What Is Strategic Sourcing - Meaning, Process, Examples

Alok Suman
August 27, 2022

With globalization becoming the buzzword in today's business landscape, the role and importance of effectively sourcing goods and services from suppliers have increased dramatically.

In addition, an increasing number of business and procurement leaders are shifting their focus on reducing costs while enhancing business productivity and delivering outcomes simultaneously.

This is where strategic sourcing comes in.

An evolving business practice, the strategic sourcing approach is completely transforming the way businesses and procurement leaders manage their buyer-supplier relationships.

The approach works primarily by considering the total cost of ownership in terms of the industry trends and ensures to optimize the sourcing procedure by building strategic, long-term, and mutually beneficial relationships with vendors.

Let's explore the process of strategic sourcing in more detail, including what it is, how it works, its advantages, steps involved in the process, examples of strategic sourcing, and more.

What is Strategic Sourcing?

Strategic sourcing is essentially a holistic supply chain management process that aims to help organizations obtain the maximum value from their purchasing decisions.

The goal of strategic sourcing is to secure the best possible total cost, rather than just the lowest purchase price for the goods in question. This is achieved by gathering and organizing all useful data in a way that aligns with the respective business goals and purchasing strategy.

Put simply, strategic sourcing refers to a process designed to purchase the best possible products and services for optimal value.

The highlight of the process is that it is not a one-time effort but a systemic approach that continuously re-evaluates the organization's purchasing activities, including the activities related to the acquisition or direct buying of goods, services, or commodities.

Further, it is a long-term process that is dependent on various factors such as analysis of the market, continuous re-evaluation of the business’s sourcing activities, and aligning the goals and requirements of the business with those of the suppliers.

How Does Strategic Sourcing Work?

An increasing number of businesses today use strategic sourcing to ensure that their procurement processes are more focused on value and price.

Having a detailed and well-thought-of sourcing plan can allow businesses to build a powerful system that contributes to the overall success of the company in the long term. 

Strategic sourcing begins with analyzing the business's unique needs and past spending patterns, brainstorming and outlining a detailed sourcing plan, followed by conducting data collection and market analysis to ensure the guided selection of a roster of professional suppliers.

Once the selection of suppliers and negotiations over the contract is complete, the process also outlines the continuous measuring of vendors/suppliers' performance and improvement of the process. Typically, strategic sourcing is practiced by big organizations with many suppliers who wish to delegate the function to a professional or a specialist.

To this end, the key principles of strategic sourcing are as follows:

  • Making sourcing decisions based on the big-picture value 
  • Considering the total cost of ownership rather than short them costing
  • Preferring long-term partnerships over one-time transactional interactions
  • Prioritizing the key elements of a vendor’s offer
  • Highlighting the actual value of the procurement department.

Main Elements of Strategic Sourcing

Among the key elements of strategic sourcing are:

a. Well-organized: As an ongoing process, strategic sourcing covers various spend categories of goods and services and invites different suppliers to participate in the process.

b. Highly collaborative: Strategic sourcing thrives on collaboration. This is a process where teams are cross-functional, and therefore suppliers get to work and interact with the right set of people who look beyond the price. Besides, the sourcing teams also get the opportunity to connect with department managers, company stakeholders, and suppliers to find better solutions.

c. Systemic: Another important element of strategic sourcing is analytics and its data-driven nature, which makes the process function well with a systemic approach. This continuous improvement process also undergoes regular reviews to incorporate various new tools, strategies, best practices, benchmarking, etc.

The Advantages of Strategic Sourcing

There are several advantages of implementing the strategic sourcing process in your business. Some of these are discussed below:

A. Help Reduce Risks

Strategic sourcing is not just about finding a good supplier but equally about preventing an ineffective collaboration.

The in-depth and detailed process is designed and implemented to allow businesses to look into various aspects of sourcing, assess suppliers' capabilities and experience, and develop a proper plan to build communication.

Post this, they can conduct risk analysis at various levels, including for quality, financial, and supply risks. This helps businesses to come up with a comprehensive strategy to mitigate or minimize risk.

B. Reduce Both Direct and Indirect Costs

Data suggests that cost-cutting is one of the top priorities for more than 80% of procurement managers. A well-defined and properly executed sourcing strategy addresses this concern and helps save costs in several ways.

