What is Sourcing Strategy and Why is it Important?

It takes data collection, analysis, and consistent objective decision-making to implement strategic sourcing. Organizations that manage to do so will see a significant rise in the ROI of procurement efforts. Here is one example of strategic sourcing efforts bearing fruit.

Snack Food Manufacturer

An American snack manufacturer was operating without formal agreements with its suppliers. Its supply chain was heavily affected by its suppliers’ ability to react to short-term demand changes. The company also did not have a specific method for determining prices nor did they collect data for analytics to see how pricing affects sales.

In their turnaround strategy, they established a way to gather metrics on procurement spending. A sourcing team was put in place for all the company’s needs. They transitioned to new suppliers with written contracts in place. They leveraged their total procurement spend to help them negotiate better contract terms with suppliers. They saved 37% on procurement spending and put place multi-year contracts in place with important suppliers.

Why should your organization have a strategic sourcing plan?

Cost Savings

An organization can make significant savings by planning its sourcing efforts better. An audit of procurement spending can reveal opportunities to buy certain items in seasons when prices are lower. It might also reveal bulk buying opportunities that can translate into savings. Strategic sourcing involves developing criteria for choosing suppliers to work with and onboarding them afresh. One criterion has to be competitive prices. These are looked at from the beginning and throughout the relationship with a supplier in order to monitor trends in their prices.

Savings made through strategic sourcing can be reinvested in improving the inventory position of your company. You could also invest in procurement software to automate certain strategic sourcing tasks such as the aggregation of supplier data.

Alignment of Sourcing with Other Organizational Objectives

Strategic sourcing helps an organization match its procurement efforts with overall organizational goals. For instance, if the goal is to become a low-cost manufacturer of a product, the sourcing will be geared towards lowering procurement costs. This can be done by going to the cheapest markets for raw materials, finding opportunities to minimize transportation costs, and outsourcing certain aspects of the production process if it’s cheaper to do so.

Having congruent processes increases the overall level of efficiency within a company.

Ideal Suppliers

Part of the sourcing strategy is developing partnerships with the right suppliers. Suppliers play a key part in strengthening a company’s supply chain. Manufacturing companies need suppliers with core capabilities to deliver items in large volumes, very specific specifications, and at the right price. In fact, a company sometimes needs to help suppliers develop such core capabilities. This can be done through lending them technology, training their staff on certain best practices, or giving them large enough contracts to help them finance and acquire key technology.

Companies also need to ensure that suppliers are a good cultural fit. A cultural misfit may lead to strained working relationships, which can jeopardize operations.

Risk Management

Sourcing strategy also involves analyzing the risks that a company faces in its supply chain efforts. One such risk is the degree of flexibility of important suppliers. How quickly can they change product specifications when called upon? How well can suppliers deal with shocks in their own supply chains? Other important questions include the amount of geopolitical risk that comes with sourcing from a particular region. All these factors must be taken into consideration when settling on a list of suppliers and the amount of business to do with each. The goal is to leave the company reasonably guarded against all those risks.

The Role Automation is Playing in Sourcing Strategy

Globally, procurement efforts have massively embraced technology to help improve efficiency. A major reason for this has been the enhanced efforts by businesses to collect data on their spending. This has enabled them to monitor supplier performance, risk, and spending on various categories.  In fact, we must take all these factors, categorization of procurement spending into categories has helped organizations manage their spending better by treating each category independently and developing nuanced approaches for each. For instance, they may opt to use one supplier for one category and several others for another depending on the benefits.

Challenges to Expect in Sourcing Strategy Efforts

Planning is crucial for the success of any strategic sourcing process. However, there are often unprecedented scenarios that put this in jeopardy. For instance, forecasted demand is based on past demand, market growth rates, new entrants into the market, and other factors. If the factors affecting actual demand change, then the forecasted demand becomes inaccurate. This can lead to losses from overstocking or lost opportunities because of understocking. An organization has to build very strong forecasting methods to anchor its strategic sourcing efforts.

Finding the Right Software

If your company is seeking to implement a strategic sourcing strategy, you should invest in robust technology to help in collecting data, analytics, and reporting to aid decision-making. At ProcurePort, we develop custom software to help businesses smooth out their strategic sourcing process. Reach out to us for advice on the right software to invest in.