Strategic sourcing: How to build resilient supply chains
Strategic sourcing optimizes the procurement process to achieve long-term business goals. Learn how it helps reduce costs, boost quality, and drive innovation.
In today's cutthroat business environment, procurement can't just be about filling orders and juggling invoices. It needs to be a calculated effort that drives value and supports your company's growth. Enter: strategic sourcing.
Strategic sourcing is a proactive approach to procurement that goes beyond transactional activities. It focuses on optimizing the entire sourcing process to achieve long-term value. By strategically selecting and managing suppliers, you can cut costs, improve quality, enhance supply chain resilience, and drive innovation.
This article will delve into the key elements of strategic sourcing, with practical tips on how you can implement strategic sourcing practices in your own organization.
What is strategic sourcing?
Strategic sourcing is about more than just filling orders. It's a data-driven approach that formalizes information gathering and leverages your organization's buying power to find the best deals. Unlike traditional sourcing, which often focuses on short-term cost cuts, strategic sourcing is all about creating long-term value.
Strategic sourcing focuses on aligning procurement management with overall business strategy. It’s a process that requires a deep understanding of your organization’s needs, the market, and your suppliers. With this information, you can pinpoint sourcing opportunities that support growth, profitability, and risk mitigation.
Strategic sourcing vs. procurement
Strategic sourcing and procurement are often used interchangeably, but it's not quite apples to apples. Procurement is the transactional process of acquiring goods and services, while strategic sourcing is a more proactive approach that focuses on optimizing the entire sourcing process to achieve big-picture goals.
Procurement typically involves activities like issuing purchase orders, receiving goods, and managing supplier payments. While procurement is often reactive, it can also involve proactive activities like maintaining strong supplier relationships and considering long-term implications of purchasing decisions.
Strategic sourcing, on the other hand, is a tactical function that involves identifying and selecting suppliers, negotiating contracts, and managing supplier relationships. It's a forward-thinking approach that anticipates future needs and ensures the sourcing process supports the company's strategic objectives.
The strategic sourcing process in 7 steps
Strategic sourcing isn’t just about buying goods and services. It’s a smart way to find the best suppliers and get the most bang for your buck. Follow these steps to create your own sourcing roadmap to help you plan, manage, and optimize your supply chain:
1. Assess your needs
Before you start shopping, you need to know exactly what you're looking for. Identify the goods or services your business needs to run smoothly, including the required quantity.
Be as thorough and specific as you can—this step sets the stage for the rest of the sourcing process.
2. Vet potential suppliers
Once you've defined your needs, it's time to hit the books. You’ll need to conduct market research to identify potential suppliers that can meet your requirements. Start by using online directories, industry associations, and supplier databases to narrow down your options and find suppliers that are a good fit for your business.
Get a good understanding of unique factors like market dynamics, key players, and industry trends that could impact your sourcing process. Procurement orchestration software like Zip can help you gather and analyze market data, making this step easier and more efficient.
3. Set your sourcing strategy
Now that you know what you need and who's out there, it's time to decide how you're going to get it. Your sourcing strategy is your game plan for finding the best supplier. There are a few different ways to play the game, like:
- Quick bids: This is a streamlined approach for simpler purchases where speed is essential. Suppliers submit bids and you can make a decision quickly.
- Three bids and a buy: This strategy involves getting bids from three suppliers and then negotiating with the lowest bidder. It's a good option for mid-sized purchases.
- Competitive sole sourcing: This involves selecting a single supplier for a specific product or service and then negotiating terms. It can be effective for complex or specialized requirements.
- RFP bidding: This involves issuing a formal request for proposal (RFP) to multiple suppliers, who then submit detailed proposals. It's a common approach for larger, more complex purchases.
For the sake of simplicity, we’ll focus on RFPs in this article.
4. Solicit bids
The next step is to solicit bids from potential suppliers. In strategic sourcing, this is where you’ll send out an RFP or a request for quotation (RFQ) to potential suppliers.
An RFP is typically used for more complex purchases where you need detailed proposals and information about the supplier's approach and capabilities. An RFQ is often used for simpler purchases where you might just need pricing information.
These documents should clearly spell out what your company needs and what you expect from suppliers.
5. Review and negotiate your bids
Once the bids roll in, review each one carefully, comparing them based on your criteria. Don’t be afraid to discuss better terms with potential suppliers to get the best deal possible. Remember, negotiation isn't just about price—it's also about terms and conditions that work for your business.
6. Select and onboard your supplier
After the negotiations, you can select your winning supplier and integrate them into your organization’s supply chain.
Before you make it official, make sure they can deliver what you need and work smoothly with your company. Here are a few indicators to help confirm compatibility:
- Does the supplier have a proven track record of delivering similar goods or services to other companies in your industry?
- Are they known for quality and good customer service?
- Do they have the right certifications to meet your standards?
- Can they handle the volume, delivery times, and customization you need?
- Do they have a similar company culture and values?
- How do they handle changes and problems?
- How do they communicate? Are they quick to respond?
