Is your supplier network skewed?
Scouting for the right supply vendors and manually storing invoices for your production results in a fiasco between supply chain teams. When the supply distribution network is broken, it poses many challenges, such as budget overheads, raw material quality, logistical inefficiencies, and payment issues.
By implementing strategic sourcing, procurement teams can focus on maximizing value, reducing risk through vendor partnerships, and digitizing the supplier-buyer network.
Analyzing your cost per investment, raw material, demand, and market elasticity for supply change and automating supply chain operations with strategic sourcing software gives you that edge in a clumsy manufacturing market.
Strategic sourcing is an approach to procurement that weighs the overall value delivered through a vendor relationship rather than the simple cost of the product or service a vendor provides. The practice is a part of supply chain management and emphasizes customized solutions and strategic partnerships.
In addition, an emphasis on building meaningful buyer-vendor partnerships promotes collaboration, accountability, and innovation throughout the vendor lifecycle.
Ultimately, this approach achieves the overall goal of strategic sourcing – to reduce costs while improving the efficiency and reliability of the supply chain.
The concept of strategic sourcing isn’t exactly new. It started sometime in the late 1980s or early 1990s. Initially adopted by large companies to quantify and increase vendor return on investment (ROI), today, the practice is widespread among organizations of all sizes.
Regardless of size, businesses now have the ability to collect and evaluate extensive data between competitors. Indeed, while much of the value of strategic sourcing is derived from its in-depth approach, the multitude of factors also makes it difficult to attribute procurement savings directly to a single factor. However, organizations that practice strategic sourcing report several benefits.
Procurement is a groundbreaking strategy for businesses as it improves supply chain and distribution cycle efficiency and optimization. It reduces spending overheads and manpower and improves the product generation lifecycle. Digitizing raw material sourcing and centralizing product operations leads to cost optimization, supply surplus, and production growth.
While strategic sourcing undoubtedly benefits, it’s not a fit for every procurement project. After all, it is an admittedly complicated and occasionally time-consuming process. Some projects don’t require that level of detail. So, it’s important to balance the value of the item being procured and the time investment required to undertake a strategic sourcing project.
Below are the kind of projects where strategic sourcing would really prove advantageous for procurement teams.
Below are some examples of scenarios where strategic sourcing can digitize standard operating cycles within departments and help establish clearer business goals.
The detail and time required for strategic sourcing mean some situations simply won’t fit the process well. Here are a few examples.
Traditional procurement strategy is completely different from strategic sourcing. Where the first term results in a lot of factory waste, the latter aims to reduce that within cost brackets.
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Traditional procurement is described as non-agile inventory control strategy where manufacturers analyzed market demand, goods shortage and future estimation of market orders to place an early supply request. In this method, businesses mostly considered affordable and local suppliers that could deliver raw materials to their nearest manufacturing unit. This strategy had a lot of drawbacks since there were no other tangible ways of procuring material.
In strategic sourcing, procurement is focused on controlling costs and improving company profitability. However, how organizations identify and connect with suppliers and vendors has changed significantly in the last several decades.
Procurement teams focus on controlling procurement costs by finding the vendor offering the lowest price as quickly as possible. This tactical, traditional approach is widely practiced. However, a bad experience with the wrong vendor quickly teaches that the fastest, cheapest solution isn’t always the best fit. Consequently, strategic sourcing recognizes and accounts for factors outside of cost.
While you're building a strategic sourcing process, gather as many insights you can while following these thumb rule principles during vendor collaboration.
Several people and departments will participate in your organization's strategic sourcing efforts. Typically, the procurement department owns and manages the process. Indeed, many organizations have recently created strategic sourcing manager roles to encourage specialization in this area.
As with most procurement projects, several other stakeholders will inevitably participate. For example, sales, marketing, and operations stakeholders would contribute to a CRM procurement project. In addition, legal, finance, and IT departments are often involved. Finally, almost every strategic sourcing project will require executive review and approval.
