Strategic sourcing is an institutional procurement process that continuously improves and re-evaluates the purchasing activities of a company. 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.
These skills involve analyzing high-volume purchases and developing long-term partnerships with a select group of suppliers that can provide quality products and services at low costs. High-volume purchases are the best candidates for strategic sourcing because they are likely to have the greatest impact on lowering cost structures. It ensures that the company acquires goods and services on a cost-effective basis while improving value creation. It provides continuous improvements over these factors and empowers the organization to take advantage of purchasing power.
Strategic sourcing differs from traditional purchasing in crucial ways. It applies business strategy and relationship management skills to purchasing to optimize the results of the whole business.
Table of Contents
Benefits of Strategic Sourcing
Strategic sourcing improves the value of price relationship to reducing cost and improving service quality. It examines supplier relations across the whole organization and creates partnerships with suppliers. It employs a rigorous and collaborative approach that goes beyond the purchasing department.
Strategic sourcing between of purchasing and procurement.
The topics of purchasing, procurement, and strategic sourcing are all receiving significant attention as organizations attempt to improve the overall efficiency and effectiveness of their supply networks. A better understanding of where the benefits can be obtained requires a thorough knowledge of some of the similarities, differences, and linkages between purchasing, procurement, and strategic sourcing. Many times, these terms are used somewhat interchangeably, which does not allow for clarity or optimization of the buying decision. Here is how we see them:
• Purchasing is the transactional function or activity of buying needed goods or services. This involves placing and processing purchase orders or requisitions. Prior to these transactional activities are the formal sourcing decision and ultimate selection of the desired source supplier.
• Procurement is the management of a broad range of processes that are associated with an organization’s desire to obtain the necessary goods and services needed for manufacturing a product, transforming inputs to outputs, or indirectly operating the organization. These processes include activities such as product and service sourcing, supplier selection, pricing and terms negotiation, transaction and contract management, supplier performance management, and supplier sustainability issues.
• Strategic Sourcing is a broader, more transformational process, performed at a higher organizational level. Strategic sourcing takes the procurement process further, examining the whole supply network, its linkages, and how they impact procurement and purchasing decisions. The focus is more on the Tier 1 supply network, value creation, risk, and uncertainty in the supply chain and the overall responsiveness and resilience of the supply chain.
Finally, for a business perspective, it is important to think of purchasing as an activity and procurement and strategic sourcing as processes. The next several chapters discuss the critical nature of strategic sourcing and provide a more comprehensive look at the following topics:
• Managing sourcing and procurement processes
• Strategic sourcing and delivering customer value
• The size of the organization spends and financial significance
• Understanding buyer-supplier relationships
• Global Procurement Competitiveness
Strategic Sourcing Methodology
As noted previously, strategic sourcing is a broader and more comprehensive process than procurement. Overall, the process begins with the development of the appropriate strategy, which provides direction for all ongoing organizational efforts. The appropriate strategy is influenced by the value discipline of the organization. As highlighted next, there are three generic competitive strategies for positioning the organization in the marketplace:
• Overall Cost Leadership – Requires efficient-scale facilities, tight cost and overhead control, standardized customer offerings, reduced network costs, and a low-cost operational model.
• Differentiation – Requires creating products and services that are unique and build customer loyalty.
• Focus – Requires serving a target segment very well by addressing its specific needs based on a clear understanding of the marketplace.
Approach to Strategic Sourcing Success
As the premier Group Purchasing Organization (GPO), Prime Advantage helps companies strategically source from top to bottom. Here are some of the core competencies in this realm that has helped beef up their purchasing prowess and elevate their businesses:
• Cost Savings – Through the power of group leverage and access to our negotiated savings programs with endorsed suppliers, you can enjoy significant savings in raw materials, components, services, supplies, and healthcare.
• Best Practice Sharing – Prime advantage network, professional community, and conferences provide the relationships and industry expertise you need to compete in the ever-changing business world.
• Reduce Supply Chain Risk – Endorsed suppliers are audited to gain access to the group and maintain performance states to stay in the group. Access to these suppliers across such a broad spectrum of categories adds quality, depth, and solutions to your supply chain so that you’re covered when the unanticipated occurs.
• Improve Procurement, Engineering, and Production Bandwidth – GPO is the only one of its kind endorsed suppliers, and solutions can help support and elevate your entire operation.
• Access to New Suppliers and Innovations – Constantly adding additional resources and innovative endorsed Suppliers, as well as working with the current base to generate the best relationships with our members.
• Create True Business Partnerships – Conferences and daily access to decision makers looking to develop mutually beneficial and long-term relationships make our group second to none.
All organizations need strategic sourcing and effective procurement strategy skill approach that promises to substantially improve an organization’s competitiveness and deliver significant benefits for the company including cost savings. For the business company, it is critical to review purchasing policies. Document the desired goals and then design a procurement strategy to meet those goals.
A.T. Kearney (2001) “Purchasing & Procurement Centre” 7 Step Strategic Sourcing Process. Retrieved from: (https://www.purchasing-procurement-center.com/strategic-sourcing-process.html)
Alfred Sarkissian (2017) ‘Importance of Strategic Sourcing Skills’. Retrieved from: (https://yourbusiness.azcentral.com/importance-strategic-sourcing-skills-13325.html#)
Chirantan Basu (2017) ‘Importance of Strategic Sourcing Skills’. Retrieved from: (http://smallbusiness.chron.com/importance-strategic-sourcing-skills-38123.html)
Ian Linton (2017) ‘Strategic Sourcing Versus Procurement’. Retrieved from: (https://yourbusiness.azcentral.com/strategic-sourcing-versus-procurement-15998.html)
Walter L. Wallace and Yusen L. Xia (2014) ‘Delivering Customer Value through Procurement and Strategic Sourcing’, A Professional Guide to Creating A Sustainable Supply Network. Retrieved from: (http://www.informit.com/articles/article.aspx?p=2263501)