Strategic sourcing

Last updated December 02, 2024

Strategic sourcing is the process of developing channels of supply at the lowest total cost, not just the lowest purchase price. It expands upon traditional organisational purchasing activities to embrace all activities within the procurement cycle, from specification to receipt, payment for goods and services ^[1] to sourcing production lines where the labor market would increase firms' ROI.^[2] Strategic sourcing processes aim for continuous improvement and re-evaluation of the purchasing activities of an organisation.

In the services industry, strategic sourcing refers to a service solution, sometimes called a strategic partnership, which is specifically customized to meet the client's individual needs. In a production environment, it is often considered one component of supply chain management. Modern supply chain management professionals have placed emphasis on defining the distinct differences between strategic sourcing and procurement. Procurement operations support tactical day-to-day transactions such as issuing purchase orders to suppliers, whereas strategic sourcing represents to strategic planning, supplier development, contract negotiation, supply chain infrastructure, and outsourcing models.

Use of the term

The term "strategic sourcing" was popularized through work with a variety of blue chip companies by a number of consulting firms in the late 1980s and early to mid 1990s. This methodology has become the norm for procurement departments in large, sophisticated companies such as Fortune 500 companies.^{[ citation needed ]}

A United States federal memorandum issued in 2005 emphasised the collaborative and structured nature of strategic sourcing for government departments, defining the process as one of "critically analyzing an organisation's spending and using this information to make business decisions about acquiring commodities and services more effectively and efficiently". The memorandum saw each agency's chief acquisition officer, chief financial officer and chief information officer as central to this collaborative process, and anticipated that by 1 October 2015 each agency would identify at least three commodities which "could be purchased more effectively and efficiently through the application of strategic sourcing".^[3]

Steps

The key steps in a continuous strategic sourcing process were defined by Japanese writer Toshihiro Nishiguchi in 1994 as:^[4]

Assessment of a company's current spending (what is bought, where, at what prices?).
Assessment of the supply market (who offers what?).
Total cost analysis (how much does it cost to provide those goods or services?).
Identification of suitable suppliers.
Development of a sourcing strategy (where to purchase, considering demand and supply situations, while minimizing risk and costs).
Negotiation with suppliers (products, service levels, prices, geographical coverage, Payment Terms, etc.).
Implementation of new supply structure.
Track results and restart assessment.

Sarangapani notes that "sourcing", without its "strategic" function, was traditionally linked with the fourth step, identification of suitable suppliers, and especially the identification of new or potential suppliers.^[5]

Payne and Dorn (2012) describe a strategic sourcing process with the following steps:^[6]

Data collection and spend analysis
Market Research
The RFx process (also known as go to market) ^[7]
Negotiation
Contracting
Implementation and continuous improvement

While the modernized process combines the market assessment and cost analyses steps of the older model into a single "market research" step, and the supplier identification and sourcing strategy development steps into a single "go-to-market" step, in Payne and Dorn's summary "negotiation" has been divided into two steps, "negotiation" and "contracting". This change is due to the heightened importance of market intelligence in modern strategic sourcing plans, and its ability to deliver value by improving both pricing and contract terms when leveraged against the identified suppliers.

Although both descriptions of the sourcing process are accurate to some extent, there is no standard set of steps and procedures. As strategic sourcing is put in place and practiced over time, many large, sophisticated organizations will modify the process to better meet their individual corporate needs. Since the whole process is customizable, it will tend to differ from one organization to the other. Sourcing has also used modern tools to analyze the possible outcomes. This automation makes tracking easy and the risk of errors greatly reduced.^[8]

Outsourcing a business practice to another company may also be incorporated into a sourcing strategy for services. This strategy may involve the transfer of staff and assets to the outsource company. Due to the strategic and complex nature of outsourcing, many organizations such as Procter & Gamble, Microsoft and McDonald's have created what is referred to as Vested Outsourcing agreements to help build highly collaborative win-win business relationships.^[9] Researchers at the University of Tennessee provide guidance on how to create Vested Outsourcing agreements in their book Vested Outsourcing: Five Rules that will Transform Outsourcing.^[10]

Sourcing plan

The sourcing plan is the result of all planning efforts on strategic sourcing. Into this planning, all sourcing events are organized and detailed with tactical and operational information such as the sourcing team responsible for each event, when the sourcing event is supposed to begin and end based on each RFX step (RFI, RFP, RFQ), the requirements, specifications of all services or materials, and negotiations/cost goals. The objective of the sourcing plan is to manage the timing and quality of all sourcing events in the strategic sourcing program. Many procurement professionals continue to conduct sourcing and RFX activities manually using spreadsheets; however, this creates risk for error and gaps in the sourcing process.^{[ citation needed ]}

Sourcing optimization

Operations research is a discipline of applying advanced techniques to help make better decisions. Optimization, in turn, utilizes mathematical algorithms to rapidly solve a business problem by evaluating all possible outcomes (or many outcomes) and selecting those ones that yield the best solution.