Adopting strategic sourcing happens one procurement project at a time. Initially, it may feel like a big change, but parts of the process will feel familiar. Indeed, strategic sourcing shares several common principles with traditional procurement listed as under.
Here are 9 critical steps that you can follow to adopt strategic sourcing and focus on building better supply chain and manufacturing.
Whether evaluating an existing vendor relationship or undertaking a brand-new procurement project, you’ll start with research and analysis. This step aims to define your current state, evaluate spends for different product categories and estimate the total procurement lifecycle.
Here is a breakdown of how you can manage spend analysis for your categories and keep a track of supply chain cycles.
If you decide to move forward to engage with a new vendor, you’ll now focus on finding the right partnership. On the other hand, if your research and analysis indicate to improve your current vendor relationship, you'll approach the current vendor.
To ascertain that there is no supply shortage or inelasticity at the later stages of the contract, sourcing the supply and stocking it up prevents such mishaps. Let's look at how to approach a new vendor for procurement needs.
Once you’ve received your RFP responses, it’s time to score your proposals. Start by verifying that each proposal meets your minimum requirements. Then, score any closed-ended questions. Finally, it’s time to engage your stakeholders again to help score the more nuanced responses.
Rather than having a single procurement professional score the proposals, split the scoring into several groups. For instance, the legal team should score responses to questions that deal with terms and conditions. Likewise, your IT team is best equipped to score RFP responses about software integrations and capabilities.
As you engage with individual and team proposal reviewers, provide a scoring guide to ensure everyone is on the same page. Indeed, you’ll find your initial spend analysis documents helpful as you create a scoring rubric.
While strategic sourcing considers many factors, not all are equally important to the business. For example, the vendor’s history of on-time delivery is likely far more important to you than their fax number. Many strategic sourcing teams leverage weighted scoring to properly account for these different priorities.
Weighted scoring assigns each question a point value based on its importance to the business, often a scale from one to five. Then, it weighs the score based on its value to the business. For example, several questions in the capabilities section may each be worth five points, while a question about must-have functionality is worth 20 points. Then, the capabilities section as a whole is worth 40 percent of the entire proposal.
To get the final weighted score, multiply the point total for each section by weight percentage and then add the section scores together to get a total score for each vendor. Admittedly, it sounds complicated. However, when you break it down, a simple weighted scoring calculation may look something like this:
Certainly, it’s best practice to ensure as much objectivity as possible by assigning an individual score for each question. However, some businesses prefer to score and weight each section collectively to save time. As with most procurement practices, your approach will vary based on the project's needs.
Once you’ve scored your proposals, made your comparisons and called customer references, hopefully, you have a clear winner. If not, consider narrowing your vendors to a shortlist, requesting live RFP presentations, or issuing a supplementary RFP.
When you identify the best vendor fit, begin negotiations and contracting. During this step, it’s important to define and put in writing your expectations, strategy for meeting goals, and metrics for evaluating performance. Indeed, make sure your team and the vendor are on the same page regarding timelines, deliverables, and quality control. Proactively establishing this framework will make the next step in the strategic sourcing cycle significantly easier.
Constant communication is key to maximizing the value of your vendor relationships. Far too often, in traditional procurement approaches, the relationship falls into maintenance mode after the contract is signed. Your vendor goes quiet, and the partnership uses a ‘no news is good news’ approach.
Unfortunately, this greatly limits the value the vendor partnership can provide your organization. Strategic sourcing leverages ongoing evaluation through regular performance reviews, continual communication, and market research.
Establish regular check-ins with your vendor contact using the metrics established during negotiations and contracting. Generally, setting quarterly reviews provides enough oversight to address problems while delivering sufficient feedback for continual improvement proactively. Before these reviews, gather feedback from the individual departments and users who regularly interact with the vendor to get a complete picture of the engagement.
Ask what is working well in the partnership. Is the vendor delivering the products and services as expected? How can the process become more efficient? Where is there room for improvement?
