What is Strategic Sourcing?

Strategic sourcing is the practice of using market data and procurement techniques to lower total cost. Reduce your purchasing spend in just 7 steps.
Written by:  Nikki Blank
Last Updated:  June 14, 2024
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Getting a handle on procurement spending is a heavy lift. The competitive landscape is constantly changing, and the occurrence of third-party vendor risk is increasing. Securing the lowest price doesn’t always mean getting the best price — or the best experience. 

How do you guarantee you get a good price on the things your business needs without sacrificing quality or opening your business to liability? The answer is strategic sourcing.

Companies use strategic sourcing to ensure competitive pricing, high-quality products, and exemplary service. This holistic approach helps companies avoid the pitfalls of race-to-the-bottom pricing while reaping the rewards of working with select suppliers.

This article provides the information you need to implement strategic sourcing in your procurement process. 

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What is strategic sourcing?

In simple terms, strategic sourcing is precisely what it sounds like — it’s the practice of applying advanced strategy and analysis to the sourcing stage of procurement. Strategic sourcing aims to procure goods, products, and services at the lowest total cost while keeping in mind product price, quality, value, logistics costs, overall savings, and product reliability. 

Strategic sourcing is often treated as just another term for procurement. While strategic sourcing is an aspect of procurement, the terms aren’t synonymous and shouldn’t be used as such. Strategic sourcing focuses on the process and data behind purchasing. It is used to build a resilient supply chain and help companies adjust to market shifts and changing economic conditions. 

Strategic sourcing optimizes the purchasing process by allowing businesses to assess specific product needs and enabling them to procure high-quality products in the most cost-effective way.

Why is strategic sourcing important?

Your business is only as efficient as its supply chain. Through strategic sourcing, your company reaps the benefits of total cost savings, improved vendor relationships, and better supply chain management — aligning every purchase with long-term business objectives.

Strategic sourcing also saves money by consolidating your suppliers into a preferred vendor list. With a smaller pool of suppliers who offer competitive pricing and terms, you save on costs and leverage volume pricing while maintaining high quality and efficiency in your supply chain.

How does strategic sourcing help companies succeed?

The benefits of strategic sourcing extend far beyond bringing down the cost per unit. Using a systematic approach, companies realize many quantitative and qualitative benefits, allowing them to improve business processes and drive profitability in a scalable way.

Strategic sourcing helps companies:

  1. Increasing cost savings: Strategic sourcing compares supplier prices against the quality of their products — saving companies the hassle of price-hunting while providing them with superior products.
  2. Improving top-line metrics: Better quality goods and reduced delivery timelines have the added effect of improving revenue. These improvements result from faster time to market (TTM) for products and improved product quality, resulting in higher margins and revenue potential.
  3. Reducing risk: Strategic sourcing optimizes your vendor network and improves risk management by pre-vetting and approving suppliers based on financial stability, ability to fulfill purchase orders, and corporate values alignment. 
  4. Improving supplier selection: Building long-term relationships with a preferred group of suppliers yields better cost outcomes and resilience compared to chasing the lowest-cost alternatives. It also improves communication, negotiations, and fulfillment. In fact, 60 percent of respondents to the 2022 State of Flux report said that conducting joint activities with suppliers was the best way to mitigate supply chain issues. 
  5. Streamlining internal processes: Fewer vendors translates to fewer accounts and fewer invoices flowing into the AP department. It also means fewer contracts for legal review and approval. All these factors reduce your internal stakeholders' workload and contract-management efforts, optimizing employee value and allowing contributors to focus on other initiatives.
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The Complete Guide to Procurement Management KPIs

Dive deep into how your team can benefit from tracking procurement KPIs, the 15 most important KPIs to track, and a detailed worksheet to help you calculate which KPIs suit you!

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7 Steps for implementing strategic sourcing

Implementing a strategic sourcing practice within your organization streamlines processes and delivers better bottom- and top-line results. Sourcing strategies help reduce cycle times and ensure the company responds to contingencies and market changes with agility. 

Here are seven steps to ensure a strong procurement process through strategic sourcing:

  1. Understand the market: Conduct market analysis to prioritize the key cost drivers and considerations for the product or spend categories you’re trying to fulfill. Find out what benchmarks and standard pricing data are available to inform cost analysis and negotiation.
  2. Evaluate the supplier landscape: Get a better understanding of major suppliers to help you create a sourcing plan and select the best options for specific products or needs. Consider the upstream costs and challenges driving vendor price and terms. This step helps negotiators understand what is achievable within current market conditions. 
  3. Short-list suppliers: Narrow down the field of potential suppliers by conducting preliminary due diligence and understanding each vendor's offering and value proposition. Consider the business outcomes you are trying to achieve beyond cost reduction to narrow your options.
  4. Solicit bids/quotes: Begin the request for proposal (RFP) or request for quote (RFQ) process with shortlisted vendors. Clearly define the expectations and specifications of the project. Consider using an eSourcing marketplace or platform in specific categories to gain access to competitive bids quickly. 
  5. Negotiate and close: Engage with suppliers to reach an acceptable purchase price and fulfillment terms. Once terms are established, move to close and begin the fulfillment process. 
  6. Track delivery and fulfillment: Negotiating the deal is only the first step of the supplier relationship. Once a contract has been executed, create a quality control workflow to follow the delivery and conduct a quality assessment of the process and the product. Note any exceptions to terms or promised delivery parameters for future vendor evaluations.
  7. Report and benchmark: Tracking supplier performance over time is an important part of the ongoing strategic sourcing process. Conduct regular life cycle evaluations for vendors, practice category spend analysis, adjust where needed, and commit to another competitive analysis when the contract term or project ends.

