Today’s current economic climate, coupled with the competitiveness of the business environment, has meant that businesses are in a constant search for effective and innovative ways to increase their profits, cut costs, and improve the productivity and efficiency of their teams.
The successful implementation of a strategic sourcing process is one of the ways to accomplish these objectives.
In procurement, Strategic Sourcing is an essential step in supply chain management that must be taken before you award a contract to a vendor for goods or services. In the end, you want to make sure you are paying the lowest price (without sacrificing quality) for the product or service you need.
Approximately two decades ago, AT Kearney defined the 7 Steps of the Strategic Sourcing Process, and these steps are still widely used today.
This blog will explain what Strategic Sourcing is and describe the 7 steps that have gained the reputation of being the gold standard for sourcing.
What is Strategic Sourcing
The goal of Strategic Sourcing is to gather and analyze information relating to your company's buying requirements and supplier markets, along with individual vendor performance, to identify the best sourcing partners for your company.
Strategic Sourcing aims to align your company’s spend profile, market conditions, and supplier base to create a strategy that meets your business goals.
The main goal of implementing strategic sourcing in your procurement process is reducing your Total Cost of Ownership (TCO). However, there are several other benefits that an optimized sourcing strategy can bring, including:
- Risk Minimization – The cost-focused approach aims to identify and offset potential risks by analyzing your spending compared to the value delivered by suppliers. Following this, quality, financial, supply, and customer support risk assessments are conducted. Once these risks are identified, it will be easier for your procurement team to mitigate them.
- Improved Supplier Relationships – Strategic Sourcing involves including your suppliers in sourcing decisions and making them feel valued. This breeds a foundation for trust and helps strengthen your relationships with suppliers or vendors.
- Continuous Improvement Opportunities – As strategic sourcing is a recurring activity, not just a one-off; You will need to regularly and continually evaluate strategy. Managers can identify problem areas and improve on them. Having this information also enables stakeholders to make informed judgments about developing the business model, taking advantage of market opportunities, and remaining competitive.
These benefits are easily attainable if you follow A.T Kearney’s 7 tried and tested steps of Strategic Sourcing.
Sourcing Steps in Procurement
Effective sourcing stands as a cornerstone in successful procurement strategies, involving a series of structured steps to acquire goods or services. Understanding the sourcing process is vital for businesses seeking efficient and cost-effective procurement. Let's break down the essential steps within the sourcing process:
Step 1: Profile the Category
The first step of strategic sourcing is identifying your business’s sourcing category or commodity. This involves your procurement team researching your competitors, customer base, and potential suppliers to gather the necessary information.
You need to identify the volumes your business spends on the required goods or services, as well as the specifications. To do this, you need to know the volumes spent on products and services (quantity, types, and sizes) as well as the specification details.
You will also need to perform a needs analysis to identify your customer requirements, who they are, and where they are located.Analyze the following key areas:
- Your business’s historical spend and volume
- Business spend categorized by product and sub-product
- Spend by department or user
- Spend by supplier
- Demand forecast
It is always best to gather as much information as possible in this step. Ask yourself the following questions associated with a spend analysis:
- 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).
Step 2: Understand the Supply Market
The next step is a market analysis to determine potential new local and global vendors or suppliers. You will need to collect and analyze supply market data to determine any risks and opportunities and identify your go-to strategy for a mutually beneficial contract with your suppliers.
This step gives your business the necessary insight needed to negotiate better contracts or see if there are better alternatives to your current suppliers. Explore the external marketplace in-depth to identify risks, opportunities, and potential new global and local suppliers.
You will need to analyze the key cost drivers that make up the product or service you will be sourcing. These cost drivers include the growth of the supplier market to identify competition (whether the supplier market is growing or shrinking), the costs of the raw materials, as well as the labor and transportation fees.
This knowledge is vital for purchasing managers because the more they understand the supplier’s market environment, the better positioned you will be to negotiate the best deals on your business’s purchases.
The necessary insights and data can be collected from reports and published statistics, or you can take a more hands-on approach and visit trade fairs, ask other suppliers online, and ask for advice from experts.