Once you're confident, finalize the contract and get ready to work together. Remember, contract management is ongoing. Keep an eye on the supplier's performance and make sure you’re both fulfilling your obligations.
7. Set KPIs and benchmarks for continuous improvement
Once you've got your supplier on board, you’ll want to make sure they’re continuously hitting the mark. Set key performance indicators (KPIs) to measure supplier performance, like:
- On-time delivery rate: How often are they delivering on time?
- Quality: Is the quality of their goods or services up to par?
- Cost: Are they sticking to the agreed-upon price?
- Customer satisfaction: Are you happy with their work?
Regularly review their performance and provide feedback. This will help ensure your supplier is meeting your expectations and that your sourcing process is working as it should.
Benefits of strategic sourcing
By strategically selecting and managing suppliers, you can unlock a range of benefits that support your bottom line. Some advantages of strategic sourcing include:
- Cost reduction: One of the biggest perks of strategic sourcing is the potential to cut costs. By looking at the big picture—not just the initial price tag—you can find ways to save money over the long haul.
- Streamlined processes: Strategic sourcing is like a well-oiled machine. It helps you streamline your procurement processes, making everything more efficient while reducing errors.
- Enhanced supply chain resilience: In today's unpredictable business world, a strong supply chain is a must. Strategic sourcing helps you identify and manage risks so you can navigate supply chain disruptions, price fluctuations, and whatever else comes your way.
- Increased collaboration and innovation: Strategic sourcing is about building relationships. By working closely with suppliers, you can share ideas, innovate, and create even better products or services.
- Improved quality: Strategic sourcing helps you find suppliers who are committed to quality. This means you'll get better products and services, which can lead to happier customers.
Enhanced decision making: Strategic sourcing gives you the data and insights you need to make smart decisions about your procurement. This can help you avoid costly mistakes and make the most of your resources.
How companies use strategic sourcing
Companies of all sizes have recognized the value of optimizing their procurement processes, including:
- Walmart: Walmart has revolutionized the retail industry with its focus on an efficient omnichannel supply chain and strong supplier relationships. They've used their massive buying power to negotiate killer deals, saving them and their customers money. Walmart is also embracing the cost-saving benefits of procurement automation, claiming that more than half of their fulfillment center volume will move through automated facilities by 2026.
- Apple: Apple's reputation for innovative products and premium quality is closely tied to its strategic sourcing practices. They carefully select suppliers and conduct rigorous supplier audits to ensure their products are manufactured under ethical and sustainable conditions. This focus has helped them build a great reputation and strong relationships.
- Tesla: A big part of Tesla's rapid growth and success is its smart approach to supply chain management. They've formed strategic partnerships to secure critical components and materials to keep production running smoothly. Tesla's also focused on sustainability and taking control of key parts of their supply chain, which has helped them reduce their reliance on external suppliers.
Strategic sourcing best practices
Following strategic sourcing best practices is essential to maximizing value and achieving a competitive advantage. Organizations can streamline their sourcing process and strengthen their supply chain by implementing these proven strategies.
Prioritize your needs
Not all procurement needs are created equal. Some are critical to the organization’s operations, while others are less so. By prioritizing what goods and services are essential to your business, you can focus your resources where they matter most and make sure the critical needs are met first.
Conduct through supplier research
Knowledge is power, and this is especially true when it comes to strategic sourcing. Conducting thorough research on potential suppliers—like reading through third-party reviews or asking for references—provides valuable insights into their capabilities, reliability, and performance. This information is crucial in making informed sourcing decisions.
Use standardized scoring
Fairness and objectivity are key in the supplier selection process. Using a standardized scoring system—a set of predefined criteria and weights used to evaluate potential suppliers—helps ensure that all potential suppliers are evaluated on the same criteria, making the selection process fair and transparent.
Build strong supplier relationships
Suppliers aren't just vendors; they're partners. Establishing strong relationships with suppliers fosters collaboration, encourages innovation, and leads to better outcomes. These relationships are built on trust, mutual respect, and open communication.
Always look to improve
A company's needs are dynamic and ever-changing. Continuously monitor and find ways to improve your workflows, and ensure that the sourcing processes remain effective and efficient in this changing landscape. Regularly review supplier performance, assess the effectiveness of the sourcing processes, and then make the necessary adjustments.
Zip’s approach to strategic sourcing
Zip’s approach to strategic sourcing is unique. We drive user adoption by creating a single front door for all sourcing and vendor requests—from tactical procurement to complex strategic sourcing. This allows teams to get involved early on in the purchasing process, ensuring all procurement activities align with the organization’s strategic goals.
Our Sourcing solution integrates new generative AI capabilities to reduce the time it takes to create an RFP. This means users can source more and save more, without having to depend on spreadsheets, emails, and manual follow-ups to complete a sourcing event.
To learn more about how Zip can help your organization with strategic sourcing, schedule a demo today.
Strategic sourcing is a journey, and like any journey, it requires a roadmap. This roadmap is made up of best practices that guide organizations towards their destination: a streamlined, efficient, and effective sourcing process.
