Understanding the what, why and how of strategic sourcing

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Checkmate_200.pngBy Jijnyasa Patowarya

As businesses today continue to harness the power of globalisation to expand performance, the role of effectively sourcing goods and services from suppliers has become inevitable. Additionally, procurement is transforming into a more strategic function that is aligned with organisational goals and objectives. Furthermore, issues like economic and political volatility, technological disruption, etc., have caused fierce competition in the market. Hence, it is important for organisations to adopt effective strategic sourcing skills and processes to maximise their business performance and efficiency to gain competitive advantage over their peers.

WHAT IS STRATEGIC SOURCING?

Strategic sourcing refers to the process of identifying the spend profile of an organisation and its supplier base to ensure that the organisation's business requirements are aligned with those of the suppliers.

The boom in the adoption of strategic sourcing implies that almost everyone has heard of it. However, being a term that encompasses a large number of sub-concepts, understanding strategic sourcing might get complex. This article, therefore, attempts to cover what constitutes strategic sourcing, how it differs from tactical sourcing, and its driving forces and processes.

THE DIFFERENCE BETWEEN STRATEGIC SOURCING AND TACTICAL SOURCING

Strategic sourcing involves developing a proactive, holistic, and continuous evaluation and re-evaluation of the sourcing activities in an organisation. Strategic sourcing aims to achieve the lowest total cost of ownership (TCO) along with minimal supply chain risk. As a result, it reflects an organisation's relationship with its sourcing partners as a loop instead of a one-way process − an in-depth profile of the suppliers and their core capabilities is developed and periodically aligned with the sourcing requirements of the organisation. Strategic sourcing views suppliers as crucial value partners and aims to build sustainable, collaborative relationships. The customer-supplier loop is assessed at every stage of its lifecycle in order to ensure that the needs of the organisations are continuously and efficiently met. To accomplish this, strategic sourcing leverages spend analysis, supplier evaluation, supplier relationship management (SRM) and detailed market research. Strategic sourcing is thus a long-term process and, for its successful implementation, it needs skilled personnel and relevant technology platforms and tools.

In contrast, tactical sourcing involves a short-term and traditionally reactive approach towards managing the sourcing activities of an organisation. It aims to achieve the lowest possible cost without considering other factors such as SRM, supply chain risk mitigation, etc. Consequently, building long-term relationships with suppliers and understanding how their core capabilities can meet an organisation are minimal as communication with suppliers only occur when problems arise. While tactical sourcing can bring short-term gains, it prohibits the sustained optimisation of sourcing activities. Furthermore, compared with strategic sourcing, tactical sourcing does not necessitate large investments in advanced technological platforms and/or personnel skillsets.

WHY DO WE NEED STRATEGIC SOURCING?

Outlining four key benefits of strategic sourcing
Now that the concept of strategic sourcing is clearer, it is important to understand its benefits and why it makes sense for more organisations to adopt strategic sourcing. A whitepaper authored by Zycus talks about the various advantages that an organisation can leverage by implementing strategic sourcing. These are:

1. Increased level of cost savings
The most obvious benefit that businesses will experience from strategic sourcing would be higher levels of cost savings. By identifying and selecting suppliers that will provide the highest value, at the right price, will enable an organisation to continuously achieve higher cost savings. This is even more important as, according to Zycus' Pulse of Procurement 2018, 54% of top procurement professionals have recognised cost savings as a key focus area.

2. Better alignment of sourcing and business objectives
Aligning the sourcing activities of a business to its organisational goals and objectives is at the heart of strategic sourcing. Better alignment allows a business to achieve higher business performance with higher efficiency and minimal supply chain risk.

3. Optimisation of ideal suppliers
To effectively implement strategic sourcing in your organisation, it is necessary to analyse suppliers, their profiles and core capabilities. Once this is accomplished, an organisation is equipped with information that will allow them to match their business objectives to their ideal suppliers. This implies high value creation at the lowest possible cost.

4. Building long-term supplier relationships
Strategic sourcing helps an organisation to build long-term supplier relationships. By reinforcing a focus on the core capabilities of suppliers and by ensuring the right suppliers for the right sourcing objective, strategic sourcing helps to create synergy between organisations and their suppliers. Sustained relationships with suppliers also imply that, when suppliers are valued and considered in various sourcing decisions, they feel motivated to optimise their performance to meet organisational objectives.

HOW DO WE IMPLEMENT STRATEGIC SOURCING?

7-step process to effectively implement strategic sourcing in an organisation
Understanding the advantages of strategic sourcing brings us to designing a process to implement strategic sourcing in an organisation. While a single process might not match the specifications and requirements of every organisation, we can outline a basic structure that can guide the strategic sourcing process:

1. Identify and categorise spend profiles
To initiate a strategic sourcing process, identify the spend areas that exist across all business areas in an organisation and then categorise these based on how critical/non-critical the spend area is. Categorisation will help to prioritise the sourcing activities for each spend area.

If required, other categorisation criteria that better suit the business requirements can also be developed (e.g. domestic/international spend, direct/indirect spend, etc.). In such cases, it is important to do a risk analysis of the chosen spend categories to help prioritise and develop strategies.

