7 key differences: strategic sourcing vs traditional purchasing

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DrMuddassin.jpgProcuring materials with the intention of production, sales and service fulfilment is indispensable for every single business. However, the approaches, strategies and implementations to this differ immensely. Muddassir Ahmed, Divisional Supply Chain Manager at Eaton, discusses the difference between Strategic Sourcing vs. Purchasing.

Strategic sourcing refers to making supply chain management decisions with the intent to create distinctive value and to achieve a competitive advantage.

The philosophy that traditional buying dealt with locating and hiring suppliers, instead of introducing the best value-creating party into the supply chain, is an old function and has its roots in the origins of purchasing philosophy. Generally, organisations mainly focused on cost-per-unit, which was a throw-back to high purchase volumes generating mass discounts. This method, however, evoked competitive adversarial failure for many firms as it failed to keep pace with increasing levels of service-quality and supply chain collaboration.

Strategic sourcing vs purchasing

A key difference to conventional purchasing is that strategic sourcing focuses on converging and sustaining buyer-supplier relationships. The objective is to leverage them, exploit their capabilities, integrate and complement the core competencies of the various partners in the supply chain (interdependence) in order to provide value, cost efficiencies and uniqueness to the customer.

As strategic sourcing incorporates strategic dimensions and capabilities of suppliers (such as an emphasis on quality management practices, process capabilities, design and development, and cost reduction capabilities) into the decision-making process, it is possible for firms to achieve accurate information and best-in class market results.

In traditional purchasing such practices were not followed, consequently leading to a lack of visibility, and missed opportunities for collaboration and cost synergies.

Purchasing is merely the transaction between buyers and suppliers, whereas sourcing is the integration and co-ordination of all local and global domains and resources, being monetary, human, material, informational, etc. Businesses normally initiate with the basic concept of domestic purchasing, before proceeding to internationalisation and progressive global sourcing.

The reasons for these progressions are, on the one hand, regional non-existence of suppliers and resources, co-operative growth, customer and supplier-base expansion, and on the other hand, the attempt to cut costs and, if applicable, overcome domestic supply chain disruptions or statutory restrictions.

InternationalPurchasing.pngIn the past, management likely believed that strategic sourcing was not a value-generating activity at all and, therefore, this area was entirely under-invested or omitted from the spheres of interest in some organisations. Presently, strategic sourcing functionaries are seen as decision-makers and have gained more prominence, especially in multinational corporations, as they are seen as reducing costs and ensuring resource input availability for all departments within organisations.

7 key differences
PurchasingVSStrategicV.png

Which approach?

It is pivotal to identify when it makes sense to implement purchasing or strategic sourcing.

Broadly, strategic sourcing entails qualitative products and services, which are comparatively expensive. This suggests that it does not make sense to source strategically when the size and capacity of a business is small, as sourcing costs may exceed business turnover. In such a case, depending on the products, the traditional purchasing method of economy of scale should be preferred.

On the other hand, it is reasonable to source strategically when an organisation is placed in multiple locations and requires goods and materials that are not available from the nearest supplier. Therefore, simplistically, the choice between strategic sourcing and purchasing could depend on the size and geographic locations of your business.

This article first appeared on muddassirism.com

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