Strategic Sourcing — Definition and Best Practices

What is Strategic Sourcing?

Strategic sourcing is an approach to procurement that puts overall value on the relationship with the supplier rather than its provided product or services. 

Strategic sourcing is a part of supply chain management and puts emphasis on customized solutions and strategic partnerships.

Moreover, it acknowledges and accounts for the multiple complex factors that affect value. Undoubtedly, it is often seen as a cycle that includes supplier selection, spending analysis, and ongoing engagement.

Its emphasis on creating buyer-seller partnerships promotes accountability, collaboration, and innovation.

Strategic sourcing is a growing practice among professionals and organizations in the field of procurement, emphasizing the overall value of supplier relationships over mere products or services. To help you implement this approach effectively, I have created a free-to-download editable procurement strategy template. It’s a PowerPoint file you can use to create your own strategy. I even created a video where I’ll explain how you can use this template.

Strategic Sourcing Best Practices

The bottlenecks mentioned above can be mitigated by using the procurement best practices below:

1. Create Procurement Management Frameworks

You need to create a strong framework before you address the problems. This is important in the procurement process. You should know that it is not an overnight process. Take your time to map out the workflows and build standard procedures.

The following are the processes where your framework should create guidelines:

• Monitor and approve purchase requests
• Manage your suppliers
• Quality assurance
• Payment and invoice
• Keep records
• Hiring new members of your team. Use an email finder extension to easily get in touch with potential candidates
• Train your employees on products and their procedures

2. Engage with your supplier

Your relationship with your supplier is vital to the success of your organization. Strategizing with your suppliers is vital to ensure delivery timeliness and quality assurance.

Developing supplier relationships can help you test performance and effectiveness.

You can engage your suppliers to collaborate effectively. Considering if you know them based on the data you gathered from their performance.

As an experienced procurement manager at companies such as Ahold Delhaize and Friesland Campina, I cannot stress enough how important this is. Procurement is fundamentally about people. It’s not two companies talking to each other. But two individuals representing those companies. When I started at Ahold Delhaize in a category with two major suppliers, the relationship with Supplier A was very good.

However, with Supplier B, it was very bad. Both I and the account leads from these companies started around the same time. I got along very well with the supplier where the relationship was bad. Sadly, the opposite was true for the supplier where the relationship was good.

In a short time, the entire collaboration changed, including the results. Sales with Supplier B increased significantly and we gained a lot of market share. This growth is thanks to this collaboration, and we also grew in margin. For them, the collaboration was also very fruitful. We were able to achieve this because we genuinely wished the best for each other.

Unfortunately, this was not the case with Supplier A. The companies were the same, but the people were not. This difference caused a significant shift in revenue from Supplier A to Supplier B.

3. Improve your inventory

Inventory is often overlooked in the procurement process. But, this is more important than what you think. One of the procurement best practices is keeping your inventory at an optimal level. 

The cost of taxes, warehouse fees, outdated products, and insurance adds up over time. It harms your return on investment when you hold it for too long. The inventory should rotate regularly to lower these risks and unnecessary expenses.

Data is immensely important. From experience, I can say that investing in it is highly valuable. Know what and how much inventory you have and link this to the expected rotation. Based on that information, you can estimate how many weeks of inventory you have and where you may need to make adjustments by running additional promotions.

4. Automation of procurement process

An efficient procurement process will save you time and money. It will also give you more time to focus on your customers’ preferences and feedback. However, you need to automate procurement processes to make it more efficient.

Employing automation in your procurement process will cut repetitive tasks. This will streamline your procedures. This enables your employees to focus on other things. 

Another benefit of automation is that it is free from human error. There are times when employees cannot avoid making mistakes. Automation helps streamline workflows that improve your employees’ satisfaction.  

The following are the critical processes you need to automate:

• Payment reconciliation

Payment reconciliation compares your accounting and your payments. It is to make sure that they match. Through this, your cash flow is secured with ease. Also, your team can focus on other tasks than processing each transaction manually.

• Accounts payable

Accounts payable automation platforms refine everything from invoice coding to purchase orders. With this, you can efficiently manage accounts payable processes without human interaction.

• Invoice

Invoice automation is a complex process that is an entire area of its own. Even if it is under accounts payable automation. It handles price matching, data entry, approvals, purchase orders, and invoice processing. 

By automating invoices, you can reduce the occurrence of late fees. These problems can make your suppliers happy resulting in giving you discounts. A proper manner to automate these processes is via EDI (Electronic Data Interchange)

5. Integrate your procurement process

The procurement cycle is full of approvals that create barriers. Ultimately, even with the help of automation, you will still have these gaps in your procedures.

