All companies rely on sourcing to some extent. Whether they need to source office supplies, marketing services, or manufacturing components, finding the right supplier is not always an easy feat.
For many companies, finding a supplier that offers cost-effective goods or services is enough.
However, businesses that are looking to improve their margins, better the customer experience, and build fruitful long-term relationships with suppliers may be more interested in strategic sourcing.
Continue reading below as we examine how small and medium-sized businesses can enhance their procurement practices, reduce costs, and improve supplier relationships through strategic sourcing initiatives.
Strategic sourcing definition
Strategic sourcing is a supply chain management practice. It refers to the process of identifying and securing goods and services that support business operations while ensuring purchases align with the business’s overall objectives.
Traditional sourcing methods involve selecting and evaluating potential suppliers, usually based on basic factors like price or where they’re located.
However, strategic sourcing goes one step further, ensuring the suppliers your business partners will support your long-term goals.
With strategic sourcing, you’re concerned with more factors aside from finding the supplier with the best pricing. Instead, you’ll take a more dynamic approach, consider things like:
- Quality of goods and services
- Who their suppliers are
- The customer service they provide
- Their interest in innovation
- Compliance with regulatory requirements
In other words, businesses that implement strategic sourcing recognize that the suppliers they select can significantly impact their performance, their reputation with customers, and their ability to improve profitability.
Key steps of the strategic sourcing process
To better understand what makes sourcing activities “strategic” we’ll now provide a breakdown of the main steps you should follow when evaluating and selecting suppliers.
Spend analysis
Any strategic sourcing strategy should begin with a thorough spend analysis.
Without any clear understanding of your current sourcing and procurement costs, it can be difficult to create a strategy to improve spending.
Thus, to identify cost-saving opportunities, you must collect, organize, and assess your spend data. This might include breaking down procurement into major categories, indirect vs direct spend, and by individual supplier or vendor.
This way, you will have greater transparency into current spending and it will be easy to see where you can be more strategic and enhance procurement efficiency.
For example, if you recognize you’re sourcing office supplies from more than one vendor, you may be able to achieve cost savings by consolidating to just one.
Supplier evaluation
A large part of the strategic sourcing process hinges on your ability to identify and evaluate potential suppliers effectively.
Again, with traditional or simple sourcing, you’re likely only looking for the suppliers with the best pricing.
However, with strategic sourcing, you need to take a more holistic approach. This might include considerations like:
- Industry reputation
- Years in business
- Relevant certifications or licenses
- Capabilities
- Customer reviews
- Compliance practices
Before issuing requests for proposal (RFPs) to potential suppliers, solidify your requirements with key stakeholders to understand how the goods or services you’re sourcing support your overall operations.
Once you start receiving proposals, you can evaluate them based on these criteria, ensuring you only work with qualified and reliable suppliers.
Negotiation
Another important aspect of strategic sourcing is contract negotiations. The procurement contract creates the foundation for your relationship and shouldn’t be overlooked as a boring legal document or formality.
Even if you find suppliers that tick all your boxes, you need to get these terms and expectations in writing.
During negotiations, focus on establishing a win-win contract that benefits both parties. In other words, go into negotiations with your best interests in mind, allowing you to secure payment and pricing terms that support your bottom line.
But, you shouldn’t make the supplier feel like you’re trying to undercut them or devalue their goods or services, which could set your relationship off on the wrong foot.
Learn more: How to negotiate with vendors effectively
Benefits of strategic sourcing for SMBs
Strategic sourcing isn’t a business practice that’s exclusively reserved for large enterprises.
There are plenty of benefits that small and medium-sized businesses (SMBs) can achieve through strategic sourcing, including:
Cost reduction
One of the primary reasons why businesses should implement strategic sourcing is that it can help them save money in the long run.
When sourcing strategically, companies may be able to negotiate better terms and potential volume discounts, creating immediate cost savings.
In some cases, it may cost more upfront to invest in relationships with vendors or suppliers that have more expensive goods.
However, if they can justify the higher price tag with higher-quality goods, better service, and continuous improvement, your company can benefit from better customer satisfaction and lower turnover.
Supply chain resilience
Any business that relies on third parties to deliver critical goods and services is subject to supplier risk.
Sometimes, external forces outside of your control impact your suppliers’ ability to deliver on their contractual obligations.
Maybe their supplier goes out of business, a tornado hits their distribution center, they fall victim to a cybersecurity attack, or a key business leader leaves the company suddenly.
Regardless of the reason for the supply chain disruption, investing in strategic sourcing relationships can help your business be more resilient and less susceptible to such incidents.
With strategic sourcing, the idea is that you evaluate suppliers more thoroughly, giving you a better awareness of the potential risks so you can mitigate your exposure.
