What is Strategic sourcing

Do you have an idea about how you can implement strategic sourcing into your own business?

Strategic sourcing is a method that can be used to get the most out of the business. With this, a business gets power that can be used to increase efficiency and productivity while keeping the costs at a minimum.

A lot of businesses are moving towards strategic sourcing because of a number of advantages. These advantages together smooth the process that involves steps such as market research and negotiation.

EJET has compiled a guide that will help you in understanding what exactly strategic sourcing is.

What’s more, you can also learn that how you can implement this procedure into your own business.

We have also added some benefits of this process so that you can understand it better. Let’s talk about this.

Table of Content

Chapter 1: Strategic Sourcing- What is it and how to implement it?

Chapter 2:  7 Main Steps of Starting the Strategic Sourcing Effectively

Chapter 3: Why Strategic Sourcing is Important for your Business? – 4 Benefits of Strategic Sourcing

Chapter 4: Why Automation is More Significant in Helping Strategic Sourcing?

Chapter 5: Frequently Asked Questions About Strategic Sourcing

Chapter 1: Strategic Sourcing- What is it and how to implement it?

Strategic Sourcing- What is

In this chapter, we are going to talk about strategic sourcing in detail, so that you can have a better idea.

1. What is strategic sourcing?

Strategic sourcing is defined in the statement as follows:

“Strategic sourcing is a process of identifying the spending profile of a company. The suppliers it is working with to make sure that their business parameters are matching with the vendors/suppliers.”

Let’s take an example. Suppose you are planning on buying socks from a vendor in China. The first way that you can follow is by contacting the vendor and make a deal.

This is simple yet it is not good for business. That is because you don’t have an idea what the scope of the product.

The second way is applying the method of strategic sourcing. The steps involved in strategic sourcing will give you a deeper insight into the product and how it will perform in the market.

This solution also can give you an idea of the retail price and selling price in the market.

Difference between Strategic Sourcing and Tactical Sourcing

2. Difference between Strategic Sourcing and Tactical Sourcing

Sourcing is of two types – Tactical and strategic. We are going to talk about what is the main difference between these two and which one is better for the business.

-Tactical sourcing:

Tactical sourcing can be defined as a short-term relationship with the supplier. The idea behind tactical sourcing is only focusing on the lowest possible rate.

No other factors such as supply chain risk, supplier relationship management are considered here.

In this method, an organization does not focus on long-term relationships with suppliers/vendors. For the reason that it only contacts the supplier when problems occur.

Tactical sourcing is good for short-term business while, on the other hand, it stops sustained optimization of sourcing business activities.

-Strategic sourcing:

Strategic sourcingg

In contrast with tactical sourcing, strategic sourcing provides an active evaluation of the sourcing activities in the company.

The idea is to achieve the lowest total cost of ownership while keeping the supply chain risk at a minimum rate.

This method keeps the relationship of the company and its suppliers in a loop. It also makes sure that the suppliers’ capabilities are aligned with the organization.

Moreover, strategic sourcing works to keep a sustained relationship with the supplier, because the suppliers are showcased as crucial partners.

Every factor involved such as spend analysis, market research, and supplier’s evaluation is assessed, therefore, the organization can work efficiently in the long term.

If you are going to adopt one of these methods, the idea is to check whether you want to develop a long-term relationship with the supplier or short-term.

Tactical sourcing is focused on short-term relationships whereas strategic sourcing works for a long-term relationship.

3. How Strategic Sourcing is implemented?

Businesses can use the method of strategic sourcing to make the procurement process less-priced focused and more long-sighted.

First of all, a sourcing plan can be made, which consists of the analysis of products used by other businesses, the department involved, and spending techniques.

It also involves the sourcing strategy that is based on the goals of the business.

How Strategic Sourcing is implemented

Secondly, there comes the step of researching the market for the list of potential suppliers. After the selection of the supplier, negotiation is done, and orders are placed.

Finally, strategic sourcing also involves the step of keep track of the performance. In order to make sure business goals are meeting effectively, change the sourcing strategy based on the performance is also needed.

4. What is strategic sourcing can help in business?

Strategic sourcing is getting a lot of popularity because supply chain steps are evolving.

This system involves a series of steps that give an insight into multiple things, for instance, market scope, product demand, quality of product, what to buy, from where to buy, how to source the product, and what quantity to buy.

It is basically a deep analysis of all the points that are involved in the sourcing business. That gives a detailed view of whether the product will run in the market or not.

Furthermore, strategic sourcing is also about suppliers. It works on the relationship continuously, because it defines the efficiency of the company and that is how strategic sourcing can help in the business.

