What is Strategic Sourcing and Why Does it Matter?
In an increasingly competitive and technological environment, investing in supplier relationships and management has become more important than ever.
Strategic sourcing is a vital component, with real-world impact on all facets of a business, from supply chain to final product and service delivery. Strategic sourcing is a collaborative process that allows an organization to align purchasing power with its overall value proposition. It improves efficiency and quality through building a robust, diverse supply base. There are important reasons why strategic sourcing is a smart move for organizational success.
Impact on Bottom Line
Reducing cost comes with immediate returns, freeing up resources for expanding business. Businesses typically spend over 60% of revenue purchasing goods and services, and an estimated 70% of potential procurement savings can only be achieved through strategic sourcing1. The US government is a great case study. In 2005, the government launched the Federal Strategic Sourcing Initiative (FSSI). The Library of Congress analyzed spend data and concluded that the FSSI would save 5 – 20% in procuring information products and services2. In actuality, by 2016 the program saved 20 – 47.3% across federal agencies, nearly $500 million over the half decade before with savings rates comparable to ones achieved by leading commercial companies3. Strategic sourcing streamlines procurement operations, controls costs, and maximizes the value of every dollar spent.
Strategic sourcing mitigates supply chain risk beyond compliance check. While many businesses have a pre-vetting process in place to review a supplier’s financial stability and corporate responsibility, there are broader inherited risks that go beyond Tier 1 suppliers. When sourcing, business are changing their supply chain networks. A number of factors can impact risk: nature of items sourced, country of origin, mode of transportations, and sensitivity of intellectual property or customer-specific requirements4. Sourcing with a strategy helps organizations prioritize performance metrics and goals, ensuring ongoing risk management across key procurement activities. Businesses may consider elements beyond cost, for example a supplier’s sustainability, flexibility, and innovation.
Building a strong and trustworthy relationship with vendors is vital for success.Taking supplier operations and capabilities into consideration during the sourcing process can open new opportunities. Suppliers have value-add capabilities and industry competencies that could prove beneficial in partnership programs with buyers. A supplier can influence a buyer’s customer experience and expectation, but is usually not held accountable for possible problems or quality issues. If buyers rely solely on in-house expertise and bypass suppliers, other competitors could collaborate on joint strategies with suppliers. Closer relationships can result in faster lead-times, higher quality and more reliable fulfillment, with flexibility for negotiation. If properly implemented, strategic sourcing creates a competitive advantage by aligning vendor goals with buyer goals.
Many organizations use basic spreadsheets that are insufficient and inaccurate in leveraging total purchase power. Strategic sourcing must be a priority at the C-suite level, with application across many business areas. An important component in developing strategy is analyzing the general market with past spend data. Spend data analysis reveals issues surrounding visibility, compliance, and control. Programs should monitor completeness and accuracy, add contextual business information, and eliminate data discrepancies with relevant advanced analytics5. After assessing the current spend and supply market, organizations must choose areas to minimize risk/cost, identify suitable suppliers, negotiate, and implement a new supply structure with a monitoring system6.
Strategic Sourcing has been re-enabled through digital procurement solutions. Web applications and portals with up-to-date information can connect buyers with suppliers through a variety of activities such as purchase orders, RFQs, RFIs, and logistics planning7. Additionally, digital solutions leverage real time technology. Real time data supports advanced features like timely alerts and actionable summaries, allowing organizations to automate procurement rules and compliant shopping8.