Strategic sourcing: Important Factor in Supply Chain Process

"Strategic sourcing" is an important and necessary process in current manufacturing and business enterprises because it brings many benefits to the business. So, what is strategic sourcing? Why do companies need strategic sourcing? The following article from Viindoo Enterprise Management Software will answer these questions for you!

What is Strategic sourcing?

Strategic sourcing is a supply chain procurement strategy that involves identifying the critical components, goods, or services that a business needs to operate effectively, then identifying the most cost-effective and reliable suppliers for those goods or services. The objective is to optimize costs, improve quality, and minimize risks associated with supply chain management.

To be more specific, in the Strategic Sourcing process, you will need to:

  • Analyze the products/services your business needs, the budget to spend, related processes and departments.
  • Develop a supply sourcing strategy based on the business objectives.
  • Analyze the market of potential suppliers for the products/services and create a list of potential suppliers.
  • Specify requirements and criteria for the products/services, proposals to attract suppliers.
  • Negotiate and select suitable suppliers.
  • Integrate suppliers into the business system, add any new or potential suppliers.
  • Monitor relevant performance data and optimize the sourcing plan as needed.
Strategic sourcing: Important Factor in Supply Chain Process

What is a sourcing strategy?

Why is Strategic sourcing important?

In today's business landscape, where enterprises continue to leverage the power of globalization to increase their operational efficiency, the role of sourcing goods and services is becoming increasingly crucial. This is helping companies to achieve their strategic business objectives sooner. 

According to Gartner's Magic Quadrant for Strategic Sourcing Application Suites, the top reason for investing in strategic sourcing is to transform sourcing within the organization, with 74% of respondents citing this as a key driver. Automation (65%) and increased savings (61%) were also among the top reasons for pursuing strategic sourcing.

Here are a few benefits of strategic sourcing:

  • Cost optimization: Strategic sourcing enables businesses to find the most cost-effective suppliers for their critical components, goods, or services. This reduces the overall cost of production, which can help businesses increase their profit margins and competitiveness in the market.
  • Improved quality: Strategic sourcing helps businesses find reliable suppliers that provide high-quality goods or services. This ensures that the final products are of the best quality, reducing the need for returns, replacements, or repairs. As a result, businesses can maintain customer satisfaction and improve their reputation in the market.
  • Risk mitigation: Strategic sourcing involves identifying and evaluating potential suppliers thoroughly. This helps businesses minimize the risk of supply chain disruptions caused by supplier bankruptcy, quality issues, or unforeseen events.
  • Enhanced collaboration: Strategic sourcing facilitates collaboration between businesses and their suppliers. This enables businesses to develop better relationships with suppliers, leading to improved communication, better coordination, and enhanced product development.

Successful examples of strategic sourcing initiatives in supply chain management include Walmart's commitment to sourcing $250 billion in products that support American jobs, as well as Intel's efforts to reduce supply chain risks by diversifying its supplier base. By implementing strategic sourcing, these companies have been able to improve their supply chain efficiency, increase their profits, and stay ahead of their competitors.

Strategic sourcing: Important Factor in Supply Chain Process

Strategic supply chain

How does Strategic sourcing work in your business?

As digitalization transforms procurement and supply chain processes, strategic sourcing is becoming increasingly popular. It involves scrutinizing an organization's purchases to determine what, from whom, at what price and volume they buy. 

The approach of strategic sourcing is different from conventional purchasing because it emphasizes the total cost of ownership and aims to optimize the sourcing process by continuously analyzing the market and developing relationships with suppliers.

Strategic sourcing helps businesses move beyond short-sighted, price-focused procurement processes. Instead, a strategic sourcing plan allows businesses to develop an adaptable system that contributes to long-term business value.

The process starts with analyzing business needs and spending history, creating a strategic plan, and then collecting data and analyzing the market to select a roster of suppliers. After selecting and negotiating with suppliers, strategic sourcing involves continuously measuring performance and improving the process. Typically, large organizations with many suppliers practice strategic sourcing. For those who wish to delegate the function to a specialist, outsourcing providers for strategic sourcing are available.

Strategic sourcing: Important Factor in Supply Chain Process

Strategic supply chain management​

Factors to Consider in Strategic Sourcing

When it comes to strategic sourcing, there are several important factors that businesses need to consider to ensure they select the right suppliers and manage them effectively. These factors include:

  • Cost: This is often the most obvious factor that businesses consider when selecting suppliers, but it's important to consider the total supply chain finance of ownership, not just the initial purchase price. This includes factors such as shipping, taxes, and maintenance costs.
  • Quality: It's important to ensure that the suppliers selected can provide high-quality products or services that meet the business's needs.
  • Reliability: Businesses need to work with suppliers who can consistently meet delivery deadlines and provide the necessary quantity of products or services.
  • Capacity: It's important to ensure that suppliers have the capacity to meet the business's needs, both now and in the future.
  • Financial stability: Businesses need to work with suppliers who are financially stable to ensure that they won't go out of business or be unable to fulfill orders.
  • Ethical and sustainability considerations: Many businesses now place importance on ethical and sustainability factors when selecting suppliers. This can include things like ensuring that suppliers meet environmental and labor standards.

Once suppliers have been selected, it's important to manage the relationships effectively. This can involve developing a supplier scorecard to measure performance, conducting regular audits to ensure compliance, and building strong relationships through effective communication and collaboration.

Strategic sourcing: Important Factor in Supply Chain Process

Factors to Consider in strategic sourcing plan

Challenges and Solutions in Strategic Sourcing

Common challenges in implementing strategic sourcing initiatives include resistance to change, lack of data or inaccurate data, and difficulty in identifying and evaluating potential suppliers. Additionally, managing supplier relationships can be a challenge as well.

Technology can play a significant role in overcoming these challenges. Digital tools can help with data analysis, identifying and evaluating potential suppliers, and managing supplier relationships. For example, using top supply chain management software such as our Viindoo Supply Chain Management for spend analysis can provide accurate and actionable data to guide sourcing decisions. Additionally, supplier management systems can help track performance and identify opportunities for improvement.

To successfully implement strategic sourcing strategies, it is important to have executive buy-in and a clear understanding of business goals and objectives. It is also important to involve all relevant stakeholders in the process, from procurement to finance to operations. Communication and collaboration are key to building strong supplier relationships and achieving supply chain efficiency.

Continuous improvement is also essential. Regularly reviewing and refining sourcing strategies, evaluating supplier performance, and adapting to changes in the market can help maintain a competitive advantage and drive long-term success.

Strategic sourcing: Important Factor in Supply Chain Process

Challenges and Solutions in strategic sourcing process

Through specialized information provided by Viindoo, it is hoped that businesses will gain a better understanding of the term "Strategic Sourcing" and its importance in achieving high business efficiency

Further reading:

  • supply chain responsiveness
  • supply chain forecasting

Strategic sourcing: Important Factor in Supply Chain Process
Viindoo Technology Joint Stock Company, Danny Ha 20 April, 2023

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