Strategic sourcing benefits and skills

What are the benefits of strategic sourcing?

As strategic sourcing is resource intensive in terms of people, systems, and time, it is vital that realisable benefits that provide added value for the organisation over and above price considerations are realised.

Therefore, what are the benefits of strategic sourcing and what can they bring to your organisation?

Reduced costs

Cost savings is an important benefit that comes from strategic sourcing. If you have high volume goods or services, you can negotiate improved terms from your suppliers, giving you increased value. Equally, if a supplier is providing you with high volume products, it benefits them too. Strategic sourcing also helps to mitigate potential risks, as it involves analysing suppliers’ processes, finances, and capacity. Identifying both internal and external risks of your supplier will help you to be more prepared and to devise strategies to minimise the risks. This in turn will lead to reduced costs if a risk occurs in the future.

Boost long-term supplier relationships

As sourcing becomes more complex, it can often be difficult to build long-term supplier relationships. Strategic sourcing allows you to select the right supplier that both aligns with your sourcing objectives and wider business objectives. By understanding your sourcing objectives and focusing on the suppliers' capabilities, you will be able to select high-value suppliers, where you are certain of a long-term collaborative relationship. By thinking strategically about your sourcing process, you will be able to continuously monitor suppliers’ performance and offer feedback to meet the agreement. This will also help you identify any potential risks and help focus efforts on what aspects are working well, which will support your future decisions.

Strategic approach brings digital transformation

Relying on manual efforts to process data and emails can be incredibly time consuming and can lead to errors down the line. Strategic sourcing is one area that can be transformed digitally. With the latest technology and software, you can automate your sourcing activities to help you maintain standards and accurately store and capture data. Technology allows you to accurately see and select the lowest cost and optimal source of supply for raw materials, products, and services. However, if a manual system is used, it is vital that information is diligently managed to ensure information security and robust future decision making.

Mitigate supplier risk

One of the biggest risks involved in sourcing is the disruption with key suppliers. Having good supplier relationships helps to address and avoid supplier disruption. Integrated supplier management is a key approach for sourcing and helps you maintain better relationships. Undertaking extensive supplier and market research enables you to effectively select the right supplier that brings value to your organisation whilst mitigating risks.

Strategic sourcing skills

Strategic sourcing is a critical factor within organisations that have high value and/or complex requirements. A significant procurement budget provides opportunities to create value through partnerships, negotiations, concessions, and other arrangements between different organisations.

It is important that as a professional the time, effort and expertise given to strategic sourcing is maximised. Strong communication, negotiation and influencing skills are required to convince people around you to trust your judgment on strategy. Broad-based relationship management is critical in achieving mutually agreeable long-term working arrangements. In addition to soft skills, strategic sourcing requires hard skills such as analytical thinking and the ability to manage processes and procedures.

There are many ways these strategic skills are beneficial:

Cost management

The goal and importance of any strategic sourcing effort are primarily to keep the organisation’s procurement costs within a reasonable level and ensure maximum value for money. An important skill in cost management is negotiation. However, you should be able to reveal other unseen opportunities that might lead to lower costs for the company. For instance, if you can negotiate for lower shipping costs through a particular company, it may warrant sourcing from locations where that company operates. Consolidating your purchases could also lower your overall logistical costs. Working with fewer suppliers might also precipitate discount opportunities. Analytical thinking involves taking in all this information and using available decision-aid tools to come up with an optimal solution.

Relationship management

Successful relationship management is a product of parties finding mutually beneficial contracts. As a procurement practitioner, you should be able to identify the interests of the other party and find ways to align them with your own organisation’s interests. For instance, a young company prioritises the stability of its business. If you give them longer contracts, they will appreciate stability and perhaps offer competitive prices in return. With such a company, you might be their most important customer and they will always prioritise your orders.

As the relationship grows, other valuable opportunities might arise including undertaking joint ventures or outsourcing more functions to that vendor based on their core capabilities. For instance, if a company produces merchandise for branding, you might decide to do branding at their facilities before items are shipped.

Efficiency in operations

Strategic sourcing requires the development of a standardised approach to deciding which vendors to work with. The advantage therein is that your company will find ways to make the process more efficient. For instance, you will invest in tools to digitise the sourcing process. For instance, you can have a portal where companies that want to bid on future contracts can create a profile and store their catalogue. They should be able to update their catalogue as it changes, as well as their licenses in highly regulated industries.

Strategic sourcing tools help you compare suppliers’ side-by-side, track communication with them and make the process more objective. When you undertake it manually, it is easy to miss out on opportunities because someone lost a business card, did not return a call, or simply cannot recall something from memory. It is also possible to score prospective suppliers using several metrics and settle on the one that achieves the highest overall score.

Mitigating supplier risk

As you work longer in procurement, you appreciate the ability to recognise and mitigate risk. What might look like a great proposition in terms of costs might cause more damage due to the amount of risk borne. Working with each supplier carries its own amount of risk because you are dependent on their ability to deliver as agreed. However, certain factors are beyond their control, such as unexpected disruption of the supply of a key ingredient.

For instance, when sourcing from volatile markets, in terms of geopolitical risk, it is crucial to put in place contingency plans in case supply is disrupted. You would also ensure that items being shipped from such locations are properly insured against all incumbent risks. Another risk may be that the supplier may not have the capacity to deliver in the required volume or quality. Part of risk mitigation is investigating and verifying their credentials as well as capacity. The importance of strategic sourcing skills is being able to work with other parties, such as consultants, to find out information about vendors in international markets.

Regulatory compliance

Strategic sourcing procedures help to ensure that you adhere to all set statutory laws applicable to your industry. For instance, you will only work with suppliers who have the proper licenses to produce what they are selling. You should also look to the future and see whether any impediments might interfere with your supply chain. Naturally, compliance with product origin and quality is critical to ensure optimum product performance and robust governance.