Organizations that embed strategic sourcing into their procurement processes are in the catbird seat for reducing spending, increasing operational efficiencies and working with top-notch suppliers. Through analysis of a company’s existing spending patterns, anticipated purchasing needs and external market research, strategic sourcing emphasizes long-term relationships with preferred suppliers and a consolidated vision for executing purchases that drive down long-term costs and derive more value for the business.
This involves optimizing the entire supply chain — not just the purchasing element. By evaluating suppliers, managing relationships, and considering long-term costs and risks, organizations can achieve greater value and efficiency in their sourcing activities. How can you get there? Successful strategic sourcing hinges on a range of best practices — explored in this article — that require companies to tap into a variety of business disciplines, including data analysis, contract negotiation, risk management and quality assurance.
Key Takeaways
- Effective strategic sourcing rests on a set of best practices that can help companies optimize their procurement decisions and supplier relationships.
- Strategic sourcing depends heavily on comprehensive market research and total cost of ownership analysis.
- Cross-functional teams with expertise in procurement, finance, risk management, contract management and more are also a boon.
- Cultivating long-term relationships with suppliers is a major priority.
18 Strategic Sourcing Best Practices
Strategic sourcing has emerged as a critical discipline for driving procurement excellence through sophisticated planning. It focuses on reducing total costs and building out a resilient supplier portfolio that consistently delivers high-quality goods and services to organizations. Unlike traditional procurement, which focuses on transactional purchasing, strategic sourcing aims to optimize the supply chain by considering factors like cost, quality, risk management, and long-term supplier relationships. The following list of best practices can help strategic sourcing teams continually improve their companies’ day-to-day procurement operations.
1. Conduct Comprehensive Market Research
A strategic sourcing plan is only as solid as the depth of the market research on which it is based. Strategic sourcing professionals should be analyzing market trends, industry reports and emerging technologies on an ongoing basis and using the intelligence to inform their sourcing decisions. Research should also include an examination of the supplier landscape, including suppliers’ capabilities, geographic reach, financial stability and other factors that could affect their ability to consistently provide goods and services.
Price benchmarking is another must, but the proverbial buck doesn’t stop there. Strategic sourcing teams should investigate supplier innovation and investments in research and development, quality standards, industry regulations and economies of scale that could create barriers for less-established suppliers.
2. Form Cross-Functional Teams
As with any strategic task force within a business, strategic sourcing teams do best when they comprise a cross-functional mix of experts who possess the right skills and knowledge bases — in this case, procurement, supply chain planning, operations, finance, risk management and contract management. Ideally, the team can also tap into the know-how of quality assurance, compliance and technology professionals, as well as those closest to customers, to ensure that the right products and services are sourced from well-regarded suppliers.
3. Manage Supplier Relationships
Suppliers lie at the heart of strategic sourcing. Suffice to say, managing supplier relationships should be a top priority for sourcing teams if they are to achieve their goals. Strong vendor relationships can result in long-term savings, higher-quality products and services, better service and supply chain resilience, all of which contribute to a company’s competitive advantage and success.
In addition to the important human component of management, data is also fundamental for continual monitoring of the suppliers’ performance. This information informs how to guide the relationship or to understand when it may be time to terminate certain relationships, expand the vendor pool or adjust contract terms.
4. Analyze Total Cost of Ownership (TCO)
Strategic sourcing elevates sourcing decisions from one-dimensional price comparisons to consideration of all the costs and values involved in any given procurement action. This is why total cost of ownership (TCO) analysis is a nonnegotiable best practice for a functional strategic sourcing program, involving a comprehensive assessment of every cost associated with acquiring and managing goods and services across their life cycles. This deep dive starts with purchase price but then delves into operating costs, such as maintenance, repairs, consumables, licensing fees, energy consumption and labor. It considers training and software implementation costs, the cost of managing the supplier relationship and product-related end-of-life cost considerations. Finally, TCO analysis includes the potential costs associated with supplier issues or product quality.
