Benefits of Strategic Sourcing and Best Practices
By Eric Edwards | November 1, 2022
For decades, procurement professionals saw as much daylight as the basement-dwelling character Milton Waddams in Office Space. These “back-office” workers were seen primarily as clerical support, entering and tracking purchase orders and researching suppliers.
And, like Milton, management assumed procurement people were happily left alone in dank office spaces, content having their red staplers by their side.
Today, however, the pandemic has shown procurement to be more than simply purchasing goods and services. Procurement professionals are abandoning traditional sourcing practices in favor of more responsive strategies to supply chain management in pursuit of more significant cost savings and organizational efficiencies.
In doing so, procurement professionals are ascending the corporate stairs to have a more visible seat in their business’s strategic sourcing. And, like Milton, their red staplers are coming with them.
Let’s look at what strategic sourcing is, its best practices, and five key benefits:
What is the difference between strategic sourcing and procurement?
Strategic sourcing is a holistic approach to developing supply channels that consider all activities within a procurement cycle to secure the best goods and services for the business. Also called supply chain management, this big-picture perspective focuses on more “upstream processes” such as sending out Requests for Proposals (RFPs), bid evaluation and selection, and contract negotiations.
Strategic sourcing must tie to enterprise objectives by embracing the spend analysis of the business’s needs and the supplier’s unique capabilities as well, thereby realizing a possible longer-term competitive advantage.
Strategic sourcing best practices
Here are four best practices for strategic sourcing:
1. Thinking and playing the long game
You’ve probably heard prudent financial investing in the stock market should be regarded as a long-term investment. Strategic sourcing is similar. Investing in procurement technology, team training, and supplier relationship management will have greater rewards than short-term selections based on the lowest price or aggressive supplier negotiations.
For example, according to Supply Chain Management Review, supply chain disruptions and market conditions have sent prices higher for the 2022 Holiday season months before consumers typically start purchasing. In the same article, fast shipping by large retail outlets (1 or 2 days) has forced the same consumer expectations on smaller businesses (65%).
2. Looking beyond cost
The initial cost of goods is important, but strategic sourcing takes several other factors into account, which can include:
- Total Cost of Ownership
- Security of supply
- Social responsibility
Total Cost of Ownership (TCO) shows how strategic sourcing goes beyond an item’s short-term purchasing pricing. TCO takes into account the long-term costs and expenses incurred during a product’s useful life and eventual disposal.
For most businesses, the cost to purchase an item is separate on a financial statement from the cost to operate and maintain the item. If Item A initially costs 25% more than an alternative Item B but costs 50% less to operate and maintain, Item A is a better investment using the TCO model.
3. Using data to make decisions
Strategic sourcing places much more emphasis on collecting and analyzing data and requires considerable time to research a “bigger picture” way of thinking. However, as the pandemic showed, procurement teams who had done their homework quickly adapted to the rapid change in market conditions by knowing their procurement alternatives.
4. Business goal & strategy alignment
Strategic sourcing should exist outside of only the procurement department and link to the overall business strategy. As mentioned in a previous article, Una recommends creating an extra column in your key performance indicator (KPI) report that illustrates how each procurement goal ties to a company goal.
Again, as the pandemic showed, business strategies can shift quickly. Procurement must have good communication with the C-Suite to adapt to changes in strategic goals. Conduct regular alignment checks (at least once a quarter) to ensure procurement stays aligned with corporate strategy.
Main benefits of strategic sourcing
As the four best practices of strategic sources illustrate above, strategic sourcing expands the procurement division’s influence away from the traditional clerical, back-office function into a more strategic role.
Now, let’s look at the five main benefits of strategic sourcing:
1. Increased cost savings
As mentioned, strategic sourcing considers the total cost of ownership (TCO), which leads to more significant long-term cost savings for your organization. These savings have a direct, positive impact on financial profitability, as opposed to sales revenue, which is reduced by commissions, overhead costs and costs of gold sold, among other expenditures.
2. Increased efficiency & innovation
Strategic sourcing can pre-qualify suppliers for future initiatives, which shortens sourcing timelines. In addition, fostering collaborative supplier relationships will provide opportunities to innovate.
Also, by removing manual activities in favor of automation, and introducing sourcing standards across the organization, an organization gains a systematic approach to selecting the optimal supplier.
3. Market & supplier intelligence
Reviewing and analyzing the company’s procurement through market research informs strategic business decisions. It also helps procurement teams identify the most significant risk factors. This may lead procurement teams to diversify their suppliers’ locations and implement contingency strategies.
4. Improved compliance
Strategic sourcing allows procurement to find suppliers whose values and practices align with their company’s goals. Compliance is necessary, not strategic. But, strategic sourcing extends to ensuring suppliers meet compliance and regulatory guidelines to help protect your organization’s brand equity.
5. Stronger relationships with suppliers
Working closely with suppliers should develop nurturing, meaningful relationships with both parties looking out for each other. This is a more desirable (and profitable) state than is customary with the traditional, transactional procurement model. Stronger relationships with suppliers usually pave the way for more favorable contractual terms.
Using a GPO to help with strategic sourcing
Not every company or procurement department has the time and workforce to conduct strategic sourcing. If so, a group purchasing organization (GPO) can be an integral business partner for sourcing suppliers by leveraging buying power to drive down costs from the supply base in exchange for increased volume.
A GPO, such as Una, offers tangible benefits and the expertise to leverage a strategic sourcing model. A GPO can implement strategic sourcing, facilitate strong relationships with suppliers, identify potential improvements, and provide justification for changes to improve efficiency throughout the supply chain process. Lastly, a GPO has an increased understanding of supplier markets and can help you identify potential risk factors to develop sourcing plans that should mitigate them.
Now, can a GPO negotiate for a procurement department to leave its dark location in the back office? Not likely. But it can work its strategic sourcing magic on getting the best deal on Swingline red staplers.
Ready to get strategic? Contact the Una team to learn more.
Get in Touch
Do you have questions about group purchasing? Wondering how a group purchasing organization works to save you money, time, and effort?
Una’s team of Sourcing Advisors is here to help. Contact us to learn more.