Understanding the What,

Why, & How of Strategic

Sourcing

As businesses today continue to harness the power of

globalization to expand performance, the role of
effectively sourcing goods and services from suppliers
has become inevitable. Additionally, procurement is
transforming into a more strategic function that is
aligned to organizational goals and objectives.
Furthermore, issues like economic and political volatility,
technological disruption, etc. have rendered market a
fierce competition. Hence, it is important for
organizations to adopt effective strategic sourcing skills
 and processes to maximize their business performance
and efficiency to gain a competitive advantage over their
peers. tweet

What is Strategic Sourcing?

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Definition
Strategic sourcing refers to the process of identifying the
spend profile of an organization and its supplier base to
ensure their business requirements are aligned with the
suppliers. tweet

The boom in the adoption of strategic sourcing implies that

almost everyone has heard of it. However, being a term that
encompasses a large number of sub-concepts,
understanding strategic sourcing might get complex.
Hence, this article attempts to cover what constitutes
strategic sourcing, how it differs from tactical sourcing, and
its driving forces and processes.

Difference between Tactical Sourcing

and Strategic Sourcing
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Understanding Strategic Sourcing

Strategic sourcing involves developing a proactive, holistic,

and continuous evaluation and re-evaluation of the sourcing
activities in an organization. Strategic sourcing aims to
achieve the lowest Total Cost of Ownership (TCO) along
with minimal supply chain risk. Hence, it reflects the
organization’s relationship with its sourcing partners as a
loop instead of a one-way process—an in-depth profile of
the suppliers and their core capabilities is developed and
periodically aligned to the sourcing requirements of the
organization. Strategic sourcing views suppliers as crucial
value partners and aims to building sustained, collaborative
relations. The customer-supplier loop is assessed at every
stage of its lifecycle in order to ensure that the needs of the
organizations are continuously and efficiently met. To
accomplish this, strategic sourcing leverages spend
analysis, supplier evaluation, supplier relationship
management, and detailed market research. Strategic
sourcing is, hence, a long-term process and for its
successful implementation, it needs skilled personnel and
relevant technology platforms and tools.

Understanding Tactical Sourcing

In contrast, tactical sourcing involves a short-term and

traditionally reactive approach towards managing the
sourcing activities of an organization. It aims to achieve the
lowest possible cost without considering other factors like
supplier relationship management, supply chain risk
mitigation, etc. Consequently, the focus on building long-
term relationships with suppliers and understanding how
their core capabilities can meet the organization is minimal
as communication with suppliers only occurs when
problems arise. While tactical sourcing can bring gains in
the short-term, it prohibits sustained optimization of its
sourcing activities. Furthermore, compared to strategic
sourcing, tactical sourcing doesn’t necessitate large
investments in advanced technological platforms and
personnel skillsets.

Why do we Need Strategic Sourcing?

.

Outlining 4 Key Benefits of Strategic Sourcing

Now that the concept of strategic sourcing is clearer, it is

important to understand its benefits and why it makes
sense for more organizations to adopt strategic sourcing. A
whitepaper authored by Zycus talks about the various
advantages an organization can leverage by implementing
strategic sourcing:

Increased Level of Cost Savings

The most obvious benefit businesses will experience from

strategic sourcing would be higher levels of cost savings. By
identifying and selecting suppliers that will provide the
highest value at the right pricing will enable an organization
to continuously achieve higher cost savings. This is even
more important as according to Zycus’ Pulse of
Procurement 2018, 54% of top procurement professionals
have recognized cost savings as a key focus area.

Better Alignment of Sourcing and Business

Objectives

Aligning the sourcing activities of a business to its

organizational goals and objectives is at the crux of
strategic sourcing. Better alignment allows the business to
achieve higher business performance with higher efficiency
and minimal supply chain risks.

Optimization of Ideal Suppliers

In order to effectively implement strategic sourcing in your

organization, it is necessary to analyze the suppliers, their
profiles, and core capabilities. Once this is accomplished,
an organization is equipped with information that will allow
them to match their business objectives to their ideal
suppliers. This implies highest value-creation at lowest-
possible cost.

Long-term Relationship Building with Suppliers

Strategic sourcing helps an organization build long-term

relationships with its suppliers. By reinforcing the focus on
the core capabilities of the suppliers and assuring the right
suppliers for the right sourcing objective, strategic sourcing
helps create a synergy between organizations and its
suppliers. Sustained relationship with suppliers also implies
that when the suppliers are valued and considered in
various sourcing decisions; they feel motivated to optimize
their performance to meet the organizations objectives.
How do we Implement Strategic
Sourcing?
..

7-Step Process to Effectively Implement Strategic

Sourcing in your Organization

Understanding the advantages of strategic sourcing brings

us to designing a process to implement strategic sourcing in
an organization. While a single process might not match the
specifications and requirements of every organization, we
can outline a basic structure that can guide the strategic
sourcing process:

Identification and Categorization of Spend Profiles

To initiate the strategic sourcing process, identify the spend
areas existent across all the business areas in the
organization and categorize it on the basis of how
critical/non-critical the spend area is. Categorization will
help prioritize the sourcing activities for each spend area.

If required, other categorization criteria that better suit the

business requirements can also be developed (e.g.:
domestic/international spend, direct/indirect spend). In such
cases, it is important to do a risk analysis of the chosen
spend categories to help prioritize and develop strategies.