5. Leverage Technology and Data Analytics
The importance of data-driven decision-making is far from a novel concept; rather, its worth has long been recognized by business intelligence and other data analysis tools that collect information and extract pertinent insights. In the realm of strategic sourcing, these tools provide detailed spend analyses across the procurement function, identifying redundancies and opportunities for cost reductions across the entire product/service life cycle. Analytics pertaining to supplier performance — everything from on-time delivery rates to product quality — can steer sourcing choices, be used to negotiate better pricing and help nurture long-term supplier relationships.
Beyond analytics, tech-enabled automation streamlines supplier management processes, procurement-related compliance activities and contract management. Technology also helps bridge the gap between strategic sourcing and procurement, so that procurement teams can automate the execution of a strategic sourcing plan through their day-to-day operations.
6. Mitigate Risks and Ensure Compliance
Any strategic sourcing team worth its salt understands the dangers of overreliance on too few suppliers. Proactive risk mitigation calls for maintaining a diverse base of vetted, reliable suppliers, be it in the face of a simple instance of a go-to vendor understocking a needed part or in the occurrence of a larger supply chain disruption. Vendor contracts should also contain risk mitigation provisions, such as indemnification clauses, liability limitations, insurance requirements and dispute resolution mechanisms. In addition, contractually stipulated performance measures and quality standards — paired with ongoing monitoring — should be included as a means of keeping suppliers accountable, as well as a way to discover potential issues that could threaten supply chain continuity.
Audits and other assessments of suppliers’ facilities to verify compliance to quality, safety, environmental and/or ethical standards may also fall to strategic sourcing procedures. Keeping up with the regulations, laws and industry standards that govern sourcing and procurement activities is a related best practice to mitigate risks.
7. Encourage Continuous Improvement and Innovation
Strategic sourcing is an ongoing process meant to fuel continual improvements and innovation across sourcing activities. By working closely with suppliers, business stakeholders and procurement sources —and aided by the steady research and analysis described earlier — sourcing teams can optimize what’s working and identify bottlenecks and other inefficiencies that are hurting performance. They can also devise new ways to improve sourcing methods and make the most of supplier relationships, which entails establishing and collecting key performance indicators (KPIs) that measure supplier performance, procurement efficiency and business performance.
Of note, the best strategic sourcing teams engage with suppliers as partners and collaborators to encourage joint problem-solving.
8. Prioritize Long-Term Thinking
Long-term thinking is the hallmark of strategic sourcing, rising above basic supplier price comparisons to the evaluation of how goods and services are being sourced over time and the value provided by suppliers. Conducting a TCO analysis is a good start to that forward-looking mindset. The next step is performing a value chain analysis, which looks at each stage of the supply chain and identifies not only where costs can be optimized — i.e., by streamlining procurement or consolidating purchases over the long run — but also where sourcing decisions could add more value. For example, strategic sourcing could identify component suppliers whose brands resonate with consumers for quality and could be marketed for a product branding boost, such as the “Intel Inside” logo used by computer manufacturers.
Similarly, this analysis could spot opportunities to streamline procurement or consolidate purchases over the long run.
Long-term thinking also applies as sourcing teams build strong, lasting relationships with key suppliers, working together for shared value creation and ensuring the long-term sustainability and environmental impact of procurement decisions.
9. Align With Business Strategy
Strategic sourcing teams must fully comprehend their companies’ overall business goals to guarantee that their efforts will be in sync. While cost reduction is always important, existing business initiatives may nudge sourcing plans in different directions. For example, if market expansion and product innovation are the business’s biggest priorities, sourcing teams might prioritize securing suppliers in different locations and with specialized areas of expertise. A quality improvement initiative may guide teams to re-evaluate relationships with current suppliers.
As business strategies change, a strategic sourcing team must be able to respond in kind, ready to adapt its focus and methods as necessary.
