The Importance of Strategic Sourcing: A Holistic Approach to Procurement

Teradix

Published on
May 28, 2022
The Importance of Strategic Sourcing: A Holistic Approach to Procurement

To be competitive in today’s business climate, companies are constantly looking for innovative ways to reduce costs, improve the quality of their products and reduce production time. One way to achieve this is through strategic sourcing.

Strategic sourcing allows companies to use their combined purchasing power to get the best deals. Companies should increase their supply chain knowledge by incorporating strategic sourcing and negotiation techniques to optimize price and risk.

What is strategic sourcing?

Strategic sourcing is about taking strategic steps to leverage and protect purchasing power. As procurement often involves many stakeholders, the efficient process can improve your ability to deliver value.

A strategic procurement plan that takes advantage of long-term contracts and comparative pricing can save time and money and protect against supply chain threats. Given these risks, it is crucial to develop a plan to access multiple sources of critical supplies, such as quality suppliers, options for outsourcing essential processes, and access to manufacturing capacity that will allow you to expand operations as needed quickly.

Why is strategic sourcing important?

Adopting strategic sourcing can bring significant benefits to companies. Sourcing suppliers using this method and continually analyzing the evolving market means that companies can ensure that they are consistently achieving substantial savings.

Strategic sourcing allows companies to align their materials procurement with their business objectives, increasing efficiency and minimizing risk within the supply chain.

At the heart of strategic sourcing is the ability to build long-term relationships with suppliers. As suppliers are selected based on their capabilities and compatibility with the needs and goals of the business, an efficient transaction model is created. It leads to more benefits than just getting the right materials at the expected time. Strong relationships facilitate risk identification, sales forecasting, and materials shortages management.

Streamline and Automate your Sourcing & Procurement Process!

Implementing a Strategic Sourcing plan

While it has many variations, strategic sourcing usually follows standard steps.

Analysis of the product categories

Companies must first identify which product or service categories should be used to develop an effective procurement strategy. The goal is to determine which products can be sourced from external suppliers and which items should be sourced internally. This process helps define the company’s supply chain management structure and guides strategic sourcing decisions. The best way to do this is to look at past purchasing trends and sales data and review current inventory levels.

Development of procurement strategy linked to business objectives

Once you know your company’s business strategy, identify procurement as an area where you can add value or improve its contribution to the company’s overall performance. Then define specific objectives for strategic sourcing based on your company’s comprehensive strategies and goals. Throughout the strategic sourcing process, keep these overarching goals in mind to focus on delivering a real return on investment – not just on achieving volume targets at low cost.

Analysis of the supplier market and create a supplier portfolio

To improve competitiveness, companies should invest in creating a supplier portfolio. To create a portfolio, a business needs to know its total market potential and evaluate each potential supplier based on their needs to make a priority list.

First, it’s crucial to examine demand fluctuations and trends related to products or services and suppliers’ current offerings. It will help determine when it makes sense to buy from a particular source or if there are other ways to reduce costs that could eliminate the need for procurement. It also shows how much flexibility a company has in choosing supply sources: the more options, the better.

It is also essential to look at supplier capabilities and assess the potential risks for each supplier based on their position in the company’s supply chain (i.e. whether they are upstream, midstream, or downstream). Just because a supplier is capable of producing something does not mean they can do it cost-effectively. Therefore, you should thoroughly assess its capabilities before deciding whether it belongs in your portfolio.

Negotiations and selection of suppliers

To achieve business goals, the company needs to purchase good products. And to get good products at affordable prices, it’s crucial to negotiate well with suppliers and find ones that meet your strategic objectives. The company always needs to know its value chain strategy before working with suppliers. Building strategic sourcing relationships can lead to significant savings and overall cost reductions.

A comprehensive review of the company’s supply base will also provide valuable information on how much each product or service costs to produce and offer the opportunity to develop more profitable business models by reducing unnecessary complexity in the supply chain.

Integration of suppliers into existing processes

A strategic sourcing strategy is an approach to procuring goods and services that considers where and how to invest in the supply chain. It means integrating suppliers into existing processes to avoid redundancy, streamline processes, and increase efficiency.

Enlisting a supplier from the start will allow you to maintain a seamless flow of communication and lead to reduced shipping times. Teradix’s online supplier management tool makes it easy to get a new supplier set up and onboarded with the process.

Building long-term relationships with suppliers and incentivizing them to meet agreed standards through digital platforms that facilitate easy data sharing and greater collaboration helps produce an effective sourcing strategy.

Performance metrics tracking and plan optimization

The key to a strategic sourcing timely start and long-term success is to develop performance targets based on key performance indicators. These will help determine what resources are needed and when they should be procured.

With our cloud-based solution, you can view all your transactions and supplier rankings in a single view and make an informed decision about their performance.

It also allows assessing future needs based on current conditions, considering potential business growth or other external factors that may impact company operations.

Conclusion

A more holistic approach to supply chain integration has become necessary for companies to pursue more profitable business ventures.

Strategic sourcing is an area whose potential and profitability are just beginning to be realized.

To remain competitive in today’s markets, companies must use the most innovative and advantageous cutting-edge technologies.

To learn more about the reverse auction process, or if you’d like to schedule a demo, contact us. We’d like you to envision procurement in a different way.

To learn more about strategic sourcing solutions, book a demo with our consultant and learn how Teradix can transform and digitize your procurement processes!

Streamline and Automate your Sourcing & Procurement Process!

You may also like..