Strategic Sourcing 101: An Essential Guide for Procurement Managers

In today’s ever-changing business world, the importance of procurement is more evident than ever. Central to modern procurement is the concept of strategic sourcing. 

Strategic sourcing is a procurement process that continually reevaluates and improves an organization’s purchasing activities. It goes beyond transactional procurement activities and focuses on the entire life cycle of each item – from initial product specifications to final disposal. The aim of strategic sourcing is to not just find the lowest-cost suppliers. It also takes into account spending, understanding the supply market, evaluating total costs, developing a sourcing strategy, implementing the sourcing strategy, and then monitoring the strategy to ensure its effectiveness.

In this article, we will walk you through the process of strategic sourcing and share some strategies you can implement in your own procurement process. 

Here are the topics we will cover: 

1. Strategic Sourcing Explained
2. The Strategic Sourcing Process
3. Sourcing Strategies and Examples
4. The Role of Sourcing Management and Purchasing Strategy in Strategic Sourcing

Strategic Sourcing Explained

At its heart, strategic sourcing can be likened to a compass, guiding the process of acquiring goods and services in a way that extracts the maximum value for an organisation. 

It adopts a holistic and systematic approach, putting the spotlight on the Total Cost of Ownership (TCO) instead of just the initial buying price. This includes considering aspects like quality, reliability, delivery, and service. These elements may seem insignificant at first, but they can have a significant impact on a company’s profitability.

So, what’s the difference between purchasing and procurement, and where does strategic sourcing come into play? To simplify, you can think of purchasing as a single task, mostly dealing with the actual buying of goods or services. Procurement, however, is a broader term that covers all activities from sourcing to payment and also includes managing suppliers and strategic sourcing.

In this context, strategic sourcing acts as a link, combining the transactional aspect of purchasing with the strategic approach of procurement. 

The Strategic Sourcing Process

Embarking on a strategic sourcing journey entails understanding and embracing a step-by-step process, each with its unique significance in attaining optimal sourcing outcomes. 

Here are the critical steps:

1. Step one: Identify your organization’s needs. As a procurement manager, you must first understand what products your business requires to flow smoothly and keep up with production.

2. Step two: Conduct market analysis. In other words, study the market, understand supplier capabilities, and explore opportunities for innovation or cost reduction.
   
3. Step three: supplier selection. Choose your go-to supplier considering several factors like competitive prices, delivery times, and reliability. Traditional sourcing can be quite time-consuming with procurement managers like yourself spending a great deal of time negotiating offers with every single supplier.
   
   This is where a marketplace like Droppe can make a difference. 
   
   Droppe is a wholesale marketplace where you can easily browse an extensive catalogue of 100,000+ industrial supplies, and compare 100+ European suppliers based on their product selection, price, delivery time, and much more.
   
   So, rather than spending countless hours negotiating with different suppliers, you now have their selections and offers in one single place. Plus, there are no geographical limitations, so your personal supplier pool will expand throughout Europe.
   
   Once you’ve found the right suppliers, it will only take you a moment to proceed to purchase products from different suppliers across Europe in one single invoice. Droppe takes care of all the details, from payment to order handling, so you can focus on what really matters – keeping your business flowing without any hiccups. 
   

4. Step four: conduct a performance review. This continuous step is like regular health check-ups, ensuring the strategic sourcing process is on track, delivering expected outcomes, and identifying areas for improvement.

The strategic sourcing process, when executed meticulously, paves the way for substantial value creation and a robust vendor base that can contribute to your business’s strategic objectives.

Sourcing Strategies and Examples

Sourcing strategies represent the master plan in the game of strategic sourcing, setting the course for successful procurement outcomes. 

These are they main sourcing strategies you might want to implement to your procurement process:

1. Single sourcing: This sourcing strategy involves partnering with a single supplier. It’s akin to having a dependable friend who always has your back – this strategy reduces complexity and promotes strong supplier relationships but needs careful risk management due to dependency on one supplier.
   
   
2. Multiple sourcing: On the opposite end, multiple sourcing involves engaging several suppliers for the same product or service, promoting competition, reducing risk, and ensuring supply continuity.
   

3. Dual sourcing: This sourcing strategy utilises two suppliers, ensuring a backup in case of any disruption, while still keeping the complexity manageable. For instance, an electronics manufacturer might employ multiple sourcing for procuring resistors, capacitors, and other common components, ensuring that supply disruptions in one part of the world don’t halt their production. Meanwhile, they could use single sourcing for a specific custom-made component, collaborating closely with the supplier to ensure quality and continuous improvement.

Remember, choosing the right sourcing strategy demands a keen understanding of your organisational needs, supplier market conditions, and potential risks, all of which can be honed through effective sourcing management.

The Role of Sourcing Management and Purchasing Strategy in Strategic Sourcing

Strategic sourcing can be viewed as a complex yet well-organized system. The key players in this system, sourcing management and purchasing strategy, function in a coordinated manner to ensure a seamless and effective procurement process.

Sourcing management serves as the guiding force behind strategic sourcing, directing its course towards desired goals. This involves coordinating sourcing strategies with overarching business aims, managing supplier relationships, and negotiating contracts. 

For example, in a manufacturing firm, sourcing management would involve frequent supplier performance evaluations, maintaining quality standards, and adjusting contracts in response to changing market conditions. 

Alternatively, a purchasing strategy serves as the strategic plan for procurement. It provides a detailed outline of procurement operations to achieve specific business results. A comprehensive purchasing strategy considers aspects such as purchase volumes, quality standards, delivery schedules, and cost goals. Think of it as a clear, actionable plan with defined milestones and objectives, steering you towards your procurement targets.

Imagine a business striving to be the cost leader in its industry. Their purchasing strategy might incorporate buying in bulk to take advantage of volume discounts or sourcing from low-cost regions, all while considering the equilibrium between cost savings and quality standards. 

Conclusion

All in all, strategic sourcing is not merely a buzzword; it is a powerful approach that unlocks the full potential of procurement, adding substantial value to organizations across industries.

By embracing strategic sourcing, procurement managers can reap a multitude of benefits and drive significant improvements in the procurement process. Enhanced supplier relationships, reduced costs, improved quality and delivery performance, and increased supply chain resilience are just a few of the advantages that can be achieved through effective strategic sourcing practices.

As the business landscape continues to evolve, the importance of strategic sourcing in procurement will only grow.