A Simple Definition of Strategic Sourcing
In a nutshell, strategic sourcing refers to efforts on the part of buyers to carefully evaluate and to form lasting relationships with suppliers. These relationships are generally mutually beneficial and also can involve a dramatic change in attitude. With strategic sourcing, businesses view their vendors as partners instead of simply commodity providers. While this difference in attitude may not seem significant, it has a lasting and positive impact on the success of both the supplier and the buyer.
Strategic Sourcing Importance
One of the most overlooked areas in business, particularly when companies switch to e-procurement, is strategic sourcing. In fact, some businesses may not even be aware of what exactly the term means.
Strategic sourcing has particular importance with manufacturing firms. First, these firms use a greater portion of their revenue on purchasing than any others. Sometimes as much as 75% of company budgets are devoted to purchasing raw materials and other goods/services required to create their products. Another reason is that with most manufacturers there are some goods that manufacturers cannot go without for any period of time. Otherwise, the production lines will have to be shut down. These are called bottleneck items since if a company is unable to obtain them, there will be a costly bottleneck in the manufacturing process. These are items that are usually only provided by a relatively small number of suppliers, so the costs can be driven higher by the laws of supply and demand. Plus, shortages of the product can cause delays and problems with the company's production cycle.
Because of these two reasons, manufacturers can benefit from strategic sourcing. One benefit is that by having a stable relationship with key suppliers, the business can ensure that they have a steady supply of both bottleneck items and other necessary goods. Additionally, by negotiating with the supplier and finalizing a purchasing arrangement, the company can secure a lower price on those items because the vendor is assured of a buyer for their products.
The problem with most companies and their vendor relationships is that there are not established to be lasting vendor relationships. Most businesses pick suppliers based almost exclusively on price and only a few take the time to thoroughly go into the backgrounds of the vendors that they do choose. In the long run, going through the RFP process for almost every purchase is more time-consuming and expensive than it needs to be. Additionally, suppliers have no real loyalty to their buyers because they realize that their buyers have no loyalty to them nor are they willing to invest the time in understanding the details of the buyer's industry.
Thankfully, there are ways to repair and strengthen relationships even if these problems are present in the company existing purchasing process. First, the organization needs to change its attitude towards purchasing and its suppliers. No matter what other changes are made, these changes simply won't have any impact if those attitudes are not in place because vendors will still be treated as being “outside the loop”.
Once that adjustment is made, companies should begin creating a short list of suppliers to work with on a regular basis. These suppliers should not be randomly selected but should be chosen based on their experience, reputation, price, quality, and reliability. After the company determines the suppliers, contracts need to be discussed and negotiated so that they are mutually beneficial for both companies.
Another way to strengthen those relationships is by using eSourcing software. While this type of software is just breaking into the market, these types of programs could result in cost savings and improve communication and collaboration with suppliers. Ideally they extend the buyer’s relational capabilities. Some companies have already reported significant ROI within the first year of implementing e-Sourcing software.
The biggest benefit of the software is that it counteracts many problems that do arise during the strategic sourcing process. These problems include trying to work with too few suppliers, basing vendor decisions on incomplete information, and taking longer to finalize purchasing choices. Essentially, if a company is truly interested in strategic sourcing, using eSourcing software and changing the way it does purchasing can be a great way to enhance the procurement process.