Strategic sourcing is one of the most commonly heard terms in any industry. However, it is also one of the vaguest concepts. You either hear too much information about this or too less; but never enough to actually know its meaning and its importance.
Let us try decoding this all-important concept in a very simple and uncomplicated manner. First things first, let us learn what this word actually means.
What Is Strategic Sourcing?
Strategic sourcing is a method of using a collaborative approach to procurement or supply chain management in a company. It formalizes the whole process of information gathering so that the purchasing power of the company can be optimized to the fullest extent. Strategic sourcing forms the bridge between business goals and procurement practices.
The concept analyzes everything that the company buys, the method of purchase, the amount spent on the purchase. The idea is to focus on the bigger picture. Instead of concentrating on the price of the products, what matters more is the total cost of ownership and the procurement method. This means that strategic sourcing goes on to analyze suppliers and account for factors such as packaging sizes, purchase frequency, and risks etc. to cater to the overall goal.
Components of Strategic Sourcing
A business case or voice of customer necessitates a strategic sourcing project. There are six components of strategic sourcing that trigger the growth of the company. These include:
- Spend analysis
Conducting a thorough spend analysis leads to three things – determination of the labor categories, the total number of suppliers involved with the business and how the buyers’ behavior is changing with time.
- Requirement analysis
Better termed as forecasting, this part of the sourcing process includes an analysis of the market conditions, and market utilization, in association with the estimated market demand. This is not limited to the demand analysis and forecast alone, but extends to other technical and commercial requirements as well.
- Supplier market analysis
The supplier market is an ever-changing one. Every day, there are newer suppliers being added to the framework. This leads to the requirement of more dynamic sourcing strategies that can cater to these changing conditions.
- Sourcing strategy
Sourcing strategy essentially works by establishing KPIs used for identifying the right supplier market. World-class organizations are able to incorporate 80% of their spend with 20% of their total supply base. This is due to their effective and documented sourcing strategy that gives them an advantage over other companies. This is why a comprehensive sourcing strategy is an important segment of strategic sourcing.
- Supplier selection
In this component of strategic sourcing, the suppliers are categorized and aligned as per market requirements such that the company’s business goals are fulfilled. The process begins with an RFQ, selecting a supplier, qualifying them, setting up their contracts, and also integrating the supplier within the system for smooth transition.
Continuous improvement of established metrics is a critical aspect of strategic sourcing. What does this entail? Setting up the benchmark and standardizing it, analyzing supplier performance, overseeing and managing plan execution and ensuring compliance requirements are met by the procurement and supplier teams.
How Do Companies Benefit From Strategic Sourcing?
The most observable advantage of strategic sourcing is the overall reduction in costs of procurement and supply chain management. Since the whole process is streamlined, better strategies lead to better cost management.
However, that’s not all. There are various other benefits as well that aim at transforming the entire process of sourcing within the company. With these methods, most companies have noted an increase in productivity and savings. This could be attributed to the more dynamic and adapting sourcing strategies, and combining the past and future market situations.
The whole concept of analyzing the supplier market means exposing potential risk factors. This, in turn, gives the companies the chance to find gaps and mitigate them with creative solutions.
The presence of these sourcing strategies ensures that the company is coming up with efficient plans that could lead to flexibility, sustainability and more improved supply chain management.
There is another aspect to strategic sourcing here. Apart from the fact that this helps the business have the right procurement and supply chain strategies, it also forms a gateway to the future. This helps the company build products and services of the future by identifying, partnering with and developing suppliers with a potential for growth.
Contact us today to learn how SourcX can help you develop a robust sourcing strategy.