Step 3: Grow a Sourcing Strategy
Developing a sourcing strategy is something that should be done by each procurement team and leader to be the most effective. Keep in mind; you are not selecting a supplier yet. You are outlining the qualification criteria and narrowing the options in your supplier pool.
The end goal is determining where and whom you will be purchasing your desired products or services from while trying to minimize risk and cost.
So, you will essentially be looking at your goals and determining the minimum requirements suppliers need to meet to reach the goals. Both existing and potential suppliers should be considered in this step. Look at your existing suppliers and see what requirements they are and aren’t meeting, and think about what you want from potential suppliers.
You need to have a clear idea of your business’s end goal and the minimum requirements for your suppliers. This is so you can be sure that your selected strategy aligns with your business requirements, capabilities, and resources.
It is highly recommended that this step be done with a cross-functional team that includes all stakeholders, not just end-users and subject matter experts (SMEs).
After narrowing the list of potential suppliers and identifying the criteria they must meet, you move onto the point of the process where you will be soliciting your bids. The most common method used to prepare bids is usually RFPs (requests for proposals) or RFQs (Requests for Quote).
The soliciting method you choose should clearly define all the requirements for pre-qualified suppliers. So, suppose your business’s preferred method is an RFP. In that case, the document should outline all the details of the product or service specifications, requirements, pricing breakdowns, communication plans, legal and financial terms and conditions, and evaluation criteria.
Cloud-based software solutions for procurement are frequently used in this step due to the fact that they speed up the sourcing and contracting processes, perform them more accurately, and do so in a cleaner, more efficient, and more transparent way.
Step 5: Determine a Supplier and Broker the Terms
This step is the negotiation and selection portion of the Strategic Sourcing Process, so you will finally be selecting your supplier. Your procurement team will need to take all of the responses received from the RFP process and apply the evaluation criteria set out in Step 3 to determine which supplier is the best fit for your business.
The team will need to ensure they have as much information from the suppliers as possible, which may involve interviews and asking further questions. Your team can then negotiate better deals if need be.
It is essential that the team responsible for this step knows a lot about the product or service you are hoping to purchase so that they can ask the potential suppliers the right questions.
Step 6: Communicate and Implement
After the negotiations, you should have selected the suppliers you hope to move forward with. Successful suppliers will need to be informed that they will be involved in the implementation stage.
Transparency is crucial, so you should include the suppliers in meetings or discussions included in the implementation stage to ensure that they’re up-to-date on any changes and updates.
Step 7: Communicate and Follow the Results
This benchmarking phase of the process is often overlooked, but its importance cannot be overstated. This step determines the effectiveness of your strategic sourcing plan.
Ask yourself how effective your strategic sourcing plan was and whether your business achieved the desired outcomes or not.
It is critical that your procurement team evaluates and measures the performance of your suppliers over time, starting by benchmarking the current status of the product, continuously monitoring the results, and ensuring the end goal is being achieved.
Thus, you can identify any problem areas quickly and notify your supplier to address them in a way that has the least impact on the business.
The most effective way to track the success of your current plan is using e-procurement software with comprehensive automated reporting, communication, and data collection features.
These digital solutions can track your budgets, spending, supplier performance, and cost savings to identify whether your chosen suppliers are adding value to your business or not.
By using automated software for your reporting, you are more likely to have accurate feedback in a shorter amount of time, simplifying your supplier relationship management (SRM).
The strategic sourcing process is a cycle, so once the benchmarking has been completed, you return to step one and restart the process. Treating strategic sourcing as a cycle is essential because the market conditions are constantly evolving, so you must continually re-evaluate your sourcing process and supplier performance to ensure maximum ROI (return on investment).
This process can seem confusing, and it may take some practice and further research to grasp and implement each step thoroughly. You can keep an eye on the Tradogram blog for additional information that will be published to help you with the sourcing and procurement processes.
Alternatively, visit our service page for more information about how e-procurement software can streamline your procurement efforts.
Automating your procurement and strategic sourcing processes will not only ensure efficiency and accuracy in your procurement department, but they will save your business valuable time and resources.