Strategic Sourcing, Explained for Beginners

Strategic sourcing is one of those phrases that means different things to different people.

In the hundreds of Art of Procurement podcast episodes I’ve hosted, strategic sourcing has come up regularly in conversations with enterprise leaders.

Strategic sourcing is a fundamental skill for the procurement community. In fact, it is such a fundamental that we may not give the process and its objectives enough thought. Procurement could do more to explain the associated goals, objectives, and tactics to the broader audience and people new to the profession.

Let me give you an easy to remember definition along with some useful tips and links for additional reading.

What is strategic sourcing?

Strategic sourcing is a systematic approach to procurement that involves analyzing spend, understanding market dynamics, building strong supplier relationships, and making informed decisions that align with your company’s overall goals. It’s all about moving beyond transactional purchasing and adopting a proactive, value-driven approach.

Origins in Kearney’s 7 step strategic sourcing process

While the origins of the term “strategic sourcing” are unclear, many people attribute it to Kearney’s 7 step strategic sourcing process. Since the early 1990s, management consultancies, academics, and procurement professionals have used the term to describe a strategic alternative to operational purchasing.

7 step strategic sourcing process developed by Kearney This is still a good theoretical starting point – yet, the role of strategic sourcing in procurement has become even broader over the years. Let’s go through a couple key points to remember.

How does strategic sourcing differ from traditional purchasing?

While traditional procurement operations have focused on short-term cost savings, strategic sourcing takes a broader perspective, considering factors such as total cost of ownership, quality, sustainability, and risk management.

According to Tom Beaty from Insight Sourcing Group, “Strategic sourcing blends science, art and heavy data analytics with the use of a comprehensive methodology designed to explore all viable avenues in pursuit of total cost reduction and overall quality/service parity or improvement.”

Strategic sourcing vs category management

While strategic sourcing and category management are closely related, there is a key difference between the two. Strategic sourcing focuses on the end-to-end process of identifying, evaluating, and selecting suppliers to meet an organization’s needs with the goal of achieving the best total value.

On the other hand, category management is a broader approach that involves managing categories of spend more comprehensively. Category management takes a holistic view of spend categories, considering factors such as market dynamics, demand management, stakeholder needs, and long-term business objectives to develop and implement category-specific strategies.

Four pillars of strategic sourcing

When you look into the details, strategic sourcing can be seen as consisting of four core pillars: spend analysis, sourcing, contract management, and supplier relationship management.

1. Spend Analysis

Spend analysis is the process of collecting, cleansing, categorizing, and analyzing an organization’s purchasing data to gain a comprehensive understanding of spending patterns, supplier performance, and potential cost-saving opportunities.

Spend analytics often leverages software or data analytics methods to transform raw data into actionable insights. For example, spend analytics can reveal that a company is purchasing similar products from multiple suppliers at varying prices, indicating an opportunity for consolidation and renegotiation.

2. Sourcing

Operationally, sourcing is the process of identifying, evaluating, and selecting suppliers that are qualified to meet an organization’s needs in terms of cost, quality, delivery, and innovation. It involves developing a sourcing strategy, conducting market research, engaging with potential suppliers, and ultimately selecting the most suitable partners.

For instance, when sourcing a critical raw material, procurement professionals may issue an RFP, evaluate supplier responses based on predefined criteria, conduct negotiations, and select the supplier that offers the best overall value. Effective sourcing requires a balance between cost optimization and other factors such as supplier reliability, quality, and alignment with the organization’s goals.

3. Contract management

Contract management is the process of overseeing and administering contracts with suppliers to ensure compliance, mitigate risks, and maximize value. It involves activities such as negotiating contract terms, monitoring supplier performance, managing renewals and amendments, and resolving any disputes or issues that may arise.

For example, a procurement professional may work closely with legal to develop robust contracts that clearly define performance expectations, payment terms, and compliance requirements. Throughout the contract lifecycle, they monitor supplier performance against KPIs, conduct regular reviews, and take corrective actions when necessary to ensure the best outcomes.

4. Supplier relationship management

Supplier relationship management (SRM) is the process of strategically collaborating with key suppliers to drive mutual benefits, continuous improvement, and innovation. It involves building trust, fostering open communication, and aligning goals and objectives. For instance, a procurement professional may work closely with a strategic supplier to identify opportunities for cost reduction, process optimization, or new product development.

