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Everything you need to know about strategic sourcing

Written by Alex Cohen

Strategic sourcing. You’ve no doubt heard of it before, whether at work or in Francesco Marciuliano’s Sally Forth comic strip. What exactly is it, though?

Simply, strategic sourcing is the method some organisations use to make the most of their supply chain, leveraging their power as buyers to secure savings wherever possible. It’s a detailed, pre-planned way to approach the procurement process that takes more than just purchase price into account. It’s all about data collection and analysis.

Because it’s such a ‘fine-tooth-comb’ approach, there are several stages to strategic sourcing, and a widely agreed-upon framework with which businesses go about it. We’re going to break down the fundamentals – everything you need to know to get started with strategic sourcing.

Stage one: Initial research

The first step in the strategic sourcing process involves looking at the current state of affairs within your organisation. It’s important to do so early on to get an idea of what needs improving, how your current procurement process is set up and to take a general inventory of the data you could be making use of. 

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For many, this involves taking a deep-dive into filing cabinets – leafing through piles of purchase order paperwork, invoices and requests-for-information (RFIs) from past suppliers. The internal research stage can often be a wakeup call for many organisations, letting them know that digitising the purchasing process is a necessity for more efficient, more productive processes. It’s especially essential when it comes to the kind of data management that strategic sourcing demands.

How to do it

The first thing organisations should do is create a categorisation system for their existing spending. This can be organisedin any number of ways. But, categorising based on the importance of the sourced product is a common metric to start with.  

After this is done, and you’ve got a good idea of what matters most, you should:

  • Create a risk analysis for the categories you’ve created. Deltabid recommend using the Kraljic Matrix to assess risk. 
  • Take a look at your past purchases to create an ordered list of suppliers you’re spending the most money with.
  • Consider the costs of things like storage, transportation and maintenance to estimate a ‘total cost of ownership’ for each procured product.
  • Assess your current sourcing process – how defined is it? How much negotiation takes place before a contract is signed with a supplier?

This initial work should be undertaken with the input of people throughout your organisation, especially those who work directly with the products you’re sourcing. If you want to get really in depth, you can also try to estimate the cost of production that your suppliers incur, which may help with negotiations further down the line.

Stage two: Market research

Once you’ve got an idea of what you’re spending, it’s time to assess the supply market. Here’s what you need to look for, and the information you should be gathering:

  • Gather general pricing and revenue information on both your current supplier, and others in their field.
  • Calculate your spend amount as a percentage of their total revenue to get an idea of the importance of your business to them. This is a key point of leverage.
  • Conduct interviews with suppliers where possible to try and understand their business model and any supply fluctuation that may come with it in future.

Understanding your supplier’s market – and your place in it – is crucial when it comes to gaining leverage as a buyer and using information to inform your sourcing strategy.

Stage three: Requesting information

At this stage, you should have a fairly good idea of the products you need and the suppliers you’ll be approaching. The next stage involves asking those suppliers for a quote and comparing the results.

The ‘request for quotation’ (RFQ) process involves several stages within itself (we told you this was detailed…):

  • You’ll need to prepare a specific request, including the quantity of product you’ll need, the frequency you’ll be ordering it and the speed with which you’d like to receive it. 
  • Include the criteria you’ll be judging their response by, so they know what questions to answer in detail.
  • Provide a general price that you’d like to see their responses mirror. Use all of the data that you’ve gathered from internal and market research to do so.

Once you have your responses, it’s important to respond to every candidate and to explain your decision-making, just in case you’ll be working with them in future. It’s a great way to foster positive relationships – another form of leverage you’ll want to take advantage of.

When it comes to negotiation, Deltabit recommends deploying the ‘Five Forces’ or  Purchasing Chessboard’ approach. Both of these negotiation models are worth studying and implementing. We’d recommend starting with the Five Forces – it’s simple, and it gives you an idea of the market pressures you can take advantage of to increase your power as a buyer.

Stage four: Start again

The work doesn’t end when you’ve secured a supplier. Strategic sourcing is an iterative process. It requires that you constantly revisit the questions you asked yourself at the beginning. It’s a constant cycle of self-assessment and improvement that ideally results in increased savings year-on-year from your suppliers.

Manage the data

It’s essential that this data-based process is supported with the right tools. You’ll need to gather your purchasing information in one place, and when the time comes, analyseit. Apps like Turbine automate the purchase order process and allow you to export your buying data to Excel for use with PivotTable, a widely-recommended way to develop your strategic sourcing.

It’s a daunting prospect, but one that has the potential to save your business significant amounts of money. Our advice is to keep Eleanor Roosevelt’s approach in mind:

‘It takes as much energy to wish as it does to plan.’

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Advice , Guide , Purchase Orders , Strategy