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The Strategic Sourcing Process

13 Apr 2011

Strategic Sourcing is the science of evaluating and continuously monitoring purchasing activity of an organization for improving overall efficiency. It alters the way of looking at the process of Sourcing. Sourcing, no longer is seen as an operational process but a Strategic and Impactful function. It analyses the long lasting impact of sourcing from ‘A’ particular vendor on the business operations. The Strategic Sourcing Process Cycle is a five step process of Spend Analysis, Supplier Performance Management, Supplier Identification, Sourcing and Contract Management.

Spend Analysis focuses on increasing the visibility of management on their items. It categorizes items based on annual spend, vendors, use, strategic importance to company, etc. It thus opens up avenues for a detailed version of companies sourcing expenses. The Spend Analysis also reveals relative performance of suppliers on identified parameters.

Post spend analysis, companies initiate Supplier Performance Management. During this stage, individual suppliers are identified and a Supplier Scorecard is prepared for rating suppliers on desired parameters. The improvement areas for Suppliers are communicated to the suppliers and companies go one step ahead in developing certain capabilities in suppliers’ manufacturing processes that otherwise are not available with them. The companies take a holistic approach and consider long term association with supplier as prime goal. However, if the suppliers fail to meet the requisite criteria, the association with the same is reconsidered.

Supplier Identification is the next step in Strategic Sourcing Process cycle that caters to filling lacunae in the suppliers’ ecosystem. LCC (Low-Cost Country) Sourcing is one such activity practiced by modern sourcing organizations. For items that are not of Strategic Importance (or very high value in terms of production continuity) to the company, Supplier identification paves way for ensuring the firm gets the best available resources from market at competitive terms.

Sourcing follow the supplier identification phase. Sourcing essentially means shortlisting the best source to buy the requirements considering all important and relevant parameters. Progressive organizations prefer eSourcing (or electronic Sourcing) to the traditional sourcing methodology. In eSourcing, once the suppliers are brought at technical par with each other, an online reverse auction is conducted between suppliers. The supplier cannot see the details of other suppliers, but can only see the price quoted by them. In a competitive scenario, the costs are driven down, shrinking the supplier margins and ultimately passing on the benefits to buying organization.

Contract Management is the last stage of Strategic Sourcing Process cycle, where the impetus is laid on ensuring that the deliverables of the contract are executed smoothly. It is a crucial phase to for the Strategic Sourcing Process Cycle as market and industry dynamics effect the contract terms.

Strategic Sourcing Process is a cycle and not a one time initiation. It is way of thinking keeping long term objectives in focus. It is about time that in a fiercely competitive market where companies are gunning for consumer space, Strategic Sourcing is implemented as a cost optimization solution.

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