That is why you must integrate your procurement process. Instead of manually transferring data between procurement systems, you must connect it so that it can be processed effectively.

6. Transparency

The stakeholders of your company must have the ability to see all the records, purchase orders, and technical specifications in real-time. This ensures that they are guided with the tasks that they will do. 

A transparent system enables better record management, strategic sourcing procedures, and cost reduction in procurement. 

The following are the steps to ensure transparency in procurement:

• Plan and implement strategic policies
• Document all steps in the procurement process
• Manage and update your list of potential suppliers regularly
• Create flawless procurement contracts
• Perform audits from time to time

7. Work with procurement professionals

We know that procurement is a complex and dynamic system that has overlapping procedures. This makes your procurement to be challenging to improve. 

Many questions surround those who have just started in procurement. Even some procurement managers are confused about where to start improving their procurement processes.

This is where experts in the field of procurement come in. Those who have a comprehensive background in procurement can help you where to start. Their knowledge and experience show them how to streamline your procedures even if it seems impossible.

8. Know your corporate responsibility

Many customers nowadays care about their responsibility in the community. That is why you need to be mindful of the impact of your supply chain on the economy and the environment. 

With the cancel culture on the rise, your organization must take note of all the expectations of the customers. If you fail or make a wrong move, you might end up damaging your reputation which is beyond repair.

There are several examples of companies that have collapsed due to a lack of CSR. Examples include Enron, which went bankrupt due to their accounting scandal; the Diesel or emissions scandal at Volkswagen, where they manipulated software to hide their emissions; and BP, where negligence and insufficient safety measures led to an explosion on their oil platform, resulting in one of the largest oil spills in history.

9. Create dashboards

Creating data dashboards enables your employees to see real-time data in your supply chain in a way they can easily comprehend. 

Your sourcing will become more flexible with a clear data in procurement dashboard. It can show accurate spend analysis, price fluctuations, and the performance of your supplier.

The Difference between Sourcingand Strategic Sourcing

Before we dive into the key steps & benefits, it is important to understand the difference between sourcing and strategic sourcing.

One of the key differences between regular sourcing or procurement and strategic sourcing is that with procurement, the procurement manager can just pick and use the current list of vendors or suppliers that the company’s been dealing with already for years.

The procurement manager can go and find new suppliers, but selecting and analyzing each supplier for their data is not a priority; the priority for the procurement manager is to make sure that the procurement process itself is working towards the goals of the company.

Procurement refers to the range of procedures and activities that are needed for companies to get the products and services required.

Again, it does involve both strategic and administrative responsibilities but the procurement department is more focused on the day-to-day transactions and processes that are involved with the procurement. Examples of such processes include purchase orders, payments, and invoicing. 

As for strategic sourcing, it is also a part of the procurement process and functions to improve the quality of the suppliers involved in the procurement process.

There is a selection among the suppliers and only the ones that can give the company quality supplies for the right costs are considered. The sourcing manager also makes sure that the suppliers are analyzed thoroughly and the supplies checked to make sure that the prices are just right.

The process is all about a continuous process of searching for the right source or vendor of a product. By doing so, the process is improved and re-evaluated for cost reduction, improved stability, and many other benefits.

Not to sound too confusing, but it is a part of the procurement process. It’s designed to help both the sourcing manager and the procurement manager in choosing the right vendor or supplier for the procurement.

In addition, strategic sourcing focuses on the activities that lead up to the actual purchase. This includes analyzing business needs and the marketplace at large.

Procurement always keeps an eye on looking for the lowest price; strategic sourcing however keeps the big picture in mind. Thus, the process employs large sets of data to evaluate other factors, such as good vendor relationships and risk reduction in businesses.

The 7 Ideal Strategic Sourcing Steps

Now that we’ve talked about strategic sourcing, the strategic sourcing manager, and what the process can do for your company, it’s now time to talk about the steps involved.

Each step will help the sourcing manager in making sure that the sourcing process is done efficiently. These steps are divided into the following:

Step 1: Profiling

Understand what you need by identifying the materials, users, and supply chain players.

Step 2: Supply Market Analysis

Research suppliers, their costs, risks, and market conditions.

Step 3: Develop strategy

Decide where to buy while keeping costs and risks low.

Step 4:  Select sourcing process

Choose how to source, whether through bidding or proposals.

Step 5:  Negotiate and select suppliers

Finalize deals and negotiate terms with chosen suppliers.

Step 6: Integration

Work with suppliers to implement and streamline processes.

Step 7:  Check your placement and results in the market

Evaluate your market position and ensure business goals are met.