10. Cultivate Strategic Relationships
Close relationships with key suppliers can lead to better pricing deals that reduce a company’s long-term total costs and encourage innovation. Some organizations formalize these relationships through preferred supplier programs, enabling suppliers to work with sourcing and procurement teams on a more streamlined, day-to-day basis. In addition, these programs often guarantee a certain amount of annual or quarterly supplier purchases in exchange for more advantageous prices or terms. The suppliers are usually selected based on their ability to consistently deliver high-quality products or services, as well as on factors like unique market positioning or environmental friendliness.
11. Plan With a Sourcing Calendar
The ultimate goal of strategic sourcing is to convert the in-depth research and analysis performed by the sourcing team into an actionable plan that drives better value from the procurement department. This plan should be organized around a well-designed sourcing calendar that schedules key dates, milestones and events relevant to the sourcing process. What’s more, the calendar can align future sourcing activity to the company’s budgetary cycles, upcoming business initiatives and seasonal trends that could impact internal demand or supply chain availability.
Another benefit: By planning with a sourcing calendar, strategic sourcing teams can proactively identify the best times to engage in contract renewals and negotiations, as well as schedule reviews of supplier performance, compliance work and risk management.
12. Validate Suppliers Through Sourcing Events
Sourcing events, whether conducted live or through an online platform, are an efficient way for strategic sourcing teams to identify a pool of suppliers for a particular procurement need, understand their terms and offerings, and negotiate with multiple vendors at one time. Whether it is an RFx event — request for information, request for proposal, request for quotation and so on — or a reverse auction-style event, where multiple suppliers compete to win a contract by bidding against one another, sourcing events can speed up strategic sourcing efforts.
These events also streamline the process of gathering, and subsequently comparing, supplier information. In addition, sourcing teams have the opportunity to establish expectations with new and existing suppliers, fostering transparent and collaborative relationships that lay the groundwork for long-term relationships.
13. Invite Numerous Suppliers to Sourcing Events
By casting a wide net for sourcing event participation, strategic sourcing teams are able to gain a broader view of vendor choices and perspectives. An added bonus: Inviting a diverse array of suppliers not only broadens the scope of potential partnerships, but it also fosters competition among vendors that can result in more favorable pricing and terms, as they strive to outdo one another to secure business.
The most straightforward way to invite suppliers — existing, previous or otherwise familiar — to sourcing events is by direct solicitation via email or other personalized methods. Business stakeholders, particularly those who will be most affected by the procurement decision, can also recommend suppliers to invite. Additional methods of outreach include posting notices on supplier portals and platforms, as well as on government procurement portals, which can catch the attention of suppliers not on the organization’s radar. Similarly, trade associations and industry events offer an outlet for promoting sourcing events and stimulating participation from new suppliers.
14. Limit Bidding Rounds
As much as strategic sourcing professionals should seek to broaden participation in sourcing events and bids for purchases, they must also be mindful of process efficiency. Limiting the number of bidding rounds can curb the diminishing margins of return from dragged-out processes and expedite decision-making. Capping the back and forth of bids also engenders a sense of trust and cooperation from participating vendors, for whom a protracted bidding process may be a turnoff.
The trick, of course, is finding the right middle ground between solid due diligence and dilatory overanalysis. Companies can determine the appropriate number of bidding rounds by examining their current processes as well as industry norms for the category under bid.
15. Standardize Noncontracted Items
Strategic sourcing strives to standardize contracts for commonly purchased goods and services. But there are also times when certain items are not part of a contract, such as in a fast-moving or commoditized buying market where procurement wants greater flexibility to choose among multiple suppliers. However, strategic sourcing can still establish consistent specifications and procurement processes for goods and services that are regularly purchased but don’t necessarily require formal contracts. Doing so can streamline requisition, ordering and payment processes, as well as manage costs and pave the way for evaluating supplier performance.
