The What, Why, and How of Strategic Sourcing

Every business relies to a lesser or greater degree on making the most of its position in the supply chain. The strategic sourcing process is one that looks at the question of procurement in a holistic manner, rather than simply relying on the ability of employees to secure the best prices for items in the supply chain on a given day.

Strategic sourcing in supply chain management is an approach to sourcing that takes an overview of the process and creates a formal, defines a framework for such things as:

• Gathering information on suppliers and materials
• Building relationships with suppliers
• Analysing the data on the products and materials being purchased
• Defining the total cost of ownership
• What is the total cost of ownership?
The total cost of ownership (TCO) refers to the absolute cost of the goods being procured rather than the simple headline price per item. You may, for example, be able to procure a product for $4 per item rather than the average market price of $6 per item. Without utilising a strategic procurement process it would seem obvious that this is the supplier you should be dealing with. If it turns out, however, that there are delays in delivering the goods needed, and that numerous items are faulty and need to be returned and replaced, then the TCO will ultimately be much higher than the initial $4 and, in fact, higher than $6 due to the disruption being caused.

A strategic supply chain strategy is one that looks far beyond simply the lowest price for items being procured and analyses factors such as how robust and reliable the supply chain is, how flexible the suppliers will be when responding to unexpected demand, and the overall quality of the goods being supplied. The other key aspect of adopting strategic sourcing solutions is that it is an approach that aligns the procurement processes of your business with the wider business plan. All too often, the procurement team is allowed to work in a silo, receiving requests from other departments, sourcing the cheapest solution at any given time, and then making the purchase, before moving on to the next request. A strategic approach, on the other hand, aligns procurement to the wider business objectives of an organisation. Your wider business approach may see quality prioritised over value, for example, and this would be reflected in a strategic sourcing approach that targets high-quality suppliers rather than those simply offering the best price. This will involve a much more in-depth analysis of suppliers than is normally the case, looking at the core capabilities offered by each potential supplier and their long-term business plans. While this may take more time initially – and therefore increase initial costs – it will more than pay for itself in the future, through the creation of strong working partnerships with suppliers whose business profile strongly aligns with your own. The digital revolution has made the switch to strategic sourcing solutions simpler than ever, in as much as every single purchase now produces a trail of data that details every aspect of that purchase. By gathering and analysing this data your business will be able to develop a strategic sourcing process in which each stage is maximised for efficiency and effectiveness. As stated earlier, this analysis can be combined with data from the wider business to ensure that the procurement processes being adopted not only deliver on their own terms – the right goods sourced at the right time – but also in terms of your wider business aims.

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