Taking a holistic approach that weighs all aspects of the vendor relationship, the strategic sourcing process investigates anything that influences value. The subsequent vendor evaluation process then identifies which of these many considerations is most important.
To align your strategic sourcing workflow with a capable vendor who can locally source inventory, here are some factors you should consider.
If you encounter challenges outside the regular review period, contact your vendor. Don’t just assume that the vendor is aware of and apathetic to the problem. An article from business.org summarizes this:
“Even the most reliable suppliers can make mistakes. Regular performance reviews and direct contact will help you monitor their work, ensure contract fulfillment, and make informed renewal decisions.”
Your partnership should be a two-way street that provides feedback to your vendors and encourages them to do the same. Ideally, transparent communication enables your vendors to become a trusted part of your network.
Ongoing collaboration between your company and your vendors encourages efficiency, identifies roadblocks, and fuels creativity. Unfortunately, vendor communication doesn’t always happen spontaneously. It must be planned for and encouraged.
An article from Entrepreneur puts it like this:
“Not every customer wants a close supplier relationship. If you do, let your suppliers know. They may be waiting for you to initiate a closer partnership to improve quality, reduce defects, and cut costs"
Each vendor in your supply chain has a unique perspective and valuable set of experiences. Indeed, staying in sync with your providers will help you identify trends, anticipate market changes and collaborate to find creative ways to improve efficiency.
Do watch for potential shifts in customer demand that may impact your needs. Even when you have a positive relationship with a current vendor, staying current with what their competitors can offer is important.
Fortunately, creating and maintaining vendor profiles lets you catalog key information and updates from potential suppliers. Staying abreast of the latest developments gives you a backup plan if your vendor fails to meet your needs. In addition, because these profiles contain background information and differentiators, they can help speed up shortlist selection if a new RFP must be issued.
Let’s discuss a few benefits of strategic sourcing and how they’re used today.
Reducing costs is always a top priority for procurement teams. A recent Deloitte survey reports that reducing costs is a top priority for 76 percent of chief procurement officers (CPOs). Accordingly, cost savings are easily the biggest benefit of strategic sourcing.
The entire process centers around the goal of reducing spending. Starting with the first step of the strategic sourcing cycle, procurement professionals identify current costs overdue for optimization. Then, they gather data, explore stakeholder needs, research the current market, and eventually issue a detailed request for proposal (RFP) to evaluate and select the ideal vendor.
Because the selection process is more detailed than a traditional procurement project, both parties are invested in building a mutually beneficial long-term partnership. As such, the relationship is ongoing and collaborative, reducing costs.
At its core, strategic sourcing is just as much about avoiding a bad partnership as finding a good vendor. Again, thanks to the detailed process, you can consider every factor, dig into the vendor’s experience, explore their contingency plans, and set a framework for ongoing communication. The Deloitte CPO survey indicates that 75 percent of CPOs identify improved vendor information sharing as their top risk-management strategy. Luckily, collaboration is a foundational component of strategic sourcing.
With its unique focus on partnership, strategic sourcing allows you to provide your vendors with regular feedback. Likewise, they have a platform to proactively alert you to trends, keep you competitive, and collaborate on innovative initiatives.
It won’t surprise you that neither your procurement department nor the vendor’s proposal team relish opening up a new RFP. The process could last months or even years for complex, high-value sourcing projects. By leveraging strategic sourcing, you can rest assured that you’ve accounted for every important factor, selected the right partner, and are ready to meet your goals together.
Strategic sourcing software is a must for organizations prioritizing procurement savings. Designed to centralize and automate strategic sourcing, these platforms are typically cloud-based and collaborative, enhancing efficiency and effectiveness.
Strategic sourcing software may include features like:
Procurement and supply chain teams use strategic sourcing software to analyze the "production-to-delivery" lifecycle across all spend categories. It aims to assess, control, and strategize parameters to drive production efficiency. These software tools have capabilities of project management, category management, savings tracking, supplier marketplace, and raw material availability, enabling procurement teams to design effective inventory management workflows.
