5 key benefits of strategic sourcing

5 Key Benefits Of Strategic Sourcing

Many businesses still regard purchasing as a straightforward task and a means to a goal. A procurement team's main goal is to satisfy financial criteria while lowering expenses for their company. As a result, most teams position rival suppliers against one another to save money on purchases.

It leaves firms with little room to develop an efficient procurement strategy and create supplier relationships. As a result, implementing strategic sourcing and improving the overall purchasing efficiency is difficult for businesses.

In this article we will show you how to implement a strategic procurement strategy and its benefits.

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What is strategic sourcing?

Strategic sourcing is the process of analyzing and selecting suppliers based on their ability to provide high-quality goods and services at the most competitive prices. This process typically involves developing long-term relationships with key suppliers, negotiating contracts, and continuously evaluating and improving the performance of those suppliers.

The goal of strategic sourcing is to improve an organization's procurement processes and help it achieve the best value for its money.

What are 7 the steps in Strategic Sourcing?

No company can fulfil its long-term objectives on its own, so strategic sourcing methods are used to create advantageous alliances. These alliances between purchasers and suppliers of products and services aren't formed by chance. Strategic sourcing is critical because productive partnerships require effort and preparation. It helps establish a foundation for long-term business partnerships.

seven steps in strategic sourcing

While no particular method will fit every organization's specs and needs, we can describe a basic framework that can help lead the strategic sourcing process:

Step1: Spend Profiles Identification and Categorization

To begin the strategic sourcing process, identify the expense areas across all of the organization's business units and categorize them based on how essential or non-critical they are. The sourcing procedures for each spending area will be highlighted thanks to categorization.

Other evaluation criteria that better meet the business requirements (e.g., domestic/international expenditure, direct/indirect expenditure) might be established if necessary. In such circumstances, a risk analysis of the selected expenditure categories is necessary to assist priorities and make strategies.

Step2: Analysis of the Supply Market

Your strategic procurement team will identify the markets that are most likely to offer dependable, consistent, and good raw materials, equipment, finished goods, and services at this point.

The present markets are then assessed based on cost analysis, spend classifications (including determining backup suppliers for critical raw materials, commodities, and services), and external criteria like location, logistical considerations, possibly political, social, and ecological problems, and so on.

Step3: Market Research on Suppliers

To comprehend and assess important supplier profiles, the third stage is to conduct an in-depth study of existing and potential suppliers. This involves examining suppliers' earnings or market share in order to have a better understanding of their market position and industrial performance, as well as the challenges and vulnerabilities that exist in the supplier market.

Step4: Develop a sourcing strategy

Sourcing Strategy Development

It's crucial to know who you want to purchase from, but you also need a strategy for how you want to buy. You may update current protocols or create new ones based on your organization's general business strategy, goals for supplier relationship management and development, and risk management strategy, encompassing (but not limited to):

  • Requests for proposal (RFP) or Requests for Quote (RFQ) to specific vendors are used to make direct purchases.
  • Investments: Identifying and contracting the best suppliers for a fixed-term purchase rather than a project-by-project basis.
  • Strategic alliances are formed through enhanced contract management, resulting in long-term agreements that benefit both sides.

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Step 5: Implement Supplier Relationship Management (SRM)

The fifth stage is to include Supplier Connection Management (SRM) in the strategic sourcing process, which turns the relationship between the company and its suppliers into a two-way process rather than a one-way one. By converting a simple customer-buyer relationship into strategic value partners, SRM improves the degree of engagement between an organization and its suppliers.

Both parties contribute to the development of proposals and creative methods that maximize the organization's sourcing needs. The long-term connections that result from such synergized collaboration may be used to boost supplier performance even further.

SRM is more than simply the last stage in the strategic sourcing process; it connects suppliers and organizations in such a way that current and future needs are fulfilled in the most efficient and maximizing the value in the best way possible.

Step 6: Reassembling your Supply Chain and Negotiating with Suppliers

When you implement your new strategy, the supply chain you activate will most likely be clearly distinguishable from the one that came before it. Your team has assessed your available supply marketplaces, located and classified suppliers based on the information you established and is ready to implement the mechanisms that will integrate these suppliers into your procurement process at this point.

Vendors need to know your wants and demands for both obtaining your business and negotiating deals with you once the contract is signed, so communication and collaboration are especially crucial at this point.

Step 7: Examine, Refine, and Revise

At this point, you may examine and compare the constant stream of data passing through your eProcurement solution to the KPIs you've defined for vendor management and internal procurement procedures.