By conducting regular supplier performance reviews, sharing insights and best practices, and jointly addressing challenges, organizations can build long-term, mutually beneficial relationships that drive value beyond mere cost savings.

How the different pillars of strategic sourcing are utilized depends largely on the size and scope of the business. One good reference is a well known and respected procurement organization: Procter & Gamble

Example of strategic sourcing principles

A good strategy is one that has a long-term perspective and is well communicated to both internal and external stakeholders.

Procter & Gamble (P&G) has established five core principles that guide their strategic sourcing efforts globally. These principles aim to ensure P&G consistently secures the best value while maintaining ethical and collaborative relationships with their suppliers wherever they are in the world.

P&G’s five strategic sourcing principles:

Best Total Value: P&G’s sourcing decisions prioritize the best total value, encompassing factors beyond just the initial purchase price. They consider the total cost of ownership, including quality, supplier responsiveness, speed to market, sustainability, and the supplier’s willingness to share risk and resources.
Honest, Ethical, and Fair Dealings: P&G is committed to treating all suppliers with respect, honesty, and fairness. They conduct business ethically and in compliance with all applicable laws and regulations, fostering trust and transparency in all their supplier relationships.
Externally-Linked Supply Solutions: P&G leverages their extensive market knowledge and global supplier network to identify innovative and effective solutions for their business needs. They actively seek out supplier competencies and resources to develop commercially viable supply solutions that drive growth and profitability.
Competition and Collaboration: P&G strategically utilizes both competition and collaboration in managing supplier relationships. They believe competition fosters innovation and efficiency, while collaboration allows them to tap into supplier expertise and resources for mutual benefit. The approach is tailored to each situation based on market dynamics, supplier capabilities, and the desired level of interdependence.
Supplier Incumbency: P&G values stability in their supply base and prioritizes maintaining relationships with incumbent suppliers who consistently deliver value. New suppliers must demonstrate significantly better total value to displace an incumbent, ensuring continuity and fostering long-term partnerships.

In this example from Procter and Gamble, strategic sourcing can be seen as a set of guiding principles. Many other global businesses document their strategic sourcing principles to align both internal and external stakeholders to their way of doing business.

Key benefits of strategic sourcing

Strategic sourcing offers numerous benefits to organizations that implement it effectively. Here are some of the key advantages:

Cost savings: By analyzing spending patterns, consolidating suppliers, and leveraging negotiations, strategic sourcing can significantly reduce costs and improve the bottom line.
Improved quality: Strategic sourcing focuses on selecting suppliers that offer the best overall value, which includes quality considerations. This approach ensures that organizations receive high-quality goods and services.
Risk mitigation: Through thorough supplier evaluation and risk assessment, strategic sourcing helps identify and mitigate potential risks in the supply chain, such as supplier financial instability or supply disruptions.
Enhanced supplier relationships: Strategic sourcing emphasizes building long-term, collaborative relationships with key suppliers. This approach fosters trust, open communication, and joint problem-solving, leading to better outcomes for both parties.
Innovation and continuous improvement: By partnering with strategic suppliers, organizations can tap into their expertise and knowledge to drive innovation, optimize processes, and continuously improve products or services.
Increased efficiency: Streamlined procurement processes, automation, and standardization through strategic sourcing can significantly improve operational efficiency and reduce lead times.
Better alignment with business objectives: Strategic sourcing ensures that procurement activities align with the organization’s overall goals and objectives, contributing to long-term success and competitiveness.
Enhanced visibility and control: Robust data analysis and reporting capabilities within strategic sourcing provide greater visibility into spending patterns, supplier performance, and compliance, enabling better decision-making and control over procurement activities.

By leveraging these benefits, organizations can transform their procurement function into a strategic enabler of business success, driving cost savings, improving quality, mitigating risks, and fostering innovation.

Bottom line on strategic sourcing

Strategic sourcing is a proactive and analytical approach to spend management that focuses on achieving the best total value for an organization. It often involves investments into core pillar areas of spend analysis, sourcing, contract management, and supplier relationship management.

While it is closely related to category management, strategic sourcing is usually more operational than strategic. When implemented effectively, strategic sourcing delivers significant benefits, including cost savings, enhanced quality, risk mitigation, stronger supplier relationships, and alignment with overall business objectives.