Strategic Sourcing Defined

Strategic sourcing is an essential methodology for any department working in the source-to-contract process. It gives businesses the insight to understand how they’re going to obtain essential business supplies and which supplier is best for their business.

Did you know, through strategic sourcing, businesses have reported having improved savings of up to 61%?

In this guide, DeepStream explains exactly what strategic sourcing is, the seven essential steps to developing an effective strategy, and how the process can help your business.

What is Strategic Sourcing?

Strategic sourcing is an approach to supply chain management that involves planning out the process of procurement from suppliers to achieve the most cost-effective solution.

The process involves data collection, market research, and supplier negotiation – with the aim of reducing costs by streamlining the purchasing process. This may include improving speed, manufacturing capacity, price per unit and more.

Imagine a medium-sized, national audio amplifier distributor (for this example, we’ll call the business ‘Amped Up’).

For ‘Amped Up’, the strategic sourcing process involves identifying which materials are needed to put an amp together (bolts/cases/electronic components) and which suppliers are offering the best deal. As well as any current trends that might affect purchasing direction within the industry.

Strategic sourcing is useful as it allows a company to plan an outline of what they want to achieve within a particular process of procurement.

It identifies the best suppliers to target and creates a sourcing strategy that responds to data analytics, which results in several net benefits…

Benefits of Strategic Sourcing

Strategic sourcing can deliver key benefits to your procurement process compared with traditional sourcing, including:

Reduce Costs – When a company knows which suppliers to target and how much they can save on costs in comparison to other suppliers, the total cost of procurement is reduced. Likewise, quality goods identified through strategic sourcing methods will last longer and be less likely to be damaged in transit, further reducing indirect costs.

Boost Long-Term Supplier Relationships – Sourcing also includes establishing long-term working relationships with suppliers – helping both businesses grow and improve their offering through cost and time savings, compared with constantly finding new suppliers.

Increase Efficiency – Through the increase of automated and standardised sourcing strategies, it’s easier than ever to keep track of sourcing data. All spreadsheets, supplier details and emails can be tracked and stored in one place. Having access to this information at a click of a button boosts efficiency and accuracy in decision-making.

Reduce Risks – Firstly, market research helps businesses avoid bad suppliers by developing a framework for reviewing potential partners – for example, considering their communication and collaboration credentials and contingency plans. Strategic sourcing also allows businesses to avoid risks associated with data protection regulations by identifying suppliers with the credentials to meet and maintain compliance standards.

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Challenges of Strategic Sourcing

When managing a sourcing strategy, companies can run into several challenges. Here’s how to plan and mitigate those challenges:

Accurate Stock Quantity – Both overbuying and underbuying stock can result in challenges, from going over budget to severe supply chain issues as orders aren’t being completed within an appropriate time frame. Accurate stock quantity is therefore essential for efficient, cost-effective trade. One way of mitigating stock quantity risk is through accurate demand forecast management – tracking stock requirements in a measurable format and accounting for potential industry booms.

Negotiating Cost – The amount a business pays for goods and services can be make or break. However, cost negotiation can be mitigated through a few effective means. First, having a comprehensive RFx process ensures the business maintains an advantage in contract negotiations. Keeping an accurate record of every supplier, bid and what the costs are is another essential method in mitigating cost challenges.

Supplier Management – Managing information on the performance of each supplier can be a tricky task. The best way to mitigate the risk of lost or outdated information is by using a digital tracking tool that logs the entire RFx process.

Making Accurate Purchases – During the sourcing process, businesses become flooded with information – including location, supplier, cost and market trend data. Filtering out necessary from unnecessary information is essential when making accurate decisions about commodity purchasing. One way to do so is by working with a sourcing team to identify which information will directly inform your procurement of stock.

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The Difference Between Strategic Sourcing and Normal Sourcing

Sourcing traditionally involved finding a supplier based on simplistic criteria like price, location and quality of goods – prioritising convenience and referrals.

Strategic sourcing takes this process a step further by considering a range of additional data and insights – including factors such as outsourcing models, contract negotiations and supplier development – with the aim of increasing profitability through working with the right suppliers to get the right products at the right price.

The focus is on achieving wider cost savings through working with the right supplier, rather than simply opting for the best price-per-unit.

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The Process of Strategic Sourcing

Now we’ve covered what strategic sourcing is and its key benefits, it’s time to look at how it works in practice. The process happens in seven steps, as laid out below.

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Step 1: Create a Commodity Profile

A commodity profile involves identifying the products required by the company and creating a profile for them. This should include the type of commodity, quantities, sizes and general price the company is looking to purchase for and any additional specification details.

In our example, ‘Amped Up’ is looking for amp cases, so creates a commodity profile. Based on production data, ‘Amped Up’ will require around 50 cases per month, at a medium size, with a price of roughly £80 a case, but the cases themselves need to have the surface area for additional wall mounts.

Step 2: Analyse the Market

Now the business knows which products it needs to acquire and in which quantity, it’s time to analyse the market of potential suppliers capable of meeting these requirements.