To be included in the strategic sourcing category, software must
*Below are the five leading strategic sourcing systems from G2's Fall 2024 Grid® Report. Some reviews may have been edited for clarity.
SAP Ariba automates purchasing workflows for direct and indirect goods to optimize business efficiency. It helps users to monitor their spending and manage their manufacturing and supply demands smartly to enhance procurement quality for product categories. SAP Ariba is a global marketplace that integrates with CRM and ERP systems to expedite supply chain processes.
"Under one hood, you can manage purchase order to invoice for a job with amazing outsourcing functionalities. Easy approvals and great point of contact between purchaser and vendor. Being an almost daily user, I can say the software grows on you with time."
- SAP Ariba Review, Ansh K.
"At times SAP Ariba shows discomfort in syncing with the other applications though it works fine with the master SAP."
- SAP Ariba Review, Utkarsh A.
Coupa controls your financial and accounting, material planning, procurement, and demand generation processes from a centralized platform. It enables you to operationalize your spend management share data across different stakeholders in the production squad, and monitor different product categories for supply replenishment and vendor sourcing.
"Coupa, really streamlines the process and really takes the pressure off having an employee to maintain the whole system. You only have to locate items once you have linked in the vendor, as once the order is approved, the PO is cut and automatically sent out."
- Coupa Review, Kaylan T.
"The support tickets could be addressed faster and with more involvement - sometimes the answers are vague, not addressing the issue/question submitted."
- Coupa Review, Inese B.
mjPRO is a digital procurement platform that manages supply auctions, maintenance repair and operations (MRO), and project buys with large bills of quantities (BOQ) by integrating payments and purchase order data to build procurement efficiency. It also offers multiple automated RFP templates, purchase order automation, and a supplier base to empower procurement leaders.
"One of the most appealing aspects of mjPRO is its comprehensive suite of features tailored for professionals, offering robust tools for managing projects efficiently, fostering collaboration, and providing insightful analytics, ultimately streamlining workflows and enhancing productivity."
- mjPRO Review, Rishi M.
"Need to understand the portal security with respect to price bid opening. The tender price bid mail was received, and the buyer was informed it was an erroneous message."
- mjPRO Review, Arunava B.
Procol ensures steady operational efficiency of procurement teams by integrating real reporting insights for every category and updating the list of supplier data and services required. This enables teams to reduce costs, maintain quality operations, and gather reliable suppliers.
"Along with the very helpful team, Procol has timely solutions to all our auction requirements. Their customer support is invincible. Most importantly, it is user-friendly."
- Procol Review, Anupama Khaitan Q.
"There should be provision for downloading excel sheet to suppliers in case of multiple items for working out on prices their side."
- Procol Review, Jay S.
Tropic provides e-sourcing capabilities for you and your teams to prevent overspending. It manages your SaaS contracts, shortlists raw materials, and tracks spending management for businesses to optimize their expenses for multiple products and utilize their raw materials more efficiently.
"Tropic is a great tool to organize, manage, and (most importantly) get the best rates on your tech spend. I have used it for over a year and it took us from little management of spend to complete organization. Their negotiation team is quite good and got us all the savings they promised."
- Tropic Review, Brian M.
"The only downside to Tropic is that there is currently a $5K annual spend threshold that has to be met for them to negotiate, which makes sense considering how low the return on that time may be."
- Tropic Review, Dakota C.
Strategic sourcing goes beyond basic, transactional purchases and focuses on the big picture—how to help the organization achieve its goals. It enables you to build permanent vendor partnerships to navigate the rough waters of the supply-inelastic market while improving operational workflows and reducing costs.
Naturally, the specifics of strategic sourcing will change from one organization to the next. But the foundation remains the same. You should start strategic sourcing efforts now, one project at a time.
Explore procure-to-pay software to centralize your spending operations and join a trusted supplier network.
This article was originally published in 2020 and has been updated with new information.
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