What is Strategic Sourcing? Definition, steps, and principles

What is strategic sourcing?

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Strategic sourcing is an approach to procurement that formalizes the way information is gathered and used so that an organization can leverage its consolidated purchasing power to find the best possible values in the marketplace. Unlike traditional sourcing, strategic sourcing focuses on long-term value creation rather than short-term cost reduction.

Strategic sourcing is about more than just getting the best price; it’s about creating strong relationships with suppliers, understanding market trends, and using data to make informed decisions. It’s a process that requires a deep understanding of your organization’s needs, the market, and your suppliers.

In this article, you’ll learn about the steps involved in strategic sourcing, its benefits, key principles, best practices, and how Zip’s approach to strategic sourcing can help your organization.

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The steps of strategic sourcing

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Strategic sourcing is a systematic and data-based approach for optimizing an organization’s vendor base and improving overall value propositions for software and services. It involves a series of steps that help an organization to plan, manage, and optimize supply chain activities. 

Here are the key steps involved in the strategic sourcing process.

1. Define the need

The first step in strategic sourcing is to define the need. Identify the goods or services you need, along with the required quantity. Be as thorough and specific as you can here, because this stage sets the direction for the rest of the sourcing process!

2. Market research

Once you’ve defined your needs, you’ll want to conduct market research to identify potential suppliers that can meet your requirements. It’s helpful to have a keen understanding of the market dynamics, the key players, and the trends that could impact the sourcing process.

3. Set your sourcing strategy

Based on the market research, you’ll want to set your sourcing strategy. There are several modern options, including Quick Bids, Three Bids and a Buy, Competitive Sole Sourcing, and traditional RFP bidding. We’ll look at traditional RFP sourcing for the purposes of 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 a request for proposal (RFP) or a request for quotation (RFQ) to potential suppliers. The RFP or RFQ should clearly outline the organization’s needs and expectations.

5. Bid review and negotiation

Once the bids are received, they are reviewed and negotiations are conducted with potential suppliers to ensure the best possible terms. In this step, you’ll spend your time evaluating the bids based on a set of predefined criteria and then negotiate with the suppliers to get the best deal.

6. Supplier selection and integration

After the negotiations, a supplier is selected and integrated into the organization’s supply chain. Be sure to confirm that the supplier can meet your needs, and that they can work effectively with your company within your expected time frame.

7. Set KPIs and benchmarking

Finally, set your key performance indicators (KPIs) and benchmarks to measure the performance of the supplier and the effectiveness of the strategic sourcing process. Set clear expectations for the supplier and regularly review their performance.

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Benefits of strategic sourcing

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When used effectively, strategic sourcing can lead to significant improvements in efficiency, cost savings, and supplier relationships. Let’s take a look at some of the key benefits you’ll immediately benefit from. 

Reduced Total Cost of Ownership (TCO)

One of the most tangible benefits of strategic sourcing is the potential for reduced total cost of ownership. By looking beyond the initial purchase price and considering all costs associated with the product or service over its lifecycle, organizations can achieve substantial savings.

Streamlined processes

Strategic sourcing helps to streamline procurement processes. By standardizing procedures and eliminating unnecessary steps, organizations can increase efficiency, reduce errors, and save time.

Enhanced collaboration

Strategic sourcing fosters enhanced collaboration. By building strong relationships with suppliers and maintaining open lines of communication, organizations can benefit from knowledge sharing, innovation, and problem-solving, leading to improved efficiency and productivity.

Better risk management

In today’s volatile business environment, risk management is more important than ever. Strategic sourcing allows organizations to proactively identify and manage supply chain risks, such as price fluctuations, supplier disruptions, and geopolitical issues. This proactive approach ensures agility and competitiveness in the face of uncertainty.

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Key principles of strategic sourcing strategy

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Strategic sourcing is not just about following a process; it’s about adhering to a set of key principles that guide every decision and action. These principles form the backbone of a successful strategic sourcing strategy, ensuring that every step taken aligns with the organization’s overall goals and objectives. Let’s explore these principles in more detail.

Link sourcing decisions to your overall business goals and objectives

Every sourcing decision should be a strategic one. This means aligning each decision with the organization’s overall business goals and objectives. By doing so, sourcing becomes a strategic function that contributes to the organization’s success.

Build strong, collaborative partnerships with key suppliers

Strategic sourcing is about more than just finding suppliers; it’s about building strong, collaborative partnerships. These partnerships can lead to improved efficiency, innovation, and value creation.

Think beyond short-term cost savings and consider the Total Cost of Ownership (TCO)

While cost savings are important, strategic sourcing encourages organizations to look beyond short-term savings and consider the TCO. This includes all costs associated with a product or service over its lifecycle, providing a more accurate picture of its true cost.

Proactively identify and mitigate potential supply chain risks

In today’s volatile business environment, risk management is crucial. Strategic sourcing involves proactively identifying and mitigating potential supply chain risks, ensuring the organization can respond quickly and effectively to any disruptions.

Utilize data and analytics to inform your sourcing decisions

Data and analytics are powerful tools that can provide valuable insights into the market, suppliers, and the organization’s own procurement practices. By leveraging these tools, organizations can make more informed sourcing decisions.

Regularly review and assess your sourcing processes and supplier performance

Continuous improvement is a key principle of strategic sourcing. It’s essential to regularly review and assess sourcing processes and supplier performance to identify areas for improvement, and ensure your teams are achieving their sourcing objectives.

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Best practices for strategic sourcing

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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. 

Prioritize needs

Not all procurement needs are created equal. Some are critical to the organization’s operations, while others are less so. Prioritizing these needs helps focus resources where they are needed most, ensuring that critical needs are met first.

Thorough supplier research

Knowledge is power, and this is especially true when it comes to strategic sourcing. Conducting thorough research on potential suppliers provides valuable insights into their capabilities, reliability, and performance. This information is crucial in making informed sourcing decisions.

Standardized scoring

Fairness and objectivity are key in the supplier selection process. Using a standardized scoring system helps ensure that all potential suppliers are evaluated on the same criteria, making the selection process fair and transparent.

Establish strong supplier relationships

Suppliers are not just vendors; they are 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.

Continuous monitoring and improvement

A company's needs are dynamic and ever-changing. Continuously monitor and find ways to improve your workflows, 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.

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Zip’s approach to strategic sourcing

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Strategic sourcing is more than just a process—it’s a transformative approach that can revolutionize your procurement workflow. By adhering to the key strategies outlined above, such as prioritizing needs, conducting thorough supplier research, while continuously monitoring and improving in a thoughtful, strategic manner, organizations can streamline the sourcing process and achieve significant benefits.

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 that all procurement activities align with the organization’s strategic goals.

Our integrated Sourcing solution integrates new generative AI capabilities that significantly reduces 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.