Best practices for strategic sourcing

When implementing strategic sourcing within your organization, these best practices ensure every aspect of the program brings optimal results. All these practices create objective environments for analyzing the price, performance, and quality of every vendor. This is more important than some may believe, as over 30 percent of procurement teams admitted to cutting corners in sourcing criteria and suppliers to secure supply, according to research from Procurious. 

Conduct a needs assessment before making changes

It’s easier to optimize your strategic sourcing practice if you know your starting point. Conduct an analysis of current procurement and strategic practices. Identify what’s working well, what could use improvement, and which goals your procurement practice should focus on.

For even greater effectiveness, establish key performance indicators (KPIs) that align well with your goals. Track these metrics regularly. This practice creates a continuous improvement cycle within the procurement function. 

Use an approval workflow

An approval workflow enables all other strategic sourcing activities by streamlining decision-making and creating a rationale for every purchase. Approval begins with a structure and criteria for the selection, evaluation, and procurement of goods and services. The approval framework ensures businesses don't miss important steps or skip due diligence when committing to a purchase.

The approval workflow also creates accountability within the selection process and ensures all decisions meet interdepartmental selection criteria (such as legal requirements, security minimums, and finance guidelines). Once established, approval workflows save time and money on every transaction.

Streamline your vendor pool

Reducing your total number of suppliers helps increase efficiency and enable volume discounts. To begin, evaluate existing vendors you use, and eliminate any that aren’t providing good value or high-quality services. Consider consolidating vendors for similar products or services to maximize buying power and ensure cost savings. When assessing new vendors, use a scorecard to ensure objectivity in decision-making. 

Monitor contract performance

Performance monitoring means tracking KPIs to measure how a vendor meets the terms of an agreement. Regular reviews of vendor performance identify areas for improvement, such as cost, quality, delivery time, or service levels. Compliance checks ensure that vendors are fulfilling their obligations as promised. If vendors are out of compliance, the buyer has information and recourse for corrective action. 

Use supplier benchmarking

Benchmarking prices is essential to strategic sourcing decisions. It allows companies to compare vendor pricing and performance and ensure rates remain competitive. To begin, examine historical data from current suppliers and gather recent market intelligence from future potential vendors. This helps you better understand the competitive environment and ensures you get the best possible deal for your budget. It also helps identify patterns in pricing across different vendors to be leveraged for savings.

Manager interested in details
Ebook

The Complete Guide to Procurement Management KPIs

Dive deep into how your team can benefit from tracking procurement KPIs, the 15 most important KPIs to track, and a detailed worksheet to help you calculate which KPIs suit you!

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How Order.co’s strategic sourcing saved XpresSpa thousands

When thousands of invoices, slow manual processes, poor spend management, and lack of visibility hampered progress for innovative wellness provider XpresSpa, the company turned to Order.co to implement automation and help them get a handle on procurement at their 50+ locations. 

The company: XpresSpa offers air travelers fast, professional massage and spa services to make travel more comfortable and enjoyable. The company has over 750 employees across 50 in-terminal locations in 21 airports. 

The problem: Hosting spa services across many locations requires thousands of orders for supplies and equipment. Offering these services inside an airport is a great competitive advantage, but it makes procurement and logistics challenging and expensive. 

The solution: XpresSpa implemented Order.co as its procurement and sourcing solution. Centralizing procurement into one dynamic platform allowed the company to consolidate its vendor list, reduce the burden of processing over 1 million annual invoices, and escape the logjam of manual AP processing.

The outcome: With Order.co’s help, XpresSpa realized nearly $70k in procurement savings in the first year alone. They reduced management approvals by nearly half and raised their catalog compliance rates from 70 percent to 100 percent. 

Improve strategic sourcing with Order.co

Order.co allows companies to meet their unique challenges and realize significant savings without sacrificing quality or agility in a changing market. It gives companies confidence in their purchases, saves money, and encourages strong relationships with quality vendors. Our network of over 4,000 vendors allows companies to find the high-quality products they need at the lowest total cost. 

Strategic sourcing reduces supply chain risk and clears the path toward your long-term business goals. You know where that path leads — Order.co helps you get there.

Schedule a demo of Order.co to learn how you can automate strategic sourcing for your business.

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