What is Sourcing Strategy and Procurement?
Strategic sourcing and procurement is a crucial process that aids businesses to balance revenue growth strategies, smart cost containment, sourcing and operations configuration.
“When the economy’s going down, people aren’t making as much money as before,” says Scott Bellinger, BluWave’s co-head of research and operations. “Even if they’re maintaining or increasing their sales, the cost is going up. Every dollar you can capture in a downturn is huge for business.”
The process entails a strategic outlook on possibilities and requires a well-executed implementation to achieve lower total cost and support revenue growth. In essence, the objective is to attain a balance between operational efficiency and financial performance.
“There are companies that are really trying to build out a platform that allows them to be a strategic sourcing provider to large manufacturers,” says one of our BluWave-grade service providers, Don Jenkins* of Supply Chain Management Co. “So they’re going to help them acquire components from around the world from suppliers. They’re going to administer those contracts. They’re going to handle the logistics of any regulatory issues that fall into that.”
Strategic sourcing is an integral part of supply chain management that provides a systematic approach to assure timely delivery of goods and services and decrease the risk and costs involved in the supply chain.
Investing in supplier relationships is a key aspect of this process. Let’s look at it in more detail.
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Examples of Strategic Sourcing
- Outsourcing non-core products or services: A company could contract a vendor or supplier who can deliver products or services within the required time frame and without any delays or issues.
“I think where it gets more proprietary, a little more specialized, I think those areas are less likely to maybe outsourced,” Jenkins says. “Whereas when you look at kind of commodity products and commodity processes, that’s where the outsourcing’s probably more likely to happen.”
- Creating partnerships with suppliers for key products: An organization might opt to centralize all purchases with a single vendor to avoid high delivery fees or fluctuating prices for goods.
- Procuring commodities internationally: A business may identify a supplier or vendor who can provide multiple products or deliveries simultaneously from different regions around the world.
Best Practices for Sourcing Optimization
- Spend analysis: Analyzing the company’s spending patterns to identify areas where costs can be reduced.
- Establishing clear criteria for supplier selection and evaluation: Businesses can use scorecards or other formats to select the suppliers that best meet the company’s needs.
- Negotiating contracts: This step helps organizations achieve the best possible terms and conditions.
- Developing strong relationships: Building long-term relationships ensures a stable and reliable supply of goods and services. Third-party resources with existing supplier relationships are a great way to accelerate this step.
“The businesses are going to want to have strong relationships with those suppliers,” Jenkins says. “They’re going to handle all the logistics-related issues, and they’re going to administer those contracts.”
- Advanced analytics: Identify opportunities for cost savings and supplier performance improvement through data. With the explosive growth of AI tools, this is easier than ever..
- Focusing on total cost of ownership: The initial purchase price should not be the only factor when evaluating suppliers.
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Supply Chain Management Benefits
- Cost savings through economies of scale: By consolidating purchases and leveraging their purchasing power, companies can achieve cost savings through economies of scale.
- Improved efficiency: Strategic sourcing can help improve the efficiency of the procurement process by reducing the time and resources required to identify and evaluate suppliers.
“There’s not a large variance in pricing that exists because of the nature of the commodity product,” Jenkins says. “So you have different areas of the world, potentially, where you can go to get that product, and the magic is just having someone that can organize it, find it, administer the contract, get the logistics set up.”
- Access to expertise and technology: Organizations may access to expertise and technology that they may not have in-house. This can help improve the quality of products and services and reduce costs.
- Improved supplier relationships and performance: Strategic sourcing involves building long-term relationships with suppliers. This can help improve supplier performance and reduce risk.
- Reduced risk: By building strong relationships with suppliers and implementing a supplier relationship management program, companies can reduce the risks associated with their supply chain.
- Increased agility: Businesses that correctly implement strategic sourcing can more quickly respond to changes in the market.
“It’s like ‘What pieces of what we do can we outsource, not have to have our full-time resources committed to this and still get the job done?'” Jenkins says of companies’ approach to strategic sourcing. “In what cases does it make sense to outsource a product or service or process as opposed to trying to do it yourself?”
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Steps for Implementing Procurement Management
Businesses are concerned with two types of procurement: indirect and direct.
Indirect procurement means cutting costs from anything that’s not core to the business product or service being done. Examples include company cars, postage, travel spend, telecom providers, and pens and pencils, to name a few.
Bellinger says expert third parties are highly motivated to help with this.
“The benefits would be that you can engage a firm that can take out costs of your business for non-core expenditures,” he says. “The beauty of it is these groups work off of a gain-share model, so they have an incentive to help you save money.”
Direct procurement, on the other than, is related to lowering COGS via things like components, manufacturers and resource suppliers.
“As your supplier base continues to raise prices, you want to engage direct procurement groups that can resource your suppliers on a lower cost profile,” Bellinger says.
- Step 1: Assess your current procurement process: This involves analyzing your current procurement process to identify areas for improvement and opportunities for cost savings.
- Step 2: Identify products or services to outsource: This involves identifying the products or services that can be outsourced to achieve cost savings and improve efficiency.
- Step 3: Evaluate potential suppliers: This involves evaluating potential suppliers based on criteria such as cost, quality, reliability, and delivery time.
- Step 4: Negotiate contracts and establish service level agreements: This involves negotiating contracts with suppliers to achieve the best possible terms and conditions, and establishing service level agreements to ensure that suppliers meet the company’s requirements.
- Step 5: Monitor and evaluate supplier performance: This involves monitoring supplier performance to ensure that they are meeting the company’s requirements and taking corrective action if necessary.
Factors to Consider for Strategic Sourcing
- Proprietary technologies and products: Organizations should assess whether outsourcing will compromise their proprietary technologies and products that give them a competitive edge.
- Customer relationships: Firms should also consider the impact on their customer relationships, particularly if they have strong ties.
- Commodity products and processes: Businesses may want to outsource commodity products and processes that do not provide a competitive advantage. This can help them reduce expenses and enhance productivity.
- Cost savings: Enterprises must evaluate the possible cost savings that can be attained through outsourcing.
- Supplier capabilities: Firms should assess the abilities of potential suppliers to ensure that they can meet the company’s requirements.
- Risk management: Organizations must consider the risks associated with outsourcing and take measures to mitigate those risks.
“There are companies that have built up a network of supply sources and a network of transportation solutions to get a product from A to B,” Jenkins says. “If you’re a large manufacturer, and this happens to be a product that you don’t deal with every single day in large quantities, but every once in a while you need it, and when you need it, you need it badly, that is a pretty good candidate for an outsource relationship.”
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Tapping into industry-specific service providers who know not only your business, but also your competitors as well as you do can provide a significant advantage.
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*Privacy is important to us. While the source and company name have been changed, these are real quotations from a real service provider in the BluWave Business Builders’ Network.