When applied to sourcing and supply chain operations, optimization helps the sourcing professional simultaneously evaluate thousands of different procurement inputs. This evaluation can take into consideration the global market, specific current supply chain conditions, and individual supplier conditions, and offers alternatives to address the buyer’s sourcing goals. Furthermore, it allows internal stakeholders in the buying organization to impose constraints on the award or specify preferences to favor certain non-cost objectives such as limited switching, reduced supplier numbers or higher quality outcomes.

Cooperative sourcing

Cooperative sourcing is a collaboration or negotiation of different companies, which have similar business processes. To save costs, the competitor with the best production function can insource the business process of the other competitors. This is especially common in IT-oriented industries due to low to no variable costs, e.g. banking. Since all of the negotiating parties can be outsourcers or insourcers the main challenge in this collaboration is to find a stable coalition and the company with the best production function. This is difficult since the real production costs are hard to estimate and negotiators might be tempted to portray their real costs as much higher than they actually are in order to demand higher fees for insourcing. High switching costs, costs for searching potential cooperative sourcers, and negotiating often result in inefficient solutions.

Sourcing business models

Sourcing Business Models are a systems-based approach to structuring supplier relationships. A sourcing business model is a type of business model that is applied to business relationships where more than one party needs to work with another party to be successful. There are seven sourcing business models that range from the transactional to investment-based.

The seven models are:

Basic Provider
Approved Provider
Preferred Provider
Performance-Based/Managed Services Model
Vested outsourcing Business Model
Shared Services Model and
Equity Partnership Model.

Sourcing business models are targeted for procurement professionals who seek a modern approach to achieve the best fit between buyers and suppliers.

In popular culture

Strategic sourcing from a professional standpoint is lampooned in the American syndicated comic strip Sally Forth , in which the titular character's husband Ted Forth is employed within this field for the duration of the series's run. Sally Forth is currently written by the writer-illustrator team of Craig MacIntosh and Francesco Marciuliano and frequently lampoons many aspects of business and procurement culture and new trends in purchasing innovation.

Related Research Articles

In commerce, supply chain management (SCM) deals with a system of procurement, operations management, logistics and marketing channels, through which raw materials can be developed into finished products and delivered to their end customers. A more narrow definition of supply chain management is the "design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronising supply with demand and measuring performance globally". This can include the movement and storage of raw materials, work-in-process inventory, finished goods, and end to end order fulfilment from the point of origin to the point of consumption. Interconnected, interrelated or interlinked networks, channels and node businesses combine in the provision of products and services required by end customers in a supply chain.

A supply chain is a complex logistics system that consists of facilities that convert raw materials into finished products and distribute them to end consumers or end customers. Meanwhile, supply chain management deals with the flow of goods in distribution channels within the supply chain in the most efficient manner.

Outsourcing is a business practice in which companies use external providers to carry out business processes, that would otherwise be handled internally. Outsourcing sometimes involves transferring employees and assets from one firm to another.

Procurement is the process of locating and agreeing to terms and purchasing goods, services, or other works from an external source, often with the use of a tendering or competitive bidding process. The term may also refer to a contractual obligation to "procure", i.e. to "ensure" that something is done. When a government agency buys goods or services through this practice, it is referred to as government procurement or public procurement.

E-procurement is a collective term used to refer to a range of technologies which can be used to automate the internal and external processes associated with procurement, strategic sourcing and purchasing.

A strategic partnership is a relationship between two commercial enterprises, usually formalized by one or more business contracts. A strategic partnership will usually fall short of a legal partnership entity, agency, or corporate affiliate relationship. Strategic partnerships can take on various forms from shake hand agreements, contractual cooperation's all the way to equity alliances, either the formation of a joint venture or cross-holdings in each other.

Supplier relationship management (SRM) is the systematic, enterprise-wide assessment of suppliers' strengths, performance and capabilities with respect to overall business strategy, determination of what activities to engage in with different suppliers, and planning and execution of all interactions with suppliers, in a coordinated fashion across the relationship life cycle, to maximize the value realized through those interactions. The focus of supplier relationship management is the development of two-way, mutually beneficial relationships with strategic supply partners to deliver greater levels of innovation and competitive advantage than could be achieved by operating independently or through a traditional, transactional purchasing arrangement. Underpinning disciplines which support effective SRM include supplier information management, compliance, risk management and performance management.

Procurement outsourcing is the transfer of specified key procurement activities relating to sourcing and supplier management to a third party — perhaps to reduce overall costs or maybe to tighten the company's focus on its core competencies. Procurement categorisation and vendor management of indirect materials and services are typically the most popular outsourced activity.

Bidding is an offer to set a price tag by an individual or business for a product or service or a demand that something be done. Bidding is used to determine the cost or value of something.