Continuing the ‘Amped Up’ example, the business has determined the product parameters, so now it is ready to examine the market and judge how realistic the commodity profile is and how many suppliers can meet the criteria. This tells the buyer how powerful their position is in the prospective market.

Step 3: Select a Strategy

Now that we have a better understanding of the market, it’s time to select a sourcing strategy. Create a baseline for suppliers and benchmark each one against the minimum requirements to further thin the herd – this may include price, capacity and speed of delivery, for example.

For ‘Amped Up’, that choice has been narrowed down to a pool of 10 potential suppliers, all of whom provide cases at the right quantity, quality and price. But only eight provide those cases in the particular wide-surfaced, wall-mounted style that ‘Amped Up’ requires.

Step 4: Request for Proposal

With a pool of prospective suppliers in the pipeline, it’s time to issue bids. These are usually solicited in the form of ‘requests for proposals’ (RFPs) – documents written by a company looking to purchase a product or service.

The document outlines the required product specifications, pricing breakdowns and legal and financial contracts and criteria for supplier evaluation.

‘AmpedUp’ decides to submit an RFP to eight prospective suppliers – including the number of amp cases and specific product specifications.

It also includes a breakdown of what ‘Amped Up’ is willing to pay for those cases, along with any legal or financial terms set, and criteria of what it is looking for from its suppliers – such as communication credentials and the capacity to produce the cases.

The benefit of RFPs is that they put businesses in the driving seat. They set terms and specify their needs, and it’s up to the supplier to make a bid for the proposal.

Find out more about the strategic procurement process in our dedicated guide.

‍Step 5: Negotiate with Suppliers

Once suppliers have responded to the RFP, it’s time to vet them through a process of negotiation.

Most negotiation processes include additional interviews with suppliers to get a clearer understanding of what they can provide and at what cost. Through a series of RFPs, the outsourcing business has the upper hand in these negotiations.

‘AmpedUp’ receives six RFPs and decides to start an interview process for each of these candidates. It re-iterates the service requirements and asks the additional question of how these suppliers stand out from the rest. Four out of the six candidates provide a favourable response.

Not only does this further narrow the scope of suppliers but it also allows the team to assess how well each supplier responds to feedback, as well as their communication and collaboration credentials.

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Step 6: Pick Suppliers

Interviewing suppliers should reveal those that are right for the business’ procurement needs. It’s best to inform the successful suppliers as soon as possible and offer constructive feedback to suppliers who don’t make the cut.

‘AmpedUp’ accepts the bids of three suppliers who agree to split case production. These three suppliers are regularly updated with specifications to make sure their amps are all the same quality, type and standard.

Step 7: Measure Performance Over Time

Businesses must then regularly review supplier performance to make sure they remain the optimal partner and identify and address any challenges at the earliest opportunity.

‘AmpedUp’ monitors its suppliers’ progress with each monthly intake and identifies that one supplier is falling behind with the number of cases supplied in the first few months of the year. This is raised with the supplier, which subsequently tackles an internal time-management issue to remedy the delay and disruption. Supplier performance meets baseline again.

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How Can Technology Support Strategic Sourcing Practices

Technology is a key tool in the arsenal of any skilled strategic sourcing team. Two key technologies can effectively help the strategic sourcing process:

Contract Management

Contract management software provides an intuitive and accessible platform for compiling data on negotiations and renewals of business contracts.

Compiling all this data increases a business’ ability to collaborate, access crucial data to inform sourcing decisions and coordinate effective sourcing strategies.

For example,‘Amped Up’ uses contract management software as a medium to negotiate contracts with suppliers and keep a track of these agreements. This allows for frequent and effortless reference and allows both the strategic sourcing team and supplier to be on the same page regarding contract terms.

RFx

RFx software also provides the power to boost efficiency when it comes to sourcing and procurement processes – tracking and managing the entire source-to-contract process, including RFPs and supplier data.

With a sufficiently adept RFx client and constant monitoring of the flow of data, businesses can plan strategies that cut costs, increase profit and drive efficiency.

‘Amped Up’ implements an RFx platform to help manage and monitor the performance of its three suppliers. Each time a supplier falls behind or finishes stock orders faster than expected, ‘Amped Up’ is informed in real-time and can adjust its sourcing strategy accordingly.

With DeepStream’s RFx software, you can keep a clear track of essential supplier data that helps businesses analyse the market and formulate an informed sourcing strategy.

Frequently Asked Questions (FAQ)

What are the 4 strategic areas of sourcing?

The four areas of strategic sourcing are analysis of expenditures, sourcing data and supplier information, management of supplier contracts and management of suppliers themselves.

Is sourcing the same as procurement?

Sourcing and procurement are two separate activities within the source-to-contract process.While procurement refers to the active purchasing of goods or services, sourcing involves the planning and strategic data analysis surrounding it.

Strategic Sourcing with DeepStream

DeepStream transforms the strategic sourcing process by allowing businesses to manage the entire source-to-contract process in a single intuitive platform.

From RFx to contract management, reporting and supplier communications – keep all actionable data in a single tool and enjoy data-led, cost-effective sourcing processes that free up your team to focus on high-value tasks.

To find out more about how our tools can boost your business, chat with our team today.

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