Estimated reading time: 5 minutes
• Strategic sourcing in any organization means the development of a methodology of gathering and using the information in a manner that leverages the purchasing power of an organization to maximize value in procurement.
• What this means is that strategic sourcing needs to be well thought out. It needs to be in sync with corporate goals. If an organization is seeking to brand itself around cost leadership, the strategic sourcing function has to support that goal.
Strategic sourcing makes a lot of sense in organizations that make large purchases. A big procurement budget provides opportunities to create value through partnerships, negotiations, concessions, and other arrangements between different organizations.
As a leader, certain skills will come in handy in helping maximize the importance of your strategic sourcing effort. You’ll need strong communication and influencing skills in order to convince people around you to trust your judgment on strategy. Strong negotiation skills come in handy when dealing with third parties. Relationship management is important in helping nurture mutually agreeable long-term working arrangements. Besides soft skills, strategic sourcing requires hard skills such as analytical thinking and being able to take in loads of information within a short time.
Here are several ways these strategic skills might come in handy.
The goal and importance of any strategic sourcing effort are primarily to keep the company’s procurement costs within a reasonable level and ensure maximum value for money. An important skill in cost management is negotiation. However, you should be able to reveal other unseen opportunities that might lead to lower costs for the company. For instance, if you can negotiate for lower shipping costs through a particular company, it may warrant sourcing from locations where that company ships. Consolidating your purchases could also lower your overall logistical costs. Working with fewer suppliers might also precipitate discount opportunities. Analytical thinking involves taking in all this information and using available decision-aid tools to come up with an optimal solution.
Successful relationship management is a product of parties finding mutually beneficial contracts. As a procurement practitioner, you should be able to identify the interests of the other party and find ways to tie them with your own company’s interests. For instance, a young company prioritizes the stability of its business. If you give them longer contracts, they will appreciate stability and perhaps offer competitive prices in return. With such a company, you might be their most important company, and they will always prioritize your orders.
As the relationship grows, other valuable opportunities might arise including doing joint ventures or outsourcing more functions to that vendor based on their core capabilities. For instance, if a company produces merchandise for branding, you might decide to do branding at their facilities before items are shipped.
Efficiency in Operations
Strategic sourcing requires the development of a standardized approach to deciding which vendors to work with. The advantage therein is that your company will find ways to make the process more efficient. For instance, you will invest in tools to digitize the sourcing process. For instance, you can have a portal where companies that want to bid on future contracts can create a profile and store their catalog. They should be able to update their catalog as it changes, as well as their licenses in highly regulated industries.
Strategic sourcing tools help you compare suppliers side-by-side, track communication with them and make the process more objective. When you do it manually, it’s easy to miss out on opportunities because someone lost a business card, did not return a call, or simply can’t recall something from memory. It’s also possible to score prospective suppliers using several metrics and settle on the one that ticks the most boxes.
Mitigating Supplier Risk
As your work longer in procurement, you appreciate the ability to recognize and mitigate risk. What might look like a great proposition for a company in terms of costs might cause more damage due to the amount of risk borne. Working with each supplier carries its own amount of risk because you are dependent on their ability to deliver as agreed. However, certain factors are beyond their control, such as their disruption of the supply of a key ingredient. It’s up to the procurement team to ensure the company covers itself effectively.
For instance, when sourcing from volatile markets, in terms of geopolitical risk, it’s crucial to put in place contingency plans in case supply is disrupted. You’d also ensure that items being shipped from such locations are properly insured against all incumbent risks. Another risk may be that the supplier may not have the capacity to deliver in the required volume or quality. Part of risk mitigation is investigating and verifying their credentials as well as capacity. The importance of strategic sourcing skills is being able to work with other parties, such as consultants, to find out information about vendors in international markets.
Strategic sourcing procedures help to ensure that you adhere to all set statutory laws applicable to your industry. For instance, you’ll only work with vendors who have the proper licenses to produce what they are selling. You should also look to the future and see whether any impediments might interfere with your supply chain. For instance, if there is political strife between your country and another, you might not want to build your business model around sourcing from that country.
Complimenting Your Strategic Sourcing Skills
Having knowledge of the tools that can streamline your strategic sourcing is just as important as other soft and technical skills. If you are in the market for a strategic sourcing technology solution, reach out to ProcurePort. We are the world’s leading provider of e-procurement solutions. Book a free consultation today.