Strategic sourcing is an approach to supply chain management that formalizes the way information is gathered and used so an organization can use its consolidated purchasing power to find the best possible values in the marketplace and align its purchasing strategy to business goals.
Strategic sourcing is growing in popularity, as digital transformation is causing procurement and supply chain processes to evolve. It requires analysis of what an organization buys, from whom, at what price and at what volume. Strategic sourcing differs from conventional purchasing because it places emphasis beyond initial purchase price to focus on total cost of ownership and optimizing the sourcing process through ongoing market analysis and building relationships with suppliers.
How it works
Businesses can use strategic sourcing to make their procurement processes less shortsighted and focused on price. A sourcing plan can instead allow them to develop an adaptable system that contributes to the overall value of the business long term. The process begins with analyzing business needs and historical spending, followed by outlining a strategic plan, and then conducting data collection and market analysis that guides selection of a roster of suppliers.
Once selection and negotiations have taken place, strategic sourcing also involves measuring performance and improving the process on a continual basis. Strategic sourcing is generally practiced by large organizations with many suppliers. Outsourcing providers for strategic sourcing exist for organizations that wish to delegate the function to a specialist.
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Strategic sourcing process steps
The strategic sourcing process has many variations, but is most commonly broken into seven steps popularized by consulting firm A.T. Kearney. These include the following:
- Analyze product categories used by the business, spending patterns, and the processes and departments involved.
- Develop a sourcing strategy based on business goals.
- Analyze the supplier market and create a supplier portfolio.
- Define request for proposal criteria and templates.
- Negotiate with and select suppliers.
- Integrate suppliers into existing processes, onboarding any new vendors or outsourcing providers.
- Track performance metrics and optimize the sourcing plan, as needed.
The most obvious advantage of strategic sourcing is reduced total cost, but the benefits of rethinking the sourcing process can be far-reaching. As businesses take advantage of the vast amounts of available data and digitization of business processes, procurement is an area ripe for transformation. According to Gartner's Magic Quadrant for Strategic Sourcing Application Suites, the top reason for investing in a strategic sourcing suite is to transform sourcing within the organization, at 74%. Businesses also reported increased productivity through automation (65%) and increased savings (61%) as top drivers for pursuing strategic sourcing.
The increased understanding of supplier markets can help identify potential risk factors and help businesses develop sourcing plans that mitigate them. In addition, the emphasis on continuous improvement and sustainability of the supply chain provides increased flexibility and the ability to adapt to external factors.
Longer term, implementing strategic sourcing can facilitate strong relationships with suppliers and outsourcers, identify potential improvements and provide justification for changes to improve efficiency throughout supply chain processes.
A strategic sourcing plan can help businesses achieve a number of goals that contribute to success. Examples include the following:
- managing environmental conditions and logistics by sourcing crops or goods in the locations they are readily available or have easy access to transportation;
- competitive differentiation from using suppliers with desired brand images and emphasizing them through marketing -- i.e., the Intel Inside logo;
- meeting compliance or regulatory guidelines by choosing certified components;
- supporting business sustainability by selecting Fair Trade or other sustainably grown or manufactured goods;
- mitigating geopolitical instability by diversifying locations of suppliers and creating contingency plans for those in volatile areas; and
- minimizing risk by engaging secondary and alternative suppliers and closely monitoring changes in factors such as product availability, quality, shipping, taxes, exchange rate and regulations.
Strategic sourcing vs. procurement
Procurement refers to the range of activities and procedures necessary for businesses to acquire products and services. While this technically involves both strategic and administrative responsibilities, procurement departments often focus on the day-to-day transactions and processes involved in e-procurement, such as purchase orders, invoicing and payments.
In contrast, strategic sourcing emphasizes the activities leading up to an actual purchase, including analyzing business needs and the marketplace at large. While procurement generally looks for the lowest-priced option, strategic sourcing keeps the big picture in mind, employing large sets of data to evaluate the value of other factors, such as optimal vendor relationships and reduced risk to the business.
Strategic sourcing software can facilitate the approach by standardizing sourcing requirements and providing a platform for collecting information about suppliers, products, markets and business needs. This software is sometimes part of larger procurement systems, procure-to-pay platforms, ERP systems or supply chain management systems.
Products that are labeled "strategic sourcing application suites" are growing in popularity, however. These typically include functionality -- and often have separate software modules -- for e-sourcing, spend analysis, contract management and supplier relationship management. Major players according to Gartner include Coupa, GEP, Ivalua, JAGGAER, SAP, Synertrade and Zycus. Their products are delivered primarily via multitenant SaaS, but some offer on-premises or private cloud versions, as well.
Vendors are working on integrating advanced analytics and AI to make the sourcing process more effective. These capabilities can make recommendations based on past performance and current metrics and offer predictive models based on factors like market conditions, time of year and geopolitical factors. The integration of blockchain into the supply chain is also increasing visibility and accuracy in some cases.