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If you work in procurement, you’ve probably seen many variations of a strategic sourcing process. With so many options available, how do you pick a process that will work?
Before founding Art of Procurement I worked for over a decade as a procurement practitioner and consultant. In that time I developed my own strategic sourcing process that I used to drive procurement transformation in large enterprise organizations such as GMAC and Chiquita Brands International.
I was also part of the Ford Motor Company procurement organization that was one of the first to implement formal category management and strategic sourcing processes. Over the years I’ve seen (and implemented) many different tools and multi-step processes, but the intent and fundamentals of strategic sourcing remain the same.
Not everything in my process will be relevant to your organization, but this detailed 7-step plan can inspire you to develop your own detailed approach.
My 7 step strategic sourcing process
My 7-step process gives you a structured and data-driven approach to strategic sourcing. It helps you make informed decisions and develop sustainable supplier relationships.
It is important to do things in the right order. I recommend starting by building a foundation in category strategy and only then moving on to the actual sourcing activities.
Keep in mind the connections between Strategic Sourcing and Category Management are deep and multi-faceted. In this process, we take the perspective of a single sourcing project, in the form of something you can imagine as “Category Management Lite.” If you want to see a broader perspective, you can read up on the category management framework.
The seven steps of my strategic sourcing process are as follows:
- Step1 – Identify Opportunities
- Step2 – Develop Category Profile
- Step3 – Develop Strategy
- Step4 – Identify Selection Factors
- Step5 – Conduct RFx / Auction
- Step6 – Develop & Negotiate Agreements
- Step7 – Implement Agreements
Step 1: Identify sourcing opportunities
The first step in my strategic sourcing process is to identify the lowest hanging fruit or most impactful sourcing opportunities that your team can tackle. To start, you’ll need a project assessment, a high-level category segmentation, a project team, and a clear communication plan.
1.1 Perform project assessment
A project assessment is usually the first step in any effective strategic sourcing process. This will give you a baseline of your current spend and supplier relationships. It will also help you communicate what you plan to do and what you expect to achieve.
Gather high level spend & contracts
Before you make any changes to the sourcing strategy you should understand exactly who are you spending money with today, and what exactly are you buying. Start by collecting data on your organization’s current spend and existing contracts. This will give you a detailed picture of your supply market landscape and potential opportunities ahead.
There is a lot of valuable data at your disposal across the procurement department. Look at historical spend data, contract terms, and supplier performance records. If you don’t have access to a spend analytics tool you can reach out directly to suppliers to clarify any details. This data will serve as your foundation for understanding contract terms, identifying potential overlaps, and savings opportunities.
Develop high level category segmentation
In my strategic sourcing process I suggest developing a category strategy before moving on to sourcing activities. Category strategies can help you focus your time and resources efficiently on the right kind of sourcing activities. For this reason, it’s valuable to develop your category segmentation as early as possible in the process.
If you’re setting up your category taxonomy and segmentation for the first time a good place to start is with the Kraljic matrix or another tool to quickly identify priority categories.
Identify & prioritize opportunities
With reliable spend and contract data you can usually identify all kinds of opportunities. Look for patterns such as high-spend categories, expiring contracts, or underperforming suppliers. Prioritize these opportunities based on factors such as potential cost impact, supply risk, innovation, and complexity of implementation.
You’re most likely not going to lack inspiration for opportunities. For example, in our Expense Management Guide we’ve identified 24 different cost reduction tactics.
Estimate opportunities & finalize project plan
Having a list of opportunities is not enough. Use insights from your project assessment to estimate the potential savings or benefits from each opportunity. This will help you prioritize your resources and time during future steps in the process.
Estimates don’t need to be perfect, but they need to be backed up by key insights or data. You can build your estimates based on category market intelligence reports, subject matter expertise, should-cost models, price indexes, or new information provided by your suppliers.
Once you have a good grasp of the opportunity you can wrap up your project assessment with all the key insights you’ve uncovered. More detail is better. You may want to include timelines, resource requirements, and key milestones. This project assessment will guide your efforts and keep your team focused.
1.2 Identify team & mobilize project
You don’t necessarily need a team full of experts to make a strategic sourcing initiative successful. What’s more important is that your team is committed and you have buy-in from all your key stakeholders.
It can be helpful to have an executive sponsor or champion who makes sure you don’t do all the work for nothing. Ultimately, a committed team already brings you halfway to your goal and a champion can be helpful to clear up obstacles in your way.
1.3 Develop a project communications plan
Clear communication is important for keeping all stakeholders informed and engaged throughout the project. Start by identifying all the internal and external stakeholders who need to be informed.
Next up, you need to know how and when to communicate. Do you plan to send weekly update emails? Is there a sharepoint folder where everyone works on the same data? What are the key milestones and deadlines you need to work towards? All this can be covered in your communications plan.
While proactive and regular communications are important, you need to make sure that your work aligns with other initiatives and reporting frameworks already in place in your procurement department. It’s especially helpful to keep your communication plan aligned with your broader sourcing governance process.
1.4 Complete project category risk profile
Before moving forward, it’s valuable to assess the risks associated with the category and complete a risk profile for some of your higher risk suppliers. You can identify potential risks such as supply chain disruptions or market volatility at the category level..
I’d especially focus on categories where you can not easily switch to a different supplier. I’d also de-couple risk from spend. For example, you might spend $20K a year for a company that waters the plants in the office, but that company also has access to all your employees desks. $20K is unlikely to be a top spend category, but the access provided to that supplier is disproportionately risky.
You can get a good summary of 8 common risk factors from my solo podcast on the topic.
Gate 1: Project approval
Before proceeding to step 2 of my strategic sourcing process, it is time to perform the first Gate review. The objective of a Gate review is to ensure everyone is on-board with your plan.
At Gate 1 your goal is to ensure you have project approval. This is one of four key milestones where it is important to align key stakeholders before proceeding with your strategic sourcing process.
Review with key decision makers, (such as your CPO or leadership team), that your assessments and plans are in place and you are ready to proceed to the next phase with a solid understanding of the risks and opportunities.
Only once you’ve passed your first Gate review should you proceed on to step 2 to develop your category profile.
Related articles and resources
- Strategic Sourcing, Explained for Beginners
- Expense Management Tactics for Use when Sourcing and with Incumbent Suppliers
- Demand and Category Management Expense Reduction Tactics
- How to Build a Strategic Sourcing Strategy (That Goes Beyond Category and Supplier Management)
- Sourcing and Negotiations Technology Insights Hub