The team may closely examine these KPIs using data analysis to identify areas that need to be improved, as well as chances to change the supply chain to increase resiliency, efficiency, and competitive mobility.

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What are the benefits and objectives of strategic sourcing?

Using a collaborative and structured approach to strategic sourcing connects procurement strategy with supplier operations, resulting in long-term cost savings and other business benefits. Now take a look at the advantages: 

1. Reduces Direct and Indirect Costs

Cost reductions are unquestionably one of, if not the most important, advantages of strategic sourcing activities. Many sourcing and procurement managers emphasize the fact that actual cost reductions from sourcing operations go straight to the bottom line. As a result, the financial profitability benefits from the savings.

When comparing net profit to sales revenue, remember that sales income is lowered by commissions, cost of products sold, overhead costs, and other expenses, leaving a net profit.

For example, if a company sells $1,000 goods with a 7% net profit margin, the transaction brings in $70 to the bottom line. In contrast, if a sourcing effort saves $1,000, the full savings is applied to the bottom line, increasing profitability. 

2. Improves your Efficiency and uses a Systematic Approach

To monitor hundreds of supplier data, manufacturers still use a mix of spreadsheets, emails, phone calls, and buyers' memory to handle sourcing operations. Lack of process oversight and missed supplier insights are two difficulties that have arisen as a result of this reliance on human labor.

Manufacturers are missing out on opportunities because they are unable to select the best suppliers at the best overall price, correctly monitor supplier performance, and improve supplier development that might create company value. 

Strategic sourcing is one area that the tsunami of digital transformation attempts is not ignoring. Manufacturers acquire a systematic strategy for properly choosing the lowest cost and optimum source of supply for the numerous raw materials, goods, and services they buy by automating sourcing processes and implementing sourcing standards across the business.

To analyze and evaluate pricing, quality, capacity, services, and other essential variables connected with a range of suppliers, automation eliminates the guesswork and over-reliance on buyer recollections. This ensures that a consistent sourcing procedure leads to the appropriate contract with the appropriate provider. 

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3. Reduces Supplier Risk

As the scope and complexity of business requirements and compliance requirements grow, so do the risks associated with supplier relationships. Maintaining business continuity by preventing interruptions with important suppliers remains one of the top risk concerns for sourcing and procurement companies.

As the world becomes more digitized and organizations become more reliant on digital information, sourcing and procurement teams must factor ownership, control, and usage of data into their discussions with vendors and suppliers.

Many sourcing and procurement teams' risk management and compliance activities now place a strong premium on information security. In the contemporary digital world, sourcing operations are becoming increasingly important in ensuring that supplier business continuity is maintained and that cybersecurity is used to safeguard data shared between the manufacturer and the supplier.

4. Boosts the Number of Long-Term Supplier Relationships

Procurement management with suppliers has become increasingly difficult due to the global and disruptive nature of sourcing. Making the appropriate supplier selection is critical to achieving manufacturer-supplier synergy, and this is where sourcing comes in.

Manufacturers may pick high-value suppliers with more assurance that a long-term and collaborative relationship will form by thoroughly understanding the sourcing objectives and concentrating on the supplier's key skills – along with additional expenses.

Suppliers can better manage any problems and retain focus on areas where their efforts are succeeding. The aim of mutual success is better supported for the sourcing team, and performance data is easily available for future selections to ensure the correct supplier is picked whenever needed. 

5. Make Better Decisions

Organizations' decision-making processes are aided by strategic sourcing. This aids organization in their cost-cutting efforts. Every organization aspires to increase its value and efficiency. Marketers are experimenting with new strategies to reach out to the public in this age of fierce market rivalry. Organizations are simplifying their procurement process with the aid of strategic sourcing companies. Without a question, strategic sourcing efforts may greatly help businesses.

Procurement managers are increasingly looking for new and creative methods to enhance their sourcing efforts and handle supply disruptions on a variety of levels. Integrated supplier management is a major sourcing strategy for connecting manufacturers and suppliers more effectively. If you want to gain more benefits for your company, turn to strategic sourcing operations. 

Author Bio

Mohammed Kafil is a certified procurement consultant who has been coaching companies to establish resilient digital procurement operating models for over a decade now. With Kissflow Procurement Cloud, a flexible procurement software that streamlines end-to-end procure-to-pay, and also eventually the vendor management process, Kafil helps medium and large enterprises with their digital transformation projects.

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