Industry Trends

Strategic Sourcing: What Does It Mean for Your Supply Chain

Supply chain sourcing has traditionally been an integral part of the procurement process. While these terms can seem to have the same meaning, sourcing, unlike the complex procurement cycle, is referred to as the strategic search for product or service providers. 

What is strategic sourcing and how is it different from procurement?

Procurement encompasses a wide variety of operations that firms engage in to obtain goods and services. While procurement departments are officially responsible for both strategic and administrative functions, they frequently focus on day-to-day activities such as purchase orders, invoicing, and payments.

Strategic sourcing, on the other hand, focuses on the actions that occur before purchase, such as researching company needs, proximity, sales strategy and the marketplace as a whole. 

While procurement often seeks the cheapest option, strategic sourcing considers the larger picture, using data to weigh the importance of other criteria such as ideal vendor relationships and decreased risk to the business.

Why has strategic sourcing become a focus area in supply chain management?

As modern supply chains continue to evolve and transform, so does the procurement and sourcing process. As supply chains shift from linear models and embrace globalization, the way sourcing and procurement are done is evolving also.

According to Harvard Business Review, “It’s no longer a company’s ownership of capabilities that matters but rather its ability to control and make the most of critical capabilities, whether or not they reside on the company’s balance sheet”. 

Companies that are thinking ahead are making their value chains and organizations more adaptable. Strategic sourcing is growing into a critical process for organizing and fine-tuning the value chain, as the vertically integrated corporate model fades. 

The decision is no more whether or not to outsource a skill or activity, but rather how to strategically source all of the value chain’s activities.

As outsourcing becomes more common, the new task of procurement managers is to find the best value for every service or product a company needs to purchase. 

Intensified with many crisis factors, like the pandemic and its impact on global trade, sourcing and procurement have become focus areas for supply chain executives in 2021. 

To get even more profound insights, researchers analyzed which exact area of procurement is the most critical to supply chain managers nowadays. Eventually, 33% stated supplier relationships as a key priority, and 22% named sustainable sourcing an area of focus.

As supplier communication and business responsibility emerge as top supply chain factors, that sourcing managers consider before entering into a contract  with a particular vendor. Costs, of course, remain the primary driver of sourcing optimization, however, businesses look for long-term solutions, even if it means fewer short-term savings. 

A cost-effective supplier is not enough anymore, as companies pay more attention to other factors of growing importance to their businesses. In particular, businesses cited the need to transform sourcing within the company (74%), increase productivity (65%), and drive cost savings (61%) as major motivators for exploring strategic sourcing.

As a result, companies increasingly source partners not just because of their low cost, but due to a recognized value, sustainable approach, regulatory compliance, geographical location, and so on. As the supply chain becomes more transparent and agile, the role and the background of the supplier become more important. 

Strategic sourcing best practices

When it comes to cost reductions, many teams fail to strike the correct balance between risk and value. How can companies cut material supply costs while also reducing inventory waste and risk? It’s vital to implement strategic sourcing best practices to manage risk and maximize value.

Analyze data and reevaluate your approach

Before making any strategic changes, it is worth looking at your current process and sourcing criteria, as well as developing a plan to strengthen or terminate relationships with existing suppliers. Reassessing the way you manage relationships and analyzing the implications of signing a particular contract can help you understand the needs and goals of your company better. 

Examine product and service types provided by the business, as well as spending models, work ethic, communication strategy, and the company units involved. As the key to strategic sourcing is thorough, data-based research, starting with current processes is a necessary step.

Add redefined criteria to your strategy

While doing the research in terms of competence, it is critical to clearly state compliance, costs, and long-term partnership benefit requirements in the contract. 

Companies often fail to enforce contract terms or even effectively explain contract terms and duties to all relevant parties, even though procurement teams work hard to secure advantageous contract conditions.

Setting expectations, terms, and defined KPIs will help keep relationships transparent and effective. Here is the list of important items to communicate throughout the contract award process, once the vendor is selected or shortlisted:

  • Award nominations
  • Estimates of financial gain
  • Plans for implementation
  • Plans for the transition
  • Criteria and goals for KPIs
  • Assessment and reduction of risks (i.e. compliance measures)
  • Considerations for contracts (e.g., payment conditions, year-over-year improvement)
  • Senior management communication
  • Plan for communicating with relevant stakeholders

Leverage technology to track the results

Strategic sourcing is often included in sophisticated supply chain visibility platforms, as it allows participants to collect and manage supplier data. 

By automating data entry and generating contracts, as well as offering valuable insights, technology can enhance the sourcing process, speed up transactions, and help systemize data for better purchasing decisions. 

To make the sourcing process more productive, vendors are focused on combining sophisticated analytics and AI. These tools can give prediction models based on market circumstances, time of year, and geopolitical concerns, as well as make suggestions based on historical performance and current measurements. In other circumstances, incorporating blockchain into the supply chain boosts visibility and accuracy.

An invoicing and tracking mechanism must be established once the provider has been onboarded. Any new supplier agreement provides a chance to get more automation, especially if the new contract generates numerous invoices.

Finally, you should keep track of the value of the savings you’ve achieved with the new supplier so you can show the rest of the company how the procurement’s cost-cutting tactics have helped the bottom line.

Even in the best of circumstances, the purchasing function for a business is a difficult task. Having a solid procedure and proven practices in place will allow your company to negotiate market upheavals, supplier constraints, and changing demands on a consistent basis.

Get visibility into supplier data with Agistix

A visibility platform like Agistix can help tackle your sourcing supply chain challenges. Our key advantages are centralized data infrastructure and seamless integration that requires no change to your regular business flow. 

With Agistix, you can get profound insights into your procurement spending and analyze your suppliers better. Learn more about Agistix visibility solutions today.

Author

Trevor Read

President at Agistix based in San Francisco. I am an entrepreneur with a passion for data, and technology. I am results-oriented and committed to developing fast-deployment solutions to help customers seize the new opportunity coming from big data in the global supply chain.