Procurement 101

Strategic Sourcing: Profiling the Sourcing Category

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5 minute read

Written by

Logan Price

Decorative graphic with the words "Strategic Sourcing" in all caps.

The first step of strategic sourcing is identifying your business’s sourcing category or commodity. The best way to do this is with a spend analysis. By collecting the necessary data, sorting through it, analyzing it, and validating it, your procurement team will have a better understanding of the particular sourcing category for your business, as well as the commodities within it. They will, therefore, be more equipped to make informed sourcing decisions for the betterment of your company. Learn more about effective category management.

Difference Between Strategic Sourcing and Category Management

Category management vs strategic sourcing, let’s understand the key differences before moving on further.

One of the key differences between these two is nature. Category management is considered a strategy, while strategic sourcing is considered a process. In fact, strategic sourcing can become part of category management focused on optimizing spending in a specific area/category. 

Another key difference between these two is that category management focuses on broader goals and business values. In contrast, strategic sourcing focuses on spending less at each stage of the supply chain. 

Category Sourcing Strategy 

Category sourcing is a strategic approach for procurement activity management within specific spend categories or areas. 

Essentially, it involves identifying and bundling similar products/goods in a singular unit for effective management. Such categorization helps centralize the spend data, minimize costs, and improve vendor risk management. 

Procurement Spend Categories 

The main spend categories within the business procurement process include: 

  • Direct spend. This category involved purchasing goods and services directly associated with the production, such as raw materials. 
  • Indirect spend. Items and services under this category are not directly related to the production of end-products but are still necessary, such as software and hardware IT solutions. 

Many organizations bundle similar products under each category to optimize business spend management even further.

Analyze the Following Key Areas:

As the first step of the strategic sourcing process, as outlined by AT Kearney, this step is a planning phase. So, it is important to gather as much information as possible. You will need to research and gather data on the following key areas in your company:

  • The product categories you business uses
  • Your spending patterns by department or user
  • Your business’s historical spend and volume
  • Your spend by supplier
  • Your business send categorized by product and sub-product
  • The processes and departments involved in your supply chain
  • Your product or service demand forecast
  • Your competitors
  • Your customer base (including who they are and where they are located).

An effective way to gather this information is through a spend analysis.

What is a Spend Analysis?

Spend analysis is the practice of analyzing procurement spend data to improve supplier relationships, reduce costs, or increase efficiency. Spend data refers to the costs your business incurred for goods and services that have been acquired from external suppliers. It is important to remember that the terms ‘spend analytics’ and ‘spend analysis,’ while often used interchangeably, mean different things. You use the spend analytics to gain the necessary data needed to conduct a spend analysis. Simply put, spend analytics gives you the data you need, and spend analysis determines what you do with that data.

Ask Yourself the Following Important Questions

With a spend analysis, you need to ask the right questions in order to attain the most valuable information. You need to pull together your purchase history data and look at all angles of your business expenditure.  Ask yourself the following questions which can help you review past performances and assess potential future performance and trends:

  • What is my business buying?
  • How much are we paying?
  • How much have we bought? (Quantity).
  • Who are our suppliers?
  • Who is buying from us? (Our customers).
  • What were the terms of the purchase?
  • What is the frequency of our purchases?
  • When did we make the purchase?
  • Has what was promised been delivered?
  • Where were the items delivered (geographical location)?
  • Where does the data stand in comparison to previous years?

Using Spend Analysis Software to Make the Process More Efficient

Using specialized software, you can simplify your spend analysis process. Digitizing this process can also be very beneficial for the accuracy and efficiency of your supply chain management and procurement processes as a whole. There are a few software solutions that focus solely on spend analysis, but it is recommended to invest in a more well-rounded solution such as procurement software. Procurement software can help take your entire procurement and sourcing process to the next level, rather than just focusing on one aspect.  

This type of software can either be bought from a specialized software vendor or created specifically for the needs of your business. There are three types main types of procurement software:

  1. In-house solutions can be layered on top of an existing Business Intelligence (BI) solution or be used as a standalone application. Any maintenance or upgrades will depend on your company's IT resources.  
  2. Licensed Software solutions are sold as commodities, with a single-use license that only allows installation on a specific number of machines. Larger updates might require the purchase of a new license, depending on the license agreement. Generally, licenses are sold as lump-sum purchases.
  3. Software as a Service (SaaS) is a subscription-based option that is more flexible than in-house or licensed software solutions. Providers usually host software at a separate location, allowing for central management. Updating the software is typically covered in a subscription agreement.

Tradogram brings you the best features of all the above solutions in one simple package. You can establish full spend visibility with budget and project cost tracking tools, identify new ways to save with custom spend reports and analytics, and a lot more. Our software offers solutions for Purchase to Pay, Strategic Sourcing, Supplier Management, Contract Management, Spend Analysis, and Order Management. Plus, it has various integration options so you can use our software in conjunction with some of today's biggest ERP, accounting, and SSO platforms. Contact us today to find out more.

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