Procurement Industries

The importance of Strategic Sourcing in Healthcare

Reading time:

10 minute

Written by

Sarah Wilson

The importance of Strategic Sourcing in Healthcare

Healthcare is a high-cost industry and one that requires constant investment. It is nearly impossible to reduce costs without reducing the quality of the services delivered to patients. This is why strategic sourcing is so important in healthcare - it can help with cost savings in a hospital's sourcing process while keeping quality consistent. By understanding the importance of strategic sourcing, hospitals can save millions on their overall healthcare budget.

What is Strategic Sourcing?

Strategic Sourcing is a process that minimizes supply risk across the procurement process by improving supplier selection and providing better visibility into purchasing data and forecasting. Streamlining procurement allows an organization to consolidate its purchasing activity. This optimization helps to align the supply chain management activity with the strategic business goals of an organization.

Strategic Sourcing in Healthcare is essential, and in this article, we will talk about its importance and the five steps for implementing it effectively within your organization. Before we get started, here is a quick snapshot of the process:

1.              Evaluate Current Status

2.              Decide on Engagement Model

3.              Research Suppliers

4.              Contract Award & Implementation

5.              Staff Training & Monitoring


Why Strategic Sourcing in Healthcare?



Strategic Sourcing in healthcare helps to save up to $34 billion annually in procurement costs. About 98% of hospitals in the US are associated with Group Purchasing Organizations (GPOs). The value of strategic sourcing lies in its ability to allow organizations to more effectively manage supply chain costs, while simultaneously improving service levels and achieving greater efficiencies across their supply chains. As supply markets become more global and competitive, healthcare procurement professionals are finding it increasingly challenging to manage the rising costs of goods and services while retaining a high level of customer satisfaction. For these reasons, leading healthcare providers are now turning towards strategic sourcing to help address these challenges and improve their company's bottom line.

How to Implement Strategic Sourcing in Healthcare

The five steps of strategic sourcing is a complex but essential process that allows your business to fully evaluate your current procurement methods, research the best supplier partners, award the business accordingly and measure the result of your efforts. Strategic sourcing in healthcare aims to ensure that value is extracted from the process and that the procurement processes line up with overall business goals.

1. Evaluate Current Status of Supply chain

Evaluating your current procurement operations is necessary to identify what needs to change. The first step of the strategic sourcing process is gathering data to analyze the ins and outs of how your business supplies. Typically, this involves two steps; analyzing your spending and analyzing your supply activities:

Spend analysis – an analysis of your business spending on day-to-day transactions will allow you to understand the areas where the most money is spent

Supply activities – an analysis of the market conditions relating to your supply enables you to understand the current market for the goods you purchase. This involves carrying out a comprehensive review of your sourcing activities in the areas of supply stability, pricing fluctuation, supplier relationships, and alternative sourcing opportunities.

2. Decide on Engagement Model

Managing relationships and engagement with your suppliers is one of the most crucial aspects of your strategic sourcing and procurement strategy. There are several ways to engage suppliers to communicate that you intend to engage in business with them. They include:

Invitation to Tender (ITT) – Invitations to Tender are detailed documents where you state all of the details of what you are trying to buy and all the expectations you have of your suppliers

Request for Purchase (RFP) – Request for Purchase are documents that outline the procurement needs in a less detailed fashion. They contain general conditions of the procurement requirements and rely on supplier expertise to help support the details.

Request for Quote (RFQ) – Request for Quote is used when the complexity in procurement is lower, and the price is the main driving factor of vendor selection.

3. Research Supplier

When it comes to optimizing your sourcing strategy, it’s no longer about generic market research. Researching your supplier is key to securing a great business partner in your procurement process. To start with, ask about how the supplier communicates, as you are looking for a high level of responsiveness.

Another thing to review is what is included in the cost of goods. Freight and shipping is a crucial cost within procurement, and it's essential to understand if it's included in the cost of goods you buy or if it gets charged as a separate line item. These are some of the questions sourcing professionals need to find answers to before making crucial sourcing decisions or any strategic move regarding suppliers.

The supply analysis you did as part of the initial business review in the first step of Strategic Sourcing will give you an excellent insight into the current status of the Supply Chain of the products you are buying. Where your supplier is positioned in the marketplace will tell you how stable their supply will be and what you can expect in terms of the level of service.

The financial health of your supplier is a crucial signal of longevity. The better your supplier is doing financially, the less risk they would ever go out of business, leaving you with an interrupted supply chain. Publicly traded companies publish their financials online, whereas private companies are not required to disclose this. In the absence of actual financial statements, do some online research for estimates of economic health.

Another critical area to review when evaluating potential suppliers for your procurement and supply chain is their infrastructure in sustaining your business volume.  For instance, you need to know how many warehouses they have and how your business would impact their operations. Be cautious of situations where your business is a large percentage of their existing processes. They're likely to run into challenges as you scale.

 4. Contract Award & Implementation

Once the research has been completed, procurement departments should be able to come up with a list of preferred vendors to award contracts and enter into long-term relationships with. Each vendor will have some form that enables you to get set up and kickstart the process of buying from them. This includes a contract that outlines the terms of your agreement. A contract typically contains payment terms, total cost, pricing structure, agreed-upon service levels and anything else related to the management and execution of your agreement.

Implementation of the supplier contract will also need to occur within your business. The new sourcing partner will need to get onboarded within your own procurement system to commence the buying process. Some setup processes will also need to occur within your payables department so the vendor can get paid for the goods or services they provide. This entire process is easy with automation in digitized sourcing system.

As part of the contract negotiation, you and the supplier would have discussed what a successful procurement process would entail. This information captured by your contract management system, will drive what Key Performance Indicator (KPI) is most important. Some examples of KPIs within Strategic Sourcing:

  • Days from Ordering to Delivery
  • % of Late Delivery
  • Number of Stock-outs per order
  • Number of defects per batch

Setting up a function in your business to measure this KPI is necessary to understand if the contract, over time, performs as expected. It is critical to set this up within your strategic sourcing software at the start. This allows you to develop a comprehensive view of supplier performance over time throughout the contract lifecycle.

5. Monitoring and Training Procurement Professionals

A company's strategic sourcing doesn't end with choosing the right supplier. There's work to be done internally too. Implementing an effective strategic sourcing solution requires a collaborative efforts between different stakeholders within the business process. When onboarding a new supplier, it is vital that every member of the strategic sourcing team is fully aware of how to buy from the supplier. Each supplier will have specific parameters in place that delineates how to do business with them. They may have particular order days or delivery schedules. They may have a specific format of how they receive orders or may even have an online portal or website for ordering.  Every member of your sourcing team must be aware of these parameters. A great way to document procurement information like this and get your staff on board with it quickly is through a centralized e-procurement system.

Another reason why a system like this is necessary is to ease supplier monitoring to ensure they keep up with sourcing needs of your organization. The success of your Strategic Sourcing is indicative of the success of your healthcare business and is key to realizing the benefit of this process. Keeping track of the KPIs over time and measuring a supplier's performance is the best way to ensure that value is delivered to your business through the strategic partnerships built into the unique procurement process of your organization.

Final Thoughts

Aligning your procurement processes with your business goals can be challenging. However, it is worthwhile in the long run. The most important reason for implement this is the visibility it offers. Having a system that shows you real-time data and procurement insights is critical for strategic planning of your purchasing strategy. Tradogram is a cloud-based procurement platform that does a fantastic job of giving you complete visibility of your procurement.

Strategic Sourcing in Healthcare
Speak to a product expert
Mailing List
Subscribe to have new content delivered directly to your inbox.
Speak to a product expert

Try Procurement Software