Strategic Sourcing

Strategic sourcing is an institutional procurement process that continuously improves and re-evaluates the purchasing activities of a company. In the services industry, strategic sourcing refers to a service solution, sometimes called a strategic partnership, which is specifically customized to meet the client’s individual needs. In a production environment, it is often considered one component of supply chain management. Modern supply chain management professionals have placed emphasis on defining the distinct differences between strategic sourcing and procurement. Procurement operations support tactical day-to-day transactions such as issuing Purchase Orders to suppliers, whereas strategic sourcing represents to strategic planning, supplier development, contract negotiation, supply chain infrastructure, and outsourcing models.

The term “strategic sourcing” was popularized through work with a variety of blue chip companies by a number of consulting firms in the late 1980s and early to mid 1990s. This methodology has become the norm for procurement departments in large, sophisticated companies such as fortune 500 companies.

Strategic Sourcing is the process of developing channels of supply at the lowest total cost, not just the lowest purchase price. It expands upon traditional purchasing activities to embrace all activities within the procurement cycle, from specification to receipt and payment of goods and services.

Steps

The steps in a strategic sourcing process were defined, in 1994, as:

• Assessment of a company’s current spending (what is bought, where, at what prices?).
• Assessment of the supply market (who offers what?).
• Total cost analyses (how much does it cost to provide those goods or services?).
• Identification of suitable suppliers.
• Development of a sourcing strategy (where to purchase, considering demand and supply situations, while minimizing risk and costs).
• Negotiation with suppliers (products, service levels, prices, geographical coverage, Payment Terms, etc.).
• Implementation of new supply structure.
• Track results and restart assessment (Continuous cycle)

A slimmed down strategic sourcing process was defined, in 2012, as:

• Data collection and spend analysis
• Market Research
• The RFx process (also known as go-to-market)
• Negotiations
• Contracting
• Implementation and continuous improvement

Note that while the modernized process combines the market assessment and cost analyses steps of the older model into a single “market research” step, and the supplier identification and sourcing strategy development steps into a single “go-to-market” step, negotiation has split into “negotiation” and “contracting”. This is due to the heightened importance of market intelligence in modern strategic sourcing, and its ability to deliver value by improving both pricing and contract terms when leveraged against the identified suppliers.

Note also that, while both descriptions of the sourcing process are accurate to some extent, there is no standard set of steps and procedures. As strategic sourcing is put in place and practiced over time, many large, sophisticated organizations will modify the process to better meet their individual corporate needs.

Outsourcing a business practice to another company may also be incorporated into a sourcing strategy for services. This may involve the transfer of staff and assets to the outsource company. Due to the strategic and complex nature of outsourcing, many organizations such as Procter & Gamble, Microsoft and McDonald’s have created what is referred to as Vested Outsourcing agreements to help create highly collaborative win-win business relationships.

Sourcing plan

The sourcing plan is the result of all planning efforts on strategic sourcing. Into this planning all sourcing events are organized and detailed with all tactical and operational information such as, the sourcing team responsible for each event, when is supposed to begin and end each RFX step (RFI, RFP, RFQ), the requirement, specifications of all services or materials and negotiations/cost goals. The objective of the sourcing plan is to manage time and quality of all sourcing events in the strategic sourcing program.

Sourcing optimization

Operations research is a discipline of applying advanced techniques to help make better decisions. Optimization, in turn, utilizes mathematical algorithms to rapidly solve a business problem by evaluating all possible outcomes (or many outcomes) and selecting those ones that yield the best solution.

When applied to sourcing and supply chain operations, optimization helps the sourcing professional simultaneously evaluate thousands of different procurement inputs. This evaluation can take into consideration the global market, specific current supply chain conditions, and individual supplier conditions, and offers alternatives to address the buyer’s sourcing goals.

Cooperative sourcing

Cooperative sourcing is a collaboration or negotiation of different companies, which have similar business processes. To save costs, the competitors with the best production function can insource the business process of the other competitors. This is especially common in IT-oriented industries due to low to no variable costs, e.g. banking. Since all of the negotiating parties can be outsourcers or insourcers the main challenge in this collaboration is to find a stable coalition and the company with the best production function. This is difficult since the real production costs are hard to estimate and negotiators might be tempted to portray their real cost much higher than they actually are in order to demand higher fees for insourcing. High switching costs, costs for searching potential cooperative sourcers, and negotiating often result in inefficient solutions.

Sourcing business models

Sourcing Business Models are a systems-based approach to structuring supplier relationships. A sourcing business model is a type of business model that is applied to business relationships where more than one party needs to work with another party to be successful. There are seven sourcing business models that range from the transactional to investment-based. The seven models are: Basic Provider, Approved Provider, Preferred Provider, Performance-Based/Managed Services Model, Vested outsourcing Business Model, Shared Services Model, and Equity Partnership Model. Sourcing business models are targeted for procurement professionals who seek a modern approach to achieve the best fit between buyers and suppliers.

Strategic Purchasing

Intense competitive pressures have forced companies to re-examine their approach to managing suppliers and their supply base. An increasing focus on core competencies, and the concomitant increase in outsourcing of components and services, has also placed greater emphasis on supplier management. In addition, much of the traditional in-house development activities have been pushed onto suppliers. Purchasing is thus increasingly regarded as a strategic weapon, centred on its ability to create collaborative relationships for firm advantage.

Partnerships with suppliers can have a strong positive influence on firm performance through the development of joint resources and the exchange of valuable knowledge with these individual partners. In practice, many firms fail to realize these benefits when they implement sourcing agreements at a lower negotiated price. They fail to follow through with the relational processes that capture benefits over the course of the contract. The ability to extract benefits from supplier relationships is linked to the way these relationships are managed. For example, those relationships characterised by close interactions and successful process integration between buyer and supplier are better able to create, coordinate and protect joint resources for a sustained competitive advantage. Thus, it is not enough for a firm to possess a strategic purchasing orientation, they must also create conditions which allow the buyer and supplier to contribute and develop the relationship. Various supply management practices facilitate this process. Three will now be discussed.