Strategic sourcing is a holistic method of managing the acquisition of goods and services in the upstream supply chain. The aim is to facilitate strong supplier relationships, streamline the procurement process, and align sourcing plans with your company’s long-term goals.
Below, you will discover:
- The meaning of strategic sourcing (and how deploying it is cost-saving and helps you partner with the best suppliers in the market)
- The right way to implement the strategic sourcing process step by step
- How supply chain IoT solutions like Surgere make strategic sourcing management more effective
What Is the Strategic Sourcing Process?
The strategic sourcing process is a comprehensive procurement approach. It focuses on finding the best possible value in the supply market and ensuring sourcing strategies are centered on your organization’s long-term objectives.
The approach involves conducting a thorough market analysis, evaluating your business needs in detail, and developing sourcing strategies personalized to your unique needs. As a result, it helps you obtain high-quality products at the right price and from the most compatible suppliers.
Traditionally, sourcing in supply chain management (SCM) is about procuring supplies at the lowest possible cost per unit. Strategic sourcing is different. Instead of concentrating solely on unit pricing, it focuses on the total cost of ownership—the expenses associated with buying, deploying, and retiring a particular product or equipment.
Forward-thinking procurement professionals leverage strategic sourcing to make their operations future-focused and less based on supplier pricing. But what steps should you follow to strategically implement SCM sourcing?
The 6 Key Steps in the Strategic Sourcing Process
Strategic sourcing processes have multiple variations, but below are the six common steps procurement teams can follow to deploy the approach:
1. Identify Spending and Needs
The first step is understanding your company’s previous spending patterns regarding supplies and identifying procurement requirements. Here, you analyze the historical data of the organization to identify:
- The types of goods and services you procure: The goal is to gain a comprehensive understanding of your procurement landscape and segment your supplies into categories.
- The top spend categories: By knowing the group of supplies that accounts for the largest share of your procurement spending, you can focus your cost-saving efforts on where they’ll have the most significant impact.
After nailing down your spending habits, the next thing is identifying your procurement needs, such as the technical specifications of supplies, delivery schedules, and quantity requirements.
To achieve that, strategic procurement departments should communicate with internal teams responsible for using or setting quality standards for raw materials in a company. This could be the engineering, product development, or quality assurance department, depending on the structure of your organization
2. Conduct Market Research and Supplier Evaluation
In this step, you conduct thorough research to gather information about the supplier market. The goal is to stay on top of pricing fluctuations, technological advancements, regulatory changes, and other factors that may impact the market.
Based on the insights you obtain from the research, shortlist several potential suppliers and assess each one’s capabilities against your organization’s needs. Determine whether the prospects can meet your company’s:
- Quality standards
- Quantity demands
- Delivery schedules
- Any other specific requirements critical to your procurement processes
Additionally, evaluate their financial stability by looking into their financial statements. Doing so helps you mitigate the risk of supply chain disruptions related to suppliers’ insolvency or bankruptcy. You should also check the suppliers’ ethical practices to ensure they comply with relevant regulations.
3. Develop Sourcing Strategy
Based on the research findings and supplier evaluations, create a strategic sourcing plan that outlines your approach. The plan should include:
- Methodology of your supply chain sourcing: Will you use single sourcing (one primary supplier) or multi-sourcing (multiple suppliers for redundancy)?
- How to reduce supply chain costs: Identify potential cost savings through volume discounts, negotiated pricing, or alternative materials.
- Risk mitigation plan: Consider potential risks associated with each supplier and devise ways to mitigate them. For example, backup suppliers are helpful when your primary suppliers cannot provide raw materials because of production issues or natural disasters.
Also, diversifying your sourcing locations can shield you from geopolitical risks, such as trade disputes and sanctions between your country and where a particular supplier is located.
- Supplier relationship management (SRM) strategy: Determine how to build and maintain strong, collaborative relationships with suppliers you will choose. The techniques you use should help you optimize supplier performance and extract maximum value from the partnerships.
4. Solicit and Evaluate Bids
Here, you ask for bids from prospective suppliers you shortlisted in step two. Common documents you can use to solicit bids include:
Carefully evaluate bids from different suppliers, considering not just price but also warranty terms, proposed payment structures, and quality certifications. Compare proposals based on your pre-defined evaluation criteria to identify suppliers that best suit your needs in the long term.
5. Negotiate and Select Suppliers
After the bidding war among potential suppliers, negotiate with top contenders. The goal is to optimize the final pricing and other contractual agreements. You’ll have the upper hand to bargain for favorable terms since you already have market insights and proposals from multiple prospective suppliers.
The outcome of the negotiations will inform your decision on supplier selections. But generally, choose suppliers who meet the following conditions:
- Have a proven record of delivering materials on time
- Provide high-quality components that meet specifications and quality standards
- Are reliable and flexible in emergencies, such as sudden spikes in demand and unforeseen supply chain disruptions
- Offer the fairest prices
6. Implement and Integrate
The final step is formally signing and using the sourcing agreements in your organization’s procurement operations. Integrate the chosen partners into your supply chain, establish channels you’ll use to communicate with them, and, if necessary, provide onboarding or training materials.
You should also monitor supplier performance continuously. Achieve this by tracking key metrics, such as on-time delivery, quality control, and how quickly a supplier responds to inquiries. Learning how to apply the SCOR model in supply chain operations can help you measure results effectively.
Enhance Strategic Sourcing With Surgere’s IoT-Based Solutions
With the above procedure, you can implement a strategic sourcing process that optimizes procurement, strengthens supplier relationships, and drives long-term value for your organization. To make strategic sourcing even more effective, use Surgere’s IoT-based solutions.
Leveraging technologies like sensors, tags, and the powerful Interius software solution, our technologies enable you to build end-to-end supply chain visibility and stay on top of your company’s sourcing needs. For instance, they can help you track inventory levels and quantity needed for requisitioning in real time.
Contact Surgere today to learn how our solutions streamline your strategic sourcing process.
