in alignment.
Sourcing professionals can also use advanced strategies to minimize risk. For example, a global sourcing strategy will enable you to find alternative suppliers in the event of a supply chain disruption. A sourcing team might consider such factors as:
- The nature and quantity of goods being received
- The country of origin
- The mode of transportation
- Requirements set by the vendor or customer
- Issues involving intellectual property
Supply chain management teams can build a resilient network of suppliers, which can help your business weather disruptions without experiencing catastrophic loss.
Similarly, procurement teams can minimize risk by selecting certified components and quality materials to maintain their own high standards of excellence.
Supporting sustainable goals
The best sourcing business models will also consider factors such as environmental sustainability. This is vital for companies that seek to achieve ESG criteria. By selecting fair trade materials and products, your sourcing business model can contribute to a broader culture of social and environmental responsibility.
Aligning your purchasing strategy with your social commitments isn't just important for your ESG compliance standards. Your customers and key stakeholders may also appreciate your dedication to sustainable practices.
Attaining competitive differentiation
Depending on your industry, you may rely on key suppliers to provide competitive differentiation. For instance, if you offer a software as a service (SaaS) business model, it may help to advertise that your core products integrate with popular brands of accounting software, such as QuickBooks Online.
That way, customers can identify your brand with a company that they already know and trust. The right supplier base can help you tap into an established customer base and build positive associations based on these supporting brands.
Focusing on holistic growth
The strategic sourcing process isn't just about cutting costs. Instead, it's about finding the best solutions to improve operations and build core competencies across your entire organization.
The end result of your process might therefore involve improved supplier selection, or onboarding new suppliers that can keep your business moving forward. That also means that there may be times when your process leads to a higher price tag, at least initially. But in the end, you'll see a strong return on your investment (ROI) as a result of implementing the right strategy.
Leverage strategic sourcing best practices to improve purchasing decisions
A strategic sourcing strategy can enhance procurement operations across your entire company. Implementing the right strategy can improve your purchasing decisions, minimize supply chain risk, and give you flexibility during contract negotiations.
Common sourcing strategies in procurement
Strategic sourcing and procurement go hand in hand, and many of the proven sourcing strategies can also be used for strategic procurement.
- Maintain open channels of communication across your sourcing/procurement teams
- Focus on holistic improvements, not just cutting costs
- Evaluate your suppliers on an ongoing basis
- Gather information from vendors to maximize your decision-making process
These strategies can help your company improve operations as well as provide business continuity by aligning your sourcing strategies with your business goals.
Three-way matching with BILL
The right technology can make all the difference. BILL offers accounts payable software that streamlines your core processes and keeps your business moving forward. And to minimize the risk of fraud, BILL offers three-way matching capabilities. Our sophisticated invoice control system is designed to match invoices with purchase orders and goods receipts. By ensuring that these documents match, you'll minimize the chance of fraud.
Want to learn more? Explore BILL's accounts payable software and discover how it can improve the way you do business.