Right from the start where the procurement team identifies the existing costs overdue for optimization to the stage where they collect data and deeper insights, carry out research, understand shareholders' needs, and then produce a comprehensive request for proposal (RFP) to find and choose the suitable supplier, the process helps save cost at every step.

C. Scope for Continuous Improvement

Another benefit of strategic sourcing is that it is not a one-time event but offers room for continuous assessment, review, and improvement of the processes.

The process involves a targeted approach that enables managers to identify growth areas and make them work to their advantage.

Besides, it also allows various shareholders to make strategic decisions for aspects such as the growth of the business model and capitalizing on market prospects to help them stay competitive.

D. Enhanced Innovation

Since the focus of strategic sourcing is on vendor partnership, it allows organizations to provide them with quick and regular feedback.

Similarly, vendors and suppliers also enjoy a platform to keep up with market trends, remain competitive in this ever-evolving space, and collaborate on several innovative initiatives.

Apart from the above-mentioned benefits of strategic sourcing, Gartner data also suggests that the top reason businesses choose a strategic sourcing plan is to transform the overall sourcing process within the organization.

Businesses that employed strategic sourcing also reported enhanced productivity through automation and higher savings/cost-cutting as some of the key drivers for pursuing this approach.

7-Step Detailed Process of Strategic Sourcing

The many advantages of strategic sourcing encourage more and more businesses to carry out a sourcing strategy as quickly as possible. Here is a 7-step plan that businesses can follow to implement strategic sourcing:

1. Thoroughly Understand Internal Requirements

The first and foremost step of strategic sourcing is to identify key spend areas across the business, followed by sorting them into different categories based on factors such as critical/non-critical, direct/indirect spending, and more.

You begin with detailed profiling of the product category, including the departments involved and the spending patterns. This allows you to implement risk analysis and prioritize the sourcing processes to develop a detailed sourcing strategy.

2. Performing Thorough Research About the Supplier Market

The next step involves analyzing the market and identifying potential new suppliers, both local and global.

Here, you need to check out both existing and future vendors and record their profiles to better understand their past market standing, industrial performance, revenue share, risks involved, etc. 

3. Gathering All Potential Vendor Details

At this stage, businesses will require complete vendor insights to be able to support the data gathered.

These can be collected by requesting vendors for RFPs/RFQs/RFIs after accurately defining their business needs so that vendors can provide accurate and relevant insights. 

4. Developing a Robust Sourcing Strategy

Once the vendor details are available, businesses can decide on the type of strategic sourcing process that will work best for them.

This should be done keeping in mind all the objectives and goals of the organization and the sourcing strategy that has a track record of being successful within their respective industry.

Developing this kind of strategic sourcing strategy will give a complete picture of the specifications of the services/goods and expected delivery time, along with a breakdown of the expenses involved between the business and the vendor.

5. Selecting the Sourcing Process

This stage involves the selection of the sourcing process, and the most common way here to strategically source supplies is through a Request for Proposal (RFP).

RFP is essentially a document prepared by procurement teams interested in sourcing goods from vendors for a project. The document may include a range of things, including details of product/service specifications, pricing breakdowns, and legal/financial terms and conditions.

In some cases, RFPs are preceded by a Request for Information (RFI), a document businesses use to narrow down their choice of potential suppliers to just a few suitable options.

6. Negotiation with Suppliers

This stage should have the number of potential suppliers narrowed down to the ones who can best fit the needs and requirements of your organization.

Further, businesses should interview suppliers and vendors for more information to assess their stability before making the final choice.

7. Implementation of the Sourcing Strategy

Once the supplier selection is done, the business needs to build communication with its sources to better negotiate the terms of a supply contract.

It is important to remember that more complex products need additional communication, meaning that vendors/suppliers should be integrated into business meetings and discussions regularly so that they can best fulfill the organization's unique needs.

The business needs to ensure that suppliers are kept fully updated on changes and understand the overall scope of the contract well.

Tracking and Reporting the Results 

Measuring the performance of different departments over time is another crucial step in strategic sourcing. Every stakeholder, including the suppliers, sales teams, and production departments, should be analyzed thoroughly and improved upon if possible.

