Procurement 101

What is Strategic Sourcing and Why is it Important?

Last Updated:

January 4, 2022

Posted by

Logan Price

In response to the digital transformation of procurement and supply chain processes, the need for effective strategic sourcing processes is growing. Due to economic and political volatility as well as technological disruptions (among other factors), the market is highly competitive. As such, it has become clear that procurement needs to refer to more than simply buying a product or service - it needs to be substantially more focused on organizational goals and objectives if the business hopes to benefit. This is where strategic sourcing comes in.

Effectively, strategic sourcing formalizes the way information is gathered in supply chain management. It does this by analyzing what a business buys, the suppliers they use, as well as the price and volume of the products they purchase. The business must then continuously evaluate and re-evaluate its strategies to account for market changes, supplier capability, cost-saving potential, and various other factors. By using strategic sourcing, a company can harness its purchasing power to achieve the best possible value in the marketplace and align its purchasing strategy with its business objectives.

With a well-organized strategic sourcing process, businesses can revise their procurement processes and recreate them to be less shortsighted and price-driven. They will then be able to create an affordable and maintainable system that maximizes their efficiency, boosts their performance, and contributes to the long-term growth and value of the company, giving them a competitive advantage. One of the most widely used strategic sourcing strategies is AT Kearney’s 7 Steps of Strategic Sourcing.

What is the Difference Between Purchasing, Procurement, and Sourcing?

While these terms are often used interchangeably, they actually have different meanings.

Procurement is a business management function that refers to the entire process of acquiring products and services, especially for business purposes. From identifying the need for certain goods or services to allocating them, this process covers a variety of activities. Among these activities are:

  • Vendor selection
  • Defining payment terms
  • Contract negotiation
  • Regulatory compliance
  • Sourcing and analysis

Purchasing, on the other hand, is just one component of the procurement process. Purchasing, as the name implies, involves the purchase and sale of goods or services. This function is restricted to receiving and making payments, and can be best described as the transactional function of procurement.

As the name suggests, sourcing is the process of identifying a source from which goods and services will be procured. Essentially, it is a subset of procurement. Procurement deals with the acquisition of goods and services while sourcing focuses on identifying the most cost-effective supplier for those goods and services. Since the profitability of the business heavily depends on finding the best suppliers, this is the first thing a business should do before selling anything.

What are the Benefits of Strategic Sourcing?

Implementing strategic sourcing in your procurement process is aimed at reducing the Total Cost of Ownership (TCO) in your business. An efficient sourcing strategy can drive efficiency, solve business problems, boost your speed to market, promote constructive competition, ensure industry compliance, and limit your production costs. In addition, an optimized sourcing strategy can provide several other benefits, such as:

Risk Minimization

In today's fluctuating global economy, business risks are prevalent. A growing number of organizations are now feeling the need to scrutinize their categories, expenses, and suppliers. Strategic sourcing involves evaluating suppliers based on numerous important criteria, including quality risks, financial risks, supply risks, and support services. By evaluating these risks before entering into a contract with a supplier, your business is less likely to suffer the costly consequences of entering into a relationship with a supplier that cannot meet your business needs.

Improved Supplier Relationships

Selecting the right supplier is vital to the success of your procurement efforts. There are numerous organizations that often switch suppliers, but this can be extremely disruptive, costly, and time-consuming for our business. Strategic sourcing helps build collaborative and mutually beneficial relationships with your suppliers by focusing on their core capabilities and goals, and ensuring that they align with your business needs. When your business works to create a transparent and collaborative relationship with your suppliers, it helps the suppliers feel valued and breeds trust in your supplier relationships. With effective strategic sourcing processes, you are more likely to have long-term relationships with your suppliers.

Continuous Improvement Opportunities

Since strategic sourcing is a recurring activity, not just a one-time event, you will need to evaluate the strategy continuously. This will allow managers to pinpoint problem areas and improve them. With this information, stakeholders can make informed decisions about the development of the business model, leveraging market opportunities, and remaining competitive.

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