Strategic sourcing is the critical process that helps buyers identify what they really need to succeed, and then works with vendors inside and outside their organization to get it for the best possible price.
This process is key because it’s based on a tried-and-tested framework that has emerged alongside modern procurement practices. The most effective organizations are bringing this proven approach into their supply chains and leveraging it to save time, money and effort.
We too can apply these same principles to a new generation of supply chains that call for an agile approach focused on customer experience and real-time data analytics.
Strategic Sourcing Vs Traditional Procurement
Quite simply, the difference between traditional procurement and strategic sourcing is that the latter takes a more holistic approach to supply management.
Strategic sourcing demands a focus on cost-efficient collaboration with suppliers from both parties, as well as mutually beneficial strategies that create long-term value for all involved.
In contrast, traditional procurement can be seen as very transactional in nature, focused on maximizing purchase price—while neglecting other factors that ultimately affect the success of procurement projects.
Traditional procurement is often broken down into three steps: pre-buying, buying, and post-buying.
Each of these phases contributes to specific goals like cost savings or generating supplier insights. But what strategic sourcing does differently is focus not only on traditional procurement phases, but also the entire end-to-end supply chain.
Basically, strategic sourcing takes a comprehensive and collaborative approach to supplier relationships. It’s focused more on creating value for both parties over transactional savings.
Such foresight leads to better collaboration between suppliers and buyers, which benefits everyone involved in this modern procurement process.
Having said that, strategic sourcing allows us to create more specific objectives, such as:
- Creating new opportunities for collaboration with suppliers.
- Identifying and managing supplier relationships to enhance outcomes.
- Establishing long-term partnerships that bring value to all stakeholders involved.
- Improving overall supplier performance.
- Developing efficiency and cost saving opportunities across the business.
Strategic sourcing is far more effective than traditional procurement because it takes a proactive approach to supply management, and focuses on the entire end-to-end supply chain—from supplier to buyer.
7 Steps to Better Strategic Sourcing for Your Organization
The original 8-step strategic sourcing model for procurement was created sometime in 1994 by Toshihiro Nishiguchi.
Nishiguchi worked on identifying the key differentiator between successful and failed supplier relationships across the automotive industry, notably at Toyota. He found a model that could be used universally in this work and named it the Value Analysis Process (VAP).
Here’s a modern 7-step model that can be used to improve supplier relationships and strategic sourcing projects:
Step 1: Create a Modern Procurement Plan
Your first step is to create a plan for strategic sourcing. This includes choosing a team, holding a meeting to discuss the goals of the project and what resources are available.
It is important to establish how much you currently spend on purchasing materials, and what contracts are already in place so you can identify opportunities for new contracts.
Step 2: Organize the Supply Chain
The second step is to organize your supply chain. This means mapping out each link in the chain, involving suppliers and internal stakeholders.
An effective mapping process should include value-adding activities with suppliers as well as establishing a long-term strategy for supplier management. This allows everyone to be on the same page from day one.
Step 3: Determine the Supplier Evaluation Approach & Set Supplier Quality Requirements
In this step, it is important to set up a purchasing cycle that will not only ensure quality control, but also identify quality improvement opportunities.
For this reason, it is essential to establish specific supplier requirements and begin the supplier evaluation process both internally and with suppliers.
Step 4: Develop Supplier Evaluation System
Once you have identified the right suppliers, it is important to build strong relationships with them by developing regulations, standards, ways of working, etc. Knowing what each party expects from the other makes it easier to create quality work.
It is also important to define an evaluation system that you can use for all suppliers, including the scoring method and weighting variables used to determine supplier scores.
Establishing a long-term plan for continued collaboration with your supplier will help you develop a win-win relationship.
Step 5: Evaluate and Select Suppliers
At this stage, it is time to compare your internal scores with those of your suppliers and once again determine what each party expects from the other. This should be done before negotiations begin as it is easier to influence a supplier’s score if you know what they are looking for.
You can also use this time to determine which metrics you will be using throughout the contract, such as quality control and delivery times.
Step 6: Negotiate Supplier Contracts
The goal of this step is to select new suppliers that will bring value to the company moving forward.
Once evaluations have been completed, it is possible to negotiate contracts with suppliers. At this point, both parties should have a clear idea of what the other is expecting from this relationship.
You may need to adjust your evaluation system during negotiations as it will become apparent which areas you are more comfortable with or less confident about. This can help strengthen your supplier relationships in the long term.
Step 7: Expand Supplier Operations with Supplier Development
During this step, it is important to ensure that any new supplier contracts are beneficial for both parties.
A crucial component of this step is focused on improving overall supplier performance using a variety of different methods. This includes incentivizing suppliers based on performance, streamlining processes and productivity increases.
It is also necessary to emphasize training for products and services moving forward in order to reduce the amount of errors and improve overall supplier performance.
While the above steps may seem overwhelming for some, it is important to understand that they are simply guidelines.
Each company will have different needs and requirements in order to achieve success when implementing a better supplier management plan moving forward.
However, these basic steps provide a solid foundation for reaching out to suppliers in the right way.
If you are looking to improve your supplier relationships and strategic sourcing projects, get in touch with Procoto today!