Strategic Sourcing: A key nexus in supply chain management
What is strategic sourcing? It is simply the totality and efficacy of a firm’s procurement process, leading to the gathering and using of all relevant information that will enable a firm to make the best procurement decision.
Strategic sourcing as a procurement process employs and connects data collection, spend analysis, market research, negotiation, and contracting.
In short, we can categorize every firm’s procurement process before purchasing and paying for goods and services as a strategic sourcing process.
A successful strategic sourcing is valued through its efficiency and reliability. A firm’s strategic sourcing strategy should seek to maximise supplier relationships by carefully weighing the overall value delivered through pre-existing relationships, customized solutions, strategic partnerships, seamless deliveries, and ongoing vendor engagement.
Strategic sourcing presents a range of technological tools that can strengthen the pre-existing procurement relationship between firms and their suppliers
A veritable example of a crucial strategic sourcing interplay involves using fact-based research to arrive at tangential procurement decisions like supplier selection decisions, establishing firm-wide procurement needs and goals, determining the spend analysis, creating Request-For-Proposals (RFPs), reducing procurement costs and so on.
Why is strategic sourcing so important?
In its 2021 Global Chief Procurement Officer Survey, Deloitte, the global professional services firm, concludes that 78% of Chief Procurement Officers (CPOs) place driving operational efficiency as their top priority.
The firm adds that reducing costs is the second most crucial procurement imperative for many CPOs, and this drive comes in at 76.4%.
The desire to both exalt operational efficiency and decimate high procurement costs in the face of soaring global inflation is speeding up the employment of strategic sourcing in the procurement process of many firms.
Not only can strategic sourcing enable collaborative procurement processes, but it can also help a firm seamlessly communicate with its suppliers, help it build long-term relationships with its suppliers, and help it create value in many more ways, thereby driving up brand support, loyalty, and customer retention. In a concise format, these are the plethora of reasons strategic sourcing remains a lifesaver to supply chain processes:
1. It saves cost
By incorporating automation in strategic sourcing, firms can reduce costs and increase profitability. Indeed, it is now a supply chain industry consensus that a well-formalized procurement process reduces the haphazard discrepancies associated with the purchase-to-pay process.
As a result, a technologically enabled process that fully advances the benefits of automation can reduce procurement hassles and cut out unnecessary procurement expenses.
By creating and following a formal procurement process that leverages computerized approvals for procurement purchases after specific benchmarks and auditory guidelines have been met, unauthorized payments can be drastically reduced leading to cost savings and firm profitability.
Through strategic sourcing, concurrent procurement costs like contract and negotiation fees, transportation fees, taxes, customs charges, invoice processing fees, rush delivery fees, restocking fees, and many other similarly related expenses can be adequately harmonized in a way that they don’t drag down the firm’s bottom line.
2. It helps to build collaborative and mutually beneficial relationships with suppliers
Strategic sourcing presents a range of technological tools that can strengthen the pre-existing procurement relationship between firms and their suppliers. Indeed, an all-important Artificially Intelligent (AI) tool like the Arkestro AI platform can play an immutable role in ensuring procurement resiliency between suppliers and firms.
This AI tool like many others can ensure that major Key Performance Indexes (KPIs) in the procurement process, like spend, need prioritization, and procurement execution are all adhered to. This helps in building a mutually beneficial and sustainable relationship between your company and your suppliers.
Incorporating AI tools in strategic sourcing imperatives can also help build transparency. There are many varied ways by which it can drive efficiency and create a system of shared vision and values between suppliers and firms.
The reality of strategic sourcing manifests in mutually beneficial relationships between suppliers and firms. Like UCB procurement’s mission statement, companies must be committed to ‘‘responsible procurement” because it is the best way to have a positive impact on society, appropriately engage with suppliers and improve the bottom-line.
The benefits of sustainable and entrenched relationships between firms and suppliers are innumerable.
They trickle down into other relevant firm-wide advantages, including reduced costs, improved efficiency, minimization of price volatility, and continual improvement of firm operations, amongst many others.
3. It helps to mitigate supplier risks by standardizing processes
In an ever-volatile supply chain climate, standards are critical in procurement processes. Procurement standards ensure that products from suppliers are delivered in a way that ultimately meets the needs and tastes of customers.
And this is the point where strategic sourcing comes in. A procurement process devoid of ethical standards and best practices that ensure uniformity of supplies ultimately toys with the satisfaction of customer’s needs. It leaves it to open-ended interpretation, much to the detriment of firms and suppliers.
By ensuring that suppliers comply with regulations and standards that are in tandem with customers’ needs, firms can help mitigate supplier risks and ensure the sustenance and profitability of their businesses.
As a procurement necessity, strategic sourcing that delineates and considers the importance of standards can help ensure that suppliers are not put out of business through outdated supplies that don’t meet the needs of the times.
Strategic sourcing activities like spend analysis, supplier identification and evaluation, negotiation and contracting, and ongoing supplier relationship management can all be placed under specific standards that are clear to suppliers, thereby mitigating your risks, ensuring the longevity of your businesses, and cementing the firm-supplier relationship in a way that creates a life-cycle of smooth business relations between firms and suppliers.
Following the global economic throes occasioned by the Covid-19 pandemic and the resultant supply chain impasse that has greeted the international business community, CPOs couldn’t be wiser in incorporating elemental strategic sourcing into their procurement processes.
As evidenced above, seamless procurement processes through strategic sources are a win-win for firms and suppliers.
It is therefore hoped that the ways, means, and cross-cutting advantages of strategic sourcing, as laid out in this essay, will be fully harnessed and internalized by all relevant stakeholders in the supply chain industry, not least CPOs, the primary activators of procurement processes.