Chapter 2:  7 Main Steps of Starting the Strategic Sourcing Effectively

Main Steps of Starting the Strategic Sourcing Effectively

Let’s talk about the steps that are used for strategic sourcing. We have added 7 main steps needed for this process.

1. Spend profiles identify and classification

In order to start the strategic sourcing, the first step is the identification of the spend areas all over the business.

The step is here to help you in classifying whether the spend area is critical or non-critical. This will help in prioritizing the sourcing strategy for every spend area.

Other categorizing algorithms can also be implemented, such as direct/indirect spend or local/international spend. The idea behind these is to do a risk analysis of the selected spend choice to make a better strategy.

2. Planning strategy for sourcing

Moving towards the second step is planning a sourcing strategy. In this step, a move is planned on how a specific spend area will be catered to. It is important to identify the requirements of the business.

Planning strategy for sourcing

This step includes factors such as spending goals, timelines, objectives, and rules for completing the requirements.

3. Focus on supplier market analysis

One of the most important steps of strategic sourcing is spending time on the supplier’s market and doing a proper analysis.

In this step, a business has to perform a deep analysis of its current suppliers as well as the new ones.

So that they can take out the relevant profiles that will help in building the business properly.

The step includes checking out the revenue or market share of the suppliers. Then, the business can understand the position of the supplier.

Furthermore, factors such as industrial performance along with risks are also evaluated when profiling suppliers.

4. Ensure supplier information and selection criteria is confirmed

Once searching for the supplier is confirmed, it is time for you to ask for the RFPs, RFQs from the supplier. For this reason, you can perform the selection analysis.

Make sure that suppliers understand the exact requirements of the organization is important for you.

For instance, if you are going to buy socks, make sure to tell the supplier what colors you are looking for, what brand do you want, how much quantity do you want, and what quality is you expecting.

You telling these requirements to the supplier will help him/her in creating a road map for the product. Then, make strategies to complete the organization’s objectives.

5. Select the right suppliers and enter the process of negotiation and contracts

Select the right suppliers and enter the process of negotiation and contracts

Once you have selected the list of potential suppliers that you want to work with, it is time to go for the one that offers the best price and quality.

This is the step where you have to use people skills and negotiate the price of the product.

There are different ways that you can use to negotiate the pricing with the supplier. The idea is to get the supplier that is offering an optimum price and outstanding quality.

Once selected, start the process of contracts and paperwork. On a side note, add every factor of the deal in the contract, so that you can save yourself in the future from scams.

6. Evaluate the supplier’s work and tracking their performance regularly

The method of the strategic process does not end with you choosing the right supplier. It is more than that. The sixth step of strategic sourcing is tracking the performance of your suppliers.

This step makes sure that suppliers are providing you with the quality that is needed to meet the business goals.

It is important in strategic sourcing to add a supplier tracking system, because it helps in taking out the risks that are associated with the suppliers.

Plus, it helps the organization in telling where improvements are need in the product.

7. Implementation of Supplier Relationship Management (SRM)

Implementation of Supplier Relationship Management

Lastly, the final step required for strategic sourcing is building a strong suppliers relationship management system. Basically, strategic sourcing is a bridge between the organization and the supplier.

It is like a loop instead of a one-way process. Both company and supplier tend to work on building a strong foundation for the customers.

Both parties work collaboratively to develop the sourcing strategies for the organization. This leads towards a long-lasting relationship between the company and the supplier.

CRM helps both parties in such a way that both parties can work on current and upcoming requirements to increase efficiency.

Chapter 3: Why Strategic Sourcing is Important for your Business? – 4 Benefits of Strategic Sourcing

Why Strategic Sourcing is Important for your Business

Now, we have an idea about what strategic sourcing is and how it can be implemented. let’s talk about the benefits of using this strategy in the business rather than procurement or tactical sourcing.

1. Reduced total cost

The first advantage of strategic sourcing is cost savings. When you are generating the list of potential suppliers and ask them to offer their best price, you select the one that is better suited for the company in terms of quality and price.

Right prices with the best quality help the company achieve a lot of cost savings, and that is what strategic sourcing provides.

2. Increased productivity

One of the most important advantages of strategic sourcing is providing maximum productivity.

Strategic sourcing allows a company to align its goals and check whether the suppliers align with their goals or not. This alignment of goals and objectives allows a business to grow and get increased performance while keeping high efficiency.

Increased productivity

3. Increased flexibility

Strategic sourcing involves a crucial step that requires the analysis of suppliers. This analysis gives a detailed view of whether the suppliers will meet the goals or not.