Building a Sourcing Strategy

The second step includes building a strategy on how each

categorized spend area will be approached. This involves
identifying the requirements of the business units that
necessitate spending and defining goals, objectives, and
corresponding timelines to fulfill the requirements. This also
necessitates building a communication workflow so that all
stakeholders relevant to the respective sourcing projects
have clear visibility of upcoming updates.

Analysis of the Supplier Market

The third step is to execute an in-depth analysis of the

current and future suppliers to understand and evaluate
relevant supplier profiles. This includes analyzing the
revenue or market share of suppliers to understand their
market standing and industrial performance along with the
risks and opportunities surrounding the supplier market.

Request for Supplier Information and Identification

of Selection Criteria

Once the supplier market research is completed, the fourth

step is to request RFIs/RFPs/RFQs from suppliers. It is
important to communicate the exact requirements of the
organization as well as the end-goals and performance
expectations so that the suppliers have clear understanding
of what the organization needs. This is important so that
they provide an accurate roadmap and develop strategies to
fulfill the business’s objectives.

The submitted information will provide insightful data—the

pricing structure, delivery and warranty provisions,
product/service specifications etc. After the submitted data
is collated, the selection criteria can be identified for
supplier selection.

Selection of Suppliers and Execution of Contracting

Process

After the selection criteria are identified, the fifth step is to

choose the suppliers that can offer the highest level of cost
savings along with delivering quality. After supplier selection
for the relevant spend areas, the contracting process starts
to on-board the suppliers.

Measurement and Periodic Tracking of Supplier

Performance

The process of strategic sourcing doesn’t end at choosing a

supplier. The sixth step is to effectively measure how
suppliers perform vis-à-vis the requirements and objectives
of the organization. It is important to engage in periodic
tracking of supplier performance and identify areas for
improvement. This can significantly help organizations
understand supplier risks and design strategies to mitigate
all possible supply chain disruptions.

Implementation of Supplier Relationship

Management (SRM)

The seventh step is factoring Supplier Relationship

Management (SRM) in the strategic sourcing process which
makes the relationship between the organization and
suppliers a loop instead of a one-way process. SRM
enhances the level of collaboration between an organization
and its suppliers by transforming a mere customer-buyer
relationship into strategic value partners. Both parties
participate in building propositions and innovative strategies
that optimize the sourcing needs of the organization. The
relationships that arise out of such synergized collaboration
are long-term and can be leveraged to further improve
supplier performance. More than just being the final step in
the strategic sourcing process, SRM links suppliers and
organizations in a way that both current and future
requirements are met in the most efficient and value-
maximizing manner.

Factors Driving Automation of Strategic

Sourcing
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Automation is everywhere and procurement isn’t far behind.

Organizations are adopting eSourcing in order to streamline
their strategic sourcing activities and simplify the
complexities that surround it. A CIPS blog on ‘E-sourcing
can help your organisation collaborate on procurement’ by
Alun Morris talks about how eSourcing not only focuses on
finding the right suppliers for the right sourcing need, but
also enables various business units in an organization to
collaborate on their sourcing activities. This is necessary as
every department will have their unique set of sourcing
requirements. Organizations using eSourcing software
enables ‘end-users to source their own suppliers within the
bounds of necessary procurement and compliance rules.’
The end-users of an organization can easily use eSourcing
tools to gather competitive pricing from available suppliers
vis-à-vis e-tendering and select the right ones.

Here’s a list of key factors driving increased use of

eSourcing:

Enhanced Data Reporting and Increased Visibility

into Sourcing Projects

eSourcing platforms generate useful data regarding spend

activities of an organization, supplier performance, and
supply chain risk evaluation. The data will improve visibility
and also enable holistic assessments of the various on-
going sourcing activities, thereby allowing the organization
to make more informed sourcing decisions.
 Robust Management of Key Spend Categories

Automaton of strategic sourcing activities helps identify and

categorize the various spend categories that exist in an
organization across business units. Improving visibility of
spend categories enables an organization to streamline and
control its spend activities.

Supply Chain Risk Assessment

eSourcing enables an organization to identify, evaluate, and

mitigate various risks that impede supply chain thereby
improving compliance. This expedites business
performance, reduces excessive spend due to supply chain
failures, and helps organizations cope with various external
and internal environmental disruptions. As an added bonus
of automating strategic sourcing, Pulse of Procurement
2018 identified Supply Risk Management as one of the key
procurement focus areas.

Higher Level of Accountability while executing

Sourcing Projects

An eSourcing platform showcases the workflow of sourcing

activities and its corresponding stakeholders. It enhances
the level of visibility, accountability, and compliance of all
the relevant stakeholders involved in respective sourcing
projects.
.

In a Nutshell
The attempt of this article is to demystify the various facets
of strategic sourcing—what it stands for and how it differs
from tactical sourcing, the advantages organizations
experience through strategic sourcing; its process and
factors that drive its automation.

Organizations are adopting strategic sourcing to establish a

holistic approach to manage their sourcing requirements
and to build a more proactive approach to the various
supply chain disruptions. By aligning the business goals and
requirements to the right suppliers with the right
capabilities, organizations maximize their performance and
gain a competitive edge over their peers. Furthermore, by
leveraging the power of automation technology for strategic
sourcing, business units are empowered to optimize their
sourcing.

Strategic sourcing is here to stay—it delivers cost savings

without compromising on quality. Are you there yet?