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Strategic Sourcing in Supply Chain Management, its Benefits and Ways to Employ it in Your Organization

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Sourcing is one of the most important function of a business. Sourcing is the process of acquiring goods, works and services to fulfill the objectives of an organization. It involves the activities like need identification, fixing the specifications, identification and selection of appropriate suppliers, supplier relationship management & procurement of goods, works and services for the organization. The sourcing is crucial for an organization because procuring right things of right quantity at a right time & price can provide a competitive edge to a business as compared to other competitors. Earlier, the organizations handled the sourcing function more as a tactical function rather than strategic one. Not much importance was given to the sourcing processes and it was treated as a clerical or routine function. Later on, as the development was made in the management methodologies and due to introduction of technology in the businesses, the professionals realized the importance of strategic sourcing for the success of their businesses. They also realized that how a little efficiency in the sourcing processes may lead to huge savings for their organizations. An organization having a small supply chain enjoy competitive advantage from other competitors. Due to this awakening, the sourcing has now become a strategic function rather than a tactical function. In this post, we will know, what the strategic sourcing is and how it is different from the tactical sourcing.

What is Strategic Sourcing?

Strategic sourcing is the procurement process connecting data collection, spend analysis, market research, negotiation and contracting is such a manner that it is aligned with the long term objectives of the organizations. The main objective of strategic sourcing is to establish an integrated system for creating value for the customer and to enhance profitability of the organization.

There are three main components of strategic sourcing, spend profile, market conditions and the supplier base. Sourcing strategy is the process of aligning these three components to achieve objectives of the organization.

If we conclude in simple words then the strategic sourcing is a process to decide what to buy, from where & how much to buy and what is the time to buy.

Difference between Strategic Sourcing and Tactical sourcing

Strategic SourcingTactical Sourcing
It involves developing a long term, holistic and proactive approach of the sourcing activitiesIt is a short term, reactive and traditional approach of sourcing
It aims to achieve a Total Cost of Ownership (TCO) with a minimal supply riskIt aims to achieve the lowest possible cost without considering other factors like supplier relationship management, risk mitigation, etc.
Long term relationships with the suppliers are maintainedIt focuses on the short term relationships with the suppliers
Supplier’s capabilities are developed in this type of sourcingNot aimed to develop supplier’s capabilities
Skilled personnel and latest technology is required to implement itIt doesn’t need skilled personnel and latest technology
It involves spend analysis, supplier relationship management, etc.Does not involve spend analysis, supplier relationship management, etc.
It requires large capital investmentIt does not require large capital investment

Types of Sourcing Strategies

Crowd Sourcing

Crowd sourcing is a process of obtaining work or information from a large group of people. These people submit their data through internet, smartphone app, social media, etc. People involved in the crowdsourcing are sometimes work as paid freelancers or some others may work as free. The advantages of crowd sourcing are cost saving and fast information. In crowd sourcing, the companies may approach people from anywhere in the world and hence may take benefit of vast area skills and expertise.

Outsourcing

Outsourcing is a process of assigning a task of producing some good or services to other companies having sufficient capacity and expertise of producing these goods or services. If the organization do not have sufficient in-house capacity to produce a product or service, or the benefits of producing something in- house are very less as compared to outsourcing, the organizations may consider outsourcing some or most of the assignments to other companies, having expertise in their respective fields.   

Global Sourcing

Global sourcing is also a sourcing strategy in which the organizations seek global supply partners for their requirements. The purpose of global sourcing may be unavailability of suitable technology in the country or availability of cheap manpower abroad. In some cases, the organizations choose to collaborate with partners in other countries for tax benefits or sue to business friendly policies of a country. Whatever may be the reason, the global sourcing is an important strategy being considered by the organizations for their businesses.

One example of global sourcing is business process outsourcing (BPO). Many organizations set up their call centers in other countries especially Asian countries, because they want to get benefitted from the availability of cheap labors and other resources.

Low Cost Country Sourcing

Low cost country sourcing is also a sourcing strategy in which organizations source various goods or services from the countries where cheap labor and other resources are available. Due to availability of cheap labor, technology and other resources, such countries are able to produce goods and services at comparatively cheaper rates and therefore are preferred by organizations to source goods and services as per their requirements.

Why Do We Need Strategic Sourcing?

Implementing strategic sourcing has numerous benefits for an organization. It streamlines business operations, and makes them cost effective and profitable. It strengthens the supply chain of an organization and provide a competitive advantage w.r.t. other competitors. Some of the key benefits of implementing strategic sourcing are as follows:

Cost Saving

Cost saving is an advantage of strategic sourcing. As the strategic sourcing helps selecting good suppliers, the organizations can achieve good high value products at reasonable prices. Also, the strategic sourcing aims at building long term relationship with suppliers, the organizations can negotiate low prices for long term orders. Strategic sourcing also helps in integrating requirements of all the units of an organization to enable it negotiate with suppliers for better prices in case of high volume purchase.

