How To Optimize Your Spend With a Strategic Sourcing Process
By Hugo Britt | June 1, 2021
At its core, a strategic sourcing process in procurement is about thinking ahead and being proactive when it comes to finding and choosing suppliers and analyzing your organization’s current and future spending habits.
In this article we’ll show you how to get strategic through alignment with the overall business strategy, centralization of data, spend categorization, supplier segmentation, relationship-building, and more.
Building a strategic sourcing process
“Tactical” sourcing refers to the many low-value, low-risk purchases that take place across your organization every day. Tactical buying is short-term, transactional, and usually reactive.
There is good news, though. Clever sourcing heroes are able to make the shift from tactical spending to strategic sourcing by implementing a few different approaches to procurement.
Here are five ways to set up a strategic sourcing process within your own organization.
1. Align procurement strategy with overall business strategy
Any strategy that is created in procurement must align with the overall business strategy. If you fail to do so, procurement risks barking up the wrong tree. For example, procurement may be focused on cost savings while the wider business is more interested in risk reduction.
Making sure procurement is aligned – and stays aligned – with the business is hard work and something that should be an ongoing task. Procurement must keep up on the ever-changing priorities among business stakeholders and move along with them as the business evolves over time.
2. Gain visibility with centralized spend data
Trying to be strategic without spend data visibility is like trying to play chess while blindfolded.
Create a single source of truth: a centralized depository for all procurement data that will enable spend analysis, reports, dashboards, risk reduction, and cost savings.
3. Categorize your spend
Creating a strategic sourcing process can involve several levels. There’s the overall business strategy, followed by the whole-of-procurement strategy. Below this are category strategies (such as Travel), then strategies for sub-categories such as hotels and flights.
Importantly, the strategies for spend categories and sub-categories should be aligned with the higher-level procurement and enterprise-level strategies.
Spend categorization will enable you to spot trends, find savings opportunities (such as supplier consolidation), and to create a targeted strategy for different areas of spend with unique requirements.
Finally, spend categorization will help you allocate time and resources to where they are most needed. For example, you might want to put your best talent on a strategically vital (costly and risky) category such as IT spend, while something like office stationery can be assigned to a junior team member, automated, or outsourced to a GPO. Determine strategically important categories by analyzing not only the costs, but the risks involved.
4. Segment your suppliers
In an ideal world, procurement professionals would treat every supplier relationship strategically. But this simply isn’t feasible in an organization with hundreds or thousands of suppliers in the spend tail.
Use the 80/20 rule to determine your strategic suppliers. This means segmenting the top 20% of suppliers that represent 80% of your total spend. Once you have done this, put a Supplier Relationship Management (SRM) program in place to nurture the relationship, reduce risk, and seek out additional value through innovation and partnership opportunities.
5. Outsource Tactical Spend
Strategic sourcing takes a lot of time, effort, and attention, which is why procurement professionals can’t afford to be distracted by tactical buying. One option is to outsource tactical spend to a group purchasing organization (GPO) to save time and unlock collective buying power on tail spend categories such as office supplies and parcel shipping.