For instance, if you notice that three of your critical suppliers are located in the same city, you may want to consider diversifying your supplier base in more locations.
This way, if a natural disaster hits the area, you’re not at risk of delayed deliveries from each of them.
Innovation
This may be a less obvious benefit, but strategic sourcing can help you enjoy better product and service innovation.
Oftentimes, if you’re choosing suppliers solely based on price, you may benefit from a cost perspective.
But, low-cost suppliers may not be reinvesting in their products and operations. Thus, their goods and services may not evolve with the trends and changing consumer expectations.
However, if you strategically evaluate suppliers, you may recognize certain suppliers as forward-thinking and constantly upgrading their offerings.
In turn, you can continue offering better versions of your products and services for customers, helping you create a sustainable competitive advantage over your peers.
Common challenges with strategic sourcing
Businesses that are beginning to implement strategic sourcing practices may face some roadblocks during implementation.
Here are some of the common challenges with strategic sourcing to be aware of so you can work to avoid them within your own business:
Supplier selection
The first challenge with strategic sourcing starts with supplier selection.
Depending on the goods or services you’re looking to source, there may be dozens or even hundreds of possible suppliers you could work with.
It can be overwhelming to consider all your options and determine which best suits your needs.
This is why the RFP process can be so beneficial, as it allows you to compare potential suppliers on an equal playing field and clearly see which one suits your requirements best.
Contract management
Once contracts are in place, strategic sourcing work is not over. Procurement teams must stay on top of contract terms and ensure their suppliers meet their obligations.
Contract management can be more straightforward when the company only works with a few suppliers.
However, as you expand and engage with more suppliers, it can be much more challenging to keep all contract terms straight and practically enforce their terms.
Performance measurement
Without the right tools and systems in place, businesses may not know how to measure supplier performance effectively.
First, you need to define how you will measure performance based on contract terms, such as delivery timing, quality, pricing, and other details.
For instance, if the contract states they will make deliveries by business close every Friday, you need to keep track of the time each delivery is made, giving you a clear trail of all the days they may have been late.
Best practices for implementing strategic sourcing
Use the following suggestions and best practices to successfully implement strategic sourcing into your procurement strategy.
Make data-driven decisions
Again, you can’t make strategic decisions without data to support your sourcing strategies.
You need to rely on concrete data to ensure your strategic sourcing plans are practical and measurable.
Use current spend data as the basis for your sourcing strategy. While you may have a general goal to “save money”, it can be hard to achieve real improvements if you don’t have a tangible value you’re working towards.
Collaborate with stakeholders
You need to make sourcing decisions with input from key stakeholders. Otherwise, you may make decisions that detract from their ability to perform and be productive.
Sourcing impacts all aspects of your business. So, it’s important to get feedback from employees and leaders in departments that you’re not as familiar with.
For instance, maybe you recognize that your team is using two separate customer relationship management (CRM) tools. However, after speaking with your sales and marketing teams, you may come to find that they have differing capabilities and aren’t an exact replacement for one another.
Thus, eliminating one of the vendors may not be the best solution for your team. Instead, it might be worthwhile to seek out CRM vendors with a more comprehensive feature list to accommodate both teams’ needs.
Adopt a culture of continuous improvement
For optimal impact, strategic sourcing practices should evolve over time as the company’s needs and goals change, along with shifts in consumer and market demands.
Procurement teams should adopt a culture of continuous improvement, constantly looking for ways to support vendor relationships and right-size their supplier base for lower risk exposure and more favorable partnerships.
Real-world strategic sourcing examples
To see the power of strategic sourcing, it can be helpful to review some real-world examples of companies that have implemented these strategies and how they’ve benefited.
Take retailer giant Walmart, for example. According to Procurement Magazine, part of the reason why they’re the biggest retailer in the world is because of their strategic sourcing practices. They state that Walmart uses advanced analytics and technology to help identify and support relationships with key suppliers.
In another example, they explain how strategic sourcing has helped Apple maintain its competitive advantage in the highly competitive tech market. Specifically, they work with suppliers that deliver innovation with technology and materials to help their products perform and look better.
How to support your strategic sourcing partnerships
Implementing strategic sourcing requires a holistic approach and an upfront investment of time and effort.
However, it can produce measurable long-term benefits by ensuring you only work with suppliers that support your strategic goals.
Your strategic partnership may officially begin once you’ve signed the contract. However, you need to continue supporting suppliers throughout your relationship with on-time and accurate payments.
With an automated accounts payable solution like BILL, you can easily pay suppliers on time. They can send invoices to your email, and BILL will automatically start processing them and routing the proper approvals, ensuring the payment is made by the due date.
If you want to learn more about how we can help you manage your strategic partnerships, give BILL a try today.