Better Alignment of Sourcing Processes with Long Term Objectives of the Organization

Strategic sourcing is a long term approach to strengthen supply chain of an organization. Where the tactical sourcing aims at fulfilling only short term or temporary requirements, the strategic sourcing is aligned with long term objectives of the organization. It aims at strengthening the supply chain of the organization as well as to build long term relationships with the suppliers. Strategic sourcing usually connects data collection, spend analysis, market research, negotiation and contracting is such a manner that it is aligned with the long term objectives of the organizations.

Strong Supplier Relationship

As the strategic sourcing is a long term approach, it aims at building strong and long term relations with the suppliers. The suppliers also understand the goals and objectives of the organization and work with the organization to achieve a common objective.

Optimization of Ideal Suppliers

The suppliers are evaluated in the strategic sourcing as per the suitability of the organization. The data base of such suppliers is kept for future and they are involved in future projects since beginning to provide value products.

Continuous Improvement

The tactical sourcing is only a temporary arrangement to fulfill immediate needs of the organization, while the strategic sourcing aims for continuous improvement of its supply chain. It involves spend analysis, supplier relationship management, etc. to continuously improve the supply chain.

Risk Mitigation

While there in no room for risk mitigation in tactical sourcing, the strategic sourcing takes into account the risk mitigation plans of the supply chain. The decisions are taken after considering long term implications on the business and to avoid potential risks in future. Building long term relationships with the suppliers, optimization of the supplier base, etc. help mitigating risks up to a great extent.

7 Step Process for Implementing Strategic Sourcing in Your Organization

Analyzing Business Spend

Identifying the areas where the business is spending presently is most important and crucial to apply strategic sourcing. It may be possible that the spend is going on the things which are not adding value to the organization. Strategic decisions are taken to limit the wasteful expenditure of the business. The spend is analyzed and categorized according to how critical it is. The sourcing activities may be prioritized as per the categories of spend area. Some categories of spend area may be domestic/ international, direct/ indirect, etc.

Building a Sourcing Strategy

After spend analysis and categorization of spend areas, it’s time to collect the business requirements from both short term and long term perspective. Proper sourcing strategy is developed according to the business requirements and objectives and stakeholders are selected accordingly. The decisions regarding what is to be purchased, in how much quantity and from where to be purchased, what will be time to purchase are crucial for any business and a sourcing strategy is made on the basis of answers of these questions.

Supplier Market Analysis

Analyzing the supplier market is the next step in implementing strategic sourcing. It important to understand whether it is supplier’s market or buyer’s market. The profile and capacity of existing suppliers is analyzed and recorded for further strategic decisions. The information regarding the suppliers like, their market position, historical performance, financial standing, etc. helps in selecting the appropriate supplier for the business.    

Requesting Supplier Information

After collecting the preliminary information regarding suppliers, in depth information of the supplier is gathered for some specific performance. There are numerous management tools available for this purpose like, RFQ, RFI, RFPs, etc. The RFP/RFI or RFQ documents are meticulously prepared as per the requirement of the specific assignment. Requested information is collected and analyzed, on the basis of which the suitable suppliers are selected.  

Selection of Suppliers and Contract Formation

Selection of appropriate supplier as per the business needs is crucial for the success of any business. Proper selection criteria and work requirements are prepared and incorporated in RFP/RFI/RFQ document. On the basis of information received through RFP/RFI/RFQ document, evaluation of suppliers is made and appropriate suppliers are selected accordingly. The suppliers should be selected in such a manner that they are aligned with the long term goals of the organization.

Measuring Supplier Performance

Once the suppliers are selected and performed their obligations, the next step is to measure their performance. Strategic sourcing is a long term & sustainable approach which incorporates measuring supplier performance to categorize them as per various business objectives. Involving the suppliers since beginning, measuring their performance & developing their capacities are integral part of strategic sourcing.

Implementing Supplier Relationship Management

Maintaining cordial relations with the suppliers is integral part of strategic sourcing. Long term relationship is beneficial for both the supply management organization as well as suppliers. A supplier relationship management tool can help in a great way in maintaining cordial relationship with suppliers.

Conclusion

Strategic sourcing is an important part of any organization since it helps in strengthening its overall supply chain. It is different form the tactical sourcing in a way that it is a long term approach and aims at continuous improvement and maintaining long term supplier relations. Earlier the sourcing was not given much importance and considered merely as tactical or clerical function. Now a day, as the organizations realizing its importance and considering its impact on the success of overall business, they are considering it strategically important and trying to employ better technology and resources to strengthen their supply chains.

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Rajesh Pant
Rajesh Panthttps://managemententhusiast.com
My name is Rajesh Pant. I am M. Tech. (Civil Engineering) and M. B. A. (Infrastructure Management). I have gained knowledge of contract management, procurement & project management while I handled various infrastructure projects as Executive Engineer/ Procurement & Contract Management Expert in Govt. Sector. I also have exposure of handling projects financed by multi-lateral organizations like the World Bank Projects. During my MBA studies I developed interest in management concepts.
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