16. Use Industry-Specific Sourcing Tools
As with other categories of software, industry-specific tools or broader general tools with industry-specific modules are designed to meet the unique requirements of a particular industry. In the construction industry, for example, sourcing tools might include features for bid management, project-based sourcing and tracking compliance with safety standards and building codes. Sourcing tools in the retail industry might focus on trend forecasting and supply chain transparency to ensure ethical sourcing practices.
17. Communicate Project Expectations Clearly
No compilation of best practices would be complete without underscoring the importance of effective communication among all parties. A strategic sourcing team must clearly outline project expectations, both within the organization and outwardly to suppliers and other third parties. This includes defining the project’s requirements, such as product details, delivery timelines and quality standards. Sourcing professionals must then keep the lines of communication open, updating stakeholders on supplier performance and project developments. Any changes in plans or unexpected challenges should also be communicated.
Strategic sourcing professionals also lead the charge in communicating requirements and contractual terms to suppliers through the RFx process, as well as the KPIs by which vendors will be measured. This transparency can help build trust and engender long-term partnerships.
18. Implement Feedback Mechanisms
Companies will want to set up feedback mechanisms and performance metrics to ensure that their strategic sourcing efforts are driving value and aligning with business goals. Feedback and performance data should be gathered on numerous fronts to validate the efficacy of the strategic sourcing program and identify areas that need to be reworked.
To begin, the organization should think about collecting feedback from the suppliers themselves, gathering empirical performance data through mechanisms like supplier scorecards and performance evaluations, and supplementing that information with sentiment feedback through methods like surveys, feedback sessions and third-party feedback platforms. Many high-performing strategic sourcing programs offer portals or other communication channels to allow for constant communication with strategic suppliers.
Feedback from business stakeholders — including the customers for whom purchases are made, department heads and senior management — should also be collected via surveys, interviews, focus groups or regular meetings. Ideally, the team should solicit feedback about overall satisfaction with strategic sourcing activities, as well as suggestions for improvement.
Last but not least, strategic sourcing teams should institute feedback mechanisms from the procurement department they support, including formalized process reviews that examine the workflows that feed into procurement operations.
Maximize Your Procurement Strategy’s Effectiveness With NetSuite
Strategic sourcing is an invaluable part of an effective procurement strategy, requiring real-time visibility into supplier prices, operational costs, product-defect rates, delivery times and more. NetSuite Sourcing Management provides sophisticated data collection and analysis capabilities so that sourcing teams and their procurement counterparts can fully understand the total cost and value generated by their supplier portfolios.
In addition, NetSuite Sourcing Management simplifies the creation of sourcing events that help strategic sourcing teams scale up supplier identification and vetting. NetSuite also provides a centrally managed vendor portal that offers the long-term performance tracking sourcing teams need to manage and maintain supplier relationships over time.
Strategic sourcing enables organizations to optimize their procurement process, ensuring that they acquire the best possible goods and services at the most favorable terms. By prioritizing the 18 best practices described here, organizations will be well positioned to minimize their TCO, become more operationally efficient, effectively manage supplier relationships, negotiate advantageous contracts and build out more robust supply chains.
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Strategic Sourcing Best Practices FAQs
What is a strategic sourcing framework?
A strategic sourcing framework provides a methodology for evaluating spending patterns, supplier performance, purchasing needs and market conditions, and then identifying and vetting vendors and using that data to make a plan for future procurement decisions.
What are the key capabilities of strategic sourcing?
Some key capabilities of strategic sourcing are strong data analysis, contract management and supplier relationship management.
What are the 4 pillars/principles of strategic sourcing?
The four pillars of strategic sourcing are cost management, supplier performance, risk management and supplier relationship management.
What are the 8 steps of strategic sourcing?
Strategic sourcing is a multistep process. Here’s how it’s accomplished:
- Evaluate current expenditures.
- Perform supply market analysis.
- Conduct a comprehensive cost assessment.
- Define a supplier identification process.
- Formulate a sourcing strategy.
- Negotiate with suppliers.
- Implement sourcing model changes.
- Monitor and assess supplier performance on a continual basis.