Identifying and fixing such minor issues allows you to achieve your goals more readily, thus enhancing the chances of product success.

Examples of Strategic Sourcing

Businesses today use a range of sourcing strategies to procure goods during the entire sourcing process.

To ensure the success of strategic sourcing within an organization, the organization needs to maintain clear visibility over their spending for vendors, supplies, and relationships with suppliers and allocate organization needs.

Here are some examples of strategic sourcing that you can find in the business world regularly:

  • Finding a vendor or supplier who can meet deadlines without any kind of delays or issues
  • Consolidating all purchases to one single vendor to avoid heavy delivery fees or being charged varied prices for goods 
  • Finding a supplier or vendor who can deliver multiple products/deliveries at the same time
  • Building strong and transparent business relationships with vendors so that they can assist you in times of need or during an emergency, such as by making an urgent and timely last-minute delivery
  • Making thorough considerations for various organizational objectives, specific client needs, and the key goal of delivering quality items to clients
  • Making various internal departments aware of aspects such as spending habits and purchasing rules of other departments in the organization.

A well-defined strategic sourcing plan allows businesses to achieve different organizational goals that contribute to overall success.

Some examples of these include:

  • Competitive differentiation

The process gives you a competitive edge by using suppliers with credibility in the market and emphasizing them through targeted marketing efforts.

  • Meeting compliance

Strategic sourcing ensures that your business meets all compliance and regulatory guidelines by picking certified components.

  • Managing environmental conditions 

The process ensures that the business manages environmental conditions and logistics by sourcing goods or services from easily available locations.

  • Minimizing risk

Strategic sourcing minimizes risk by engaging secondary and alternative vendors or suppliers and closely monitoring any sort of changes in factors such as quality, shipping, product availability, taxes, and regulations.

Understanding the Difference Between Strategic Sourcing and Procurement

Although strategic sourcing and procurement are related to an organization's supply chain, they are not the same and must be implemented differently to ensure success.

The key differences between the two are listed below:

Strategic Sourcing Procurement
Purpose

Value creation

Strategic sourcing aims to achieve cost reductions through quality improvements. Enterprises leverage the process to get additional value from their vendors and suppliers. They have the choice to pick vendors that offer both technologies and materials that enable them to either improve their products or develop new products. This not only gives the company a distinct competitive advantage but also adds value to the relationship.

Servicing internal customers and supporting other functions


The aim of procurement managers is primarily to ensure that vendors or suppliers meet required quality standards.
Objective TCO (Total cost of ownership) and best possible value Lowest possible cost
Approach

Preventive

Strategic sourcing primarily emphasizes the various activities leading up to the actual purchase of goods or services, including analysis of business needs and the marketplace at large.

Reactive

The focus of procurement is largely on controlling costs and enhancing the company's profitability.
Collaboration Strategic sourcing works in a way that helps in building collaborative relationships between customers and suppliers. During the process, customers offer their suppliers/vendors information on both future production plans and supply requirements, enabling them to thoroughly plan and work on their own production levels. Procurement, on the contrary, works in a way where customers would have to either cancel their orders or find new vendors/suppliers with additional capacity to be able to adjust and meet changes in market demands.
Cost In strategic sourcing, managers begin the task by assessing the total cost of doing business with a supplier. Apart from the price, they also consider other factors such as the costs of delivery, quality control, purchasing administration, and inventory with the aim of reducing the overall cost of obtaining supplies. In procurement, managers look at price as one of the key factors.

The Bottom Line

In a nutshell, strategic sourcing is the process of gathering data, collaborating with the best vendors, and ensuring the value and efficiency of an ongoing procurement.

In most cases, it goes beyond the basic, transactional purchases and shifts the focus on the bigger objective of how to help achieve the larger goals of the organization. 

Likewise, vendor partnerships as a result of strategic sourcing help organizations navigate several challenges as they arise while improving outcomes and mitigating rising costs at the same time. 

Although the details and specifics of strategic sourcing vary from one organization to the next, the basics, goals, and foundation of the process remain the same. Begin your strategic sourcing efforts with your project today to get the best out of the process.