2. Build a sourcing strategy
The second step involves building a strategy on how each categorised spend area will be approached. This comprises identifying business unit requirements that necessitate spend and defining goals, objectives and corresponding timelines to fulfil these requirements. It also necessitates building a communication workflow so that all stakeholders relevant to the respective sourcing projects have clear visibility of upcoming updates.

3. Analyse the supplier market
The third step is to perform an in-depth analysis of current and future suppliers to understand and evaluate relevant supplier profiles. This includes analysing the revenue/market share of suppliers to understand their market standing and industrial performance along with the risks and opportunities surrounding the supplier market.

4. Request supplier information and identify selection criteria
Once the supplier market research has been completed, the next step is to request information/proposals/quotations from suppliers. It is important to communicate the exact requirements of an organisation as well as the end-goals and performance expectations so that suppliers have a clear understanding of what an organisation needs. This is important for them to provide an accurate roadmap and develop strategies to fulfil business objectives.

Submitted information will provide insightful data, such as pricing structure, delivery and warranty provisions, product/service specifications, etc. After the submitted data has been collated, the selection criteria can be identified for supplier selection.

5. Select suppliers and execute the contracting process
After the selection criteria have been identified, choose the suppliers that can offer the highest level of cost savings along with delivering quality. After supplier selection for the relevant spend areas, the contracting process starts to on-board suppliers.

6. Measure and periodically track supplier performance
The process of strategic sourcing does not end when a supplier has been chosen. The sixth step is to effectively measure how suppliers perform vis-à-vis the requirements and objectives of an organisation. It is important to engage in periodic tracking of supplier performance and to identify areas for improvement. This can significantly help organisations to understand supplier risks and design strategies to mitigate against all possible supply chain disruptions.

7. Implement SRM
The final step is to factor in SRM in the strategic sourcing process. This makes the relationship between an organisation and its suppliers a loop instead of a one-way process. SRM enhances the level of collaboration between an organisation and its suppliers by transforming a mere customer-buyer relationship into a strategic value partnership. Both parties participate in building propositions and innovative strategies that optimise the sourcing needs of the organisation. The relationships that arise out of such synergised collaboration are long-term and can be leveraged to further improve supplier performance. More than just being the final step in the strategic sourcing process, SRM links suppliers and organisations in a way that both current and future requirements are met in the most efficient and value-maximising manner.

DRIVING FACTORS OF STRATEGIC SOURCING AUTOMATION

Automation is everywhere and procurement is not far behind. Organisations are adopting e-sourcing to streamline their strategic sourcing activities and to simplify the complexities that surround it. A CIPS blog, E-sourcing can help your organisation collaborate on procurement, talks about how e-sourcing not only focusses on finding the right suppliers for the right sourcing need, but also enables various business units in an organisation to collaborate on their sourcing activities. This is necessary as every department will have their own unique set of sourcing requirements. Organisations using e-sourcing software enables end-users to source their own suppliers within the bounds of necessary procurement and compliance rules. Organisational end-users can easily use e-sourcing tools to gather competitive pricing from available suppliers, vis-à-vis e-tendering, and then select the right ones.

Here is a list of key driving factors for the increased use of e-sourcing:
- Enhanced data reporting and increased visibility into sourcing projects: e-sourcing platforms generate useful data regarding an organisation's spend activities, supplier performance and supply chain risk evaluation. This data will improve visibility and also enable holistic assessment of the various ongoing sourcing activities, thereby allowing an organisation to make more informed sourcing decisions.
- Robust management of key spend categories: the automation of strategic sourcing activities helps to identify and categorise the various spend categories that exist in an organisation across business units. Improving spend category visibility enables an organisation to streamline and control its spend activities.
- Supply chain risk assessment: e-sourcing enables an organisation to identify, evaluate and mitigate various risks that impede supply chains, thereby improving compliance. This expedites business performance, reduces excessive spend owing to supply chain failures, and helps organisations to cope with various internal and external environmental disruptions. As an added bonus of automating strategic sourcing, Pulse of Procurement 2018 identified supply risk management as a key procurement focus area.
- Higher level of accountability while executing sourcing projects: an e-sourcing platform showcases the workflow of sourcing activities and its corresponding stakeholders. It also enhances the level of visibility, accountability and compliance of all relevant stakeholders involved in their respective sourcing projects.

IN A NUTSHELL

This article attempted to demystify the various facets of strategic sourcing: what it stands for and how it differs from tactical sourcing, the advantages that organisations experience through strategic sourcing, its process and the factors that drive its automation.

Organisations are adopting strategic sourcing to establish a holistic approach to managing their sourcing requirements and to building a more proactive approach to various supply chain disruptions. By aligning business goals and requirements to the right suppliers, with the right capabilities, organisations maximise their performance and gain competitive advantage over their peers. Furthermore, by leveraging the power of automation technology for strategic sourcing, business units are empowered to optimise their sourcing.

Strategic sourcing is here to stay − it delivers cost savings without compromising on quality. Are you there yet?

Zycus

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