Global sourcing is the practice of sourcing from the global market for goods and services across geopolitical boundaries. Global sourcing often aims to exploit global efficiencies in the delivery of a product or service. These efficiencies include low cost skilled labor, low cost raw material, extreme international competition, new technology and other economic factors like tax breaks and low trade tariffs. Common examples of globally sourced products or services include labor-intensive manufactured products produced using low-cost Chinese labor, call centers staffed with low-cost English speaking workers in the Philippines, India and Pakistan, and IT work performed by low-cost programmers in India, Pakistan and Eastern Europe. While these are examples of low-cost country sourcing, global sourcing is not limited to low-cost countries.

Supplier evaluation and supplier appraisal are terms used in business and refer to the process of evaluating and approving potential suppliers by quantitative assessment. The aim of the process is to ensure a portfolio of best-in-class suppliers is available for use. Supplier evaluation can also be applied to current suppliers in order to measure and monitor their performance for the purposes of ensuring contract compliance, reducing costs, mitigating risk and driving continuous improvement.

Spend analysis or spend analytics is the process of collecting, cleansing, classifying and analyzing expenditure data with the purpose of decreasing procurement costs, improving efficiency, and monitoring controls and compliance. It can also be leveraged in other areas of business such as inventory management, contract management, complex sourcing, supplier management, budgeting, planning, and product development.

Procure-to-pay is a term used in the software industry to designate a specific subdivision of the procurement process.

A reverse auction is a type of auction in which the traditional roles of buyer and seller are reversed. Thus, there is one buyer and many potential sellers. In an ordinary auction also known as a forward auction, buyers compete to obtain goods or services by offering increasingly higher prices. In contrast, in a reverse auction, the sellers compete to obtain business from the buyer and prices will typically decrease as the sellers underbid each other.

Vested outsourcing is a hybrid business model in which contracting parties create a formal relational contract using shared values and goals and outcome-based economics to create an agreement that is mutually beneficial for each party. The model was developed out of research by the University of Tennessee led by Kate Vitasek.

An ‘‘‘electronic bidding system ‘‘‘ is an electronic bidding event according to defined negotiation rules (eAgreement). A buyer and two or more suppliers take part in this online event.

Category management is an approach to the organisation of purchasing within a business organisation, also often referred to as procurement. Applying category management to purchasing activity benefits organisations by providing an approach to reduce the cost of buying goods and services, reduce risk in the supply chain, increase overall value from the supply base and gain access to more innovation from suppliers. It is a strategic approach which focuses on the vast majority of organisational spend. If applied effectively throughout an entire organisation, the results can be significantly greater than traditional transactional based purchasing negotiations, however the discipline of category management is sorely misunderstood.

Kate Vitasek is an American author and educator. She is a faculty member for Graduate and Executive Education at the University of Tennessee Haslam College of Business Her research focuses on the Vested outsourcing business model, sourcing business model theory, the relational contract, and collaborative win-win business relationships.

In supply chain management, the Kraljic matrix is a method used to segment the purchases or suppliers of a company by dividing them into four classes, based on the complexity of the supply market and the importance of the purchases or suppliers. This subdivision allows the company to define the optimal purchasing strategies for each of the four types of purchases or suppliers.

José Ignacio López de Arriortúa is a Spanish businessman who held senior positions at Opel, General Motors and Volkswagen. He was known for his assertive style dealing with suppliers, managing lean production and driving down cost.

References

↑ Kerruish, Chris (2016). Supply Management: Strategic Sourcing. Springer. ISBN 978-981-10-1722-3.
↑ Mayounga, André (2021). "Strategic sourcing in Africa: the case for the labor market". Journal of Global Operations and Strategic Sourcing. 14 (3): 397–413. doi:10.1108/JGOSS-01-2020-0003. S2CID 233790315.
↑ Johnson, C., Implementing Strategic Sourcing, Memorandum for Chief Acquisition Officers, Chief Financial Officers, Chief Information Officers, published by the Office of Management and Budget, 20 May 2005, accessed 22 July 2023
↑ Nishiguchi, Toshihiro, Strategic Industrial Sourcing (New York: Oxford University, 1994) ISBN 0-19-507109-3
↑ Sarangapani, S., Evolving Strategic Sourcing - A Paradigm Shift, accessed 31 January 2021
↑ Payne, Joe and Dorn, William (2012), Managing Indirect Spend: Enhancing Profitability Through Strategic Sourcing (John Wiley & Sons, Inc.) ISBN 978-0-470-88688-5
↑ Unpacking Competitive Bidding Methods: The Essential ABCs of the Various RFX Methods,|2016|Vested Way|accessed 2 October 2016
↑ "Key Success Factors for an Effective Procurement or Purchasing Process | SIPMM Publications". publication.sipmm.edu.sg. 19 July 2018. Retrieved 2022-06-06.
↑ Vitasek, Kate; Manrodt, Karl B (2012). Vested: How P&G, McDonald's, and Microsoft are Redefining Winning in Business Relationships (1st ed.). New York: Palgrave Macmillan. ISBN 978-0230341708.
↑ Vitasek, Kate; Ledyard, Mike; Manrodt, Karl B (2012). Vested Outsourcing: Five Rules that will Transform Outsourcing . New York: Palgrave Macmillan. ISBN 978-1-137-29719-8.