Plus, it also gives the power to change the suppliers if they are not meeting the goals.

In simple words, strategic sourcing gives increased flexibility to the organization. By using that, they can change their sourcing strategy.

4.Long-term relations with vendors/suppliers

We have mentioned above that the main focus of strategic sourcing is not pricing, it is rather the company’s relationship with the suppliers.

This sourcing method creates a bridge between the suppliers and an organization. It also gives leverage of focusing on the core capabilities of suppliers.

This helps in selecting the right supplier for the right sourcing objective. This all creates a long-term relationship and enables both parties to work, then create new sourcing strategies in the future.

Chapter 4: Why Automation is More Significant in Helping Strategic Sourcing?

Why Automation is More Significant in Helping Strategic Sourcing

Back in the day, tasks like data entry, the addition of suppliers, and project tracking were done manually. This increased the chance of human error and that placed the company at risk.

Procurement offices are turning towards cloud-based solutions that will automate strategic sourcing tasks. But, what is automation strategic sourcing?

1. What is Automation Strategic Sourcing?

Automation strategic sourcing is a process of applying automation rules in strategic sourcing. The system increases efficiency by automating simple tasks such as data entry, market analysis, and supplier analysis.

There are some of the advantages that are common to all businesses. However, automated strategic sourcing includes a power that can be used.

This power can create specific benefits for your own business, and it will surely help you in getting the most out the system.

2. Why do more and more businesses transform into automated sourcing strategy?

There are many reasons why businesses are moving towards automated strategic sourcing technology. One of those reasons is that automation expedites the procurement steps.

Basically, with strategic sourcing, automation allows increased performance and lowers the cost. Businesses can simply apply the filters according to the requirements.

Why do more and more businesses transform into automated sourcing strategy

And they can see where they need to change the sourcing strategy. The data is near too accurate because no humans are involved in this process.

Secondly, automated strategic sourcing provides better optimization. With the algorithms and tools, businesses can see supplier bids.

It helps them by notifying them if there is a reduction in the prices. Plus, it can be used to see which supplier matches the goals of the organization.

For the reason of that, with automation in strategic sourcing, businesses can create better sourcing strategies. And they can also handle complex sourcing processes using very minimum effort.

3. Advantages of leveraging automation to sourcing strategy

Talking about the advantages of using automation in strategic sourcing, there are many. This thing depends on how you are using the automation. However, to give you an idea, here are some of the advantages.

  • Provides clear visibility

Traditional procurement tasks depend on spreadsheets and manual data entry, this can expose the business to risk and put all parties in the dark.

With automation, every stakeholder can see what is going on and when to change the sourcing strategy. Plus, it also decreases human error because a minimum human effort is needed.

  • Supports every kind of regulatory requirement

Another benefit is that it will change the strategies according to the updated regulatory requirements by itself. In the sourcing business, it is important for the business to meet all local and international regulatory rules.

With automated strategic sourcing, businesses can perform effectively if there are changes in the rules.

Chapter 5: Frequently Asked Questions About Strategic Sourcing

faqs

1. What is the main focus of strategic sourcing?

In strategic sourcing, the main focus is the development of a long-term relationship between the supplier and the company.

That is because, in this process, both parties work side by side to develop new sourcing strategies that align with the organization.

2. What is the difference between strategic sourcing and purchasing?

Purchasing is the process where one contacts the vendor/supplier, negotiates the price and buys the product.

As far as strategic sourcing is concerned, there are steps involved that give a detailed view of supplier’s information, and the product they are offering.

Plus, it also involves the process where the company tracks the performance of the selected supplier.

3. What are the elements involved in strategic sourcing?

There are multiple elements involved in strategic sourcing. For example:

  • Product research
  • Sourcing strategy
  • Supplier research
  • Supplier selection
  • Negotiation
  • Tracking performance
  • Managing long-term relationship

4. Tactical sourcing vs Strategic sourcing, which one is better?

If you are looking for developing a short-term relationship with the supplier, then tactical sourcing is best for you because it involves one-time interaction with the supplier.

If you are looking to work with a supplier on a long-term basis, then strategic sourcing is the one for you. It is focused on building a relationship so that both parties can work effectively in the future.

Conclusion

The reason strategic sourcing is getting a lot of attention is that it is more focused on building a long-term relationship rather than other sourcing parameters.

Both companies and suppliers work side by side to develop new strategies for the betterment of the company.

Strategic sourcing is a method that shows whether a business’s goals align with its supplier base in every possible way.

To help you understand, EJET has compiled a guide that contains all relevant information about strategic sourcing. We hope this guide will help you in implementing your own strategic sourcing system.