Strategic sourcing is a key practice for organizations that want to make informed procurement decisions and bolster the sustainability of their supply chain. While every business knows that cost shouldn’t be the only factor that drives the selection of suppliers, products and services, many procurement teams struggle to get out of transactional price-comparison mode when they’re called to make purchasing decisions at scale.

Strategic sourcing can provide companies with a methodical way out of this one-dimensional mindset for sourcing. The systematic practice uses data analytics to examine a company’s spending activity as well as market research to evaluate suppliers and establish profitable long-term strategies for sourcing. The goals of strategic sourcing are multidimensional: Reduce total costs, enhance the quality of procured items, minimize risk and encourage innovation. This article details the role strategic sourcing plays in procurement, what kinds of activities strategic sourcing teams engage in and how a business can benefit from these undertakings.

What Is Strategic Sourcing?

Strategic sourcing is a systematic method of acquiring goods and services from suppliers based on big-picture objectives, such as total cost management and value chain analysis. Strategic sourcing analyzes a company’s existing spending patterns, anticipated purchasing needs and market research to look for ways to elevate procurement sourcing decisions beyond simple price comparisons. Using this data, a company can develop a holistic sourcing strategy to reduce total costs, create value from purchases, drive innovation and quality, reduce long-term supply chain risks and improve supplier performance.

In addition to vetting vendors and matching them to business needs, strategic sourcing helps companies build relationships and negotiate beneficial pricing and terms with selected vendors. It also measures supplier performance. All of these activities help procurement teams make better and faster day-to-day purchasing decisions.

Key Takeaways

  • Strategic sourcing is a subset of broader procurement activities that relies on total cost analysis and extensive supply market research.
  • Strategic sourcing goes beyond price when evaluating potential suppliers and considers factors such as total cost of procurement, risk, quality and performance.
  • Companies can employ strategic sourcing to help them build long-term supplier relationships and negotiate pricing with preferred vendors.
  • Strategic sourcing creates a holistic sourcing plan that makes it easier for procurement teams to execute purchases at lower cost and drive more value for the business.

Strategic Sourcing Explained

Strategic sourcing is a subset of the broader procurement process, which encompasses the full life cycle of acquiring goods and services for an organization. Strategic sourcing represents the first stage of the procurement process, which includes sourcing, purchasing and payment. Companies use strategic sourcing to establish a framework for vetting suppliers and building strong relationships with those that can deliver lower total cost and more value over time to the business. The staff in charge of running strategic sourcing varies by company. Some procurement teams engage in strategic sourcing without creating a special team assigned to the practice, while others form a dedicated strategic sourcing team that operates under the procurement umbrella. Some companies, meanwhile, designate strategic sourcing as a separate department altogether.

Strategic sourcing evaluates suppliers and purchases based on more than just price by performing a comprehensive analysis of a company’s spending patterns and total costs, as well as examining market trends and the vendor landscape. This companywide analysis could potentially help a business uncover discounts and efficiencies from restructuring or consolidating supplier relationships. Most strategic sourcing functions go beyond analyzing total cost to assess harder-to-measure business value driven by such factors as product quality, ethical or sustainable business practices and speed of innovation. Strategic sourcing also identifies potential supply chain risks so that businesses can address them through supplier diversity; these risks include geopolitical unrest, financial instability and low quality.

Companies use the analysis generated by strategic sourcing to create a plan that can guide operational procurement processes over time. The plan identifies and suggests preferred vendors in different spend categories for procurement teams to purchase from whenever possible. The sourcing plan nurtures long-term relationships with preferred vendors so that companies can negotiate better terms on future purchases, thereby minimizing costs and maximizing value over the long haul. Strategic sourcing also tracks supplier performance through monitoring and measuring key performance indicators (KPIs). Those measurements are then used to tweak the sourcing plan as needed.

Still, not every procurement department uses strategic sourcing methods; some may use traditional sourcing processes that focus selection on short-term price considerations. Procurement teams can operate without strategic sourcing, but they may overlook opportunities to consolidate vendors across business functions and often fail to systematically consider indirect costs or risks involved with things like frequent product failure or a lack of product support over time. This is likely why strategic sourcing ranks fourth in the top 10 procurement improvement initiatives named by chief procurement officers, with 54% reporting they’re implementing strategic sourcing capabilities, according to The Hackett Group.

Strategic Sourcing vs. Procurement

While strategic sourcing and procurement are sometimes mistakenly conflated, strategic sourcing represents a distinct discipline under the broader procurement umbrella. Strategic sourcing provides guidance and guardrails that drive better day-to-day procurement decisions. However, the actual transaction of buying goods and services from suppliers remains solidly in the procurement office. To break things down more clearly:

  • Procurement describes the process of acquiring goods and services to meet the immediate needs of the business. It’s operational in nature and usually driven by short-term cost considerations fixated on vendor pricing at the transactional level. Procurement activities include issuing purchase orders, coordinating receipt of goods and managing accounts payable processes. Sourcing and vendor selection are always part of the procurement process, but procurement doesn’t necessarily need strategic sourcing to function.
  • Strategic sourcing describes the process of taking a holistic look at spending associated with the procurement process to try to elevate decisions beyond the short-term transactional mindset. It analyzes the total costs around purchases and evaluates suppliers on value drivers, such as quality. This analysis can also identify opportunities for vendor or purchase consolidation. Strategic sourcing also nurtures long-term relationships with suppliers that can deliver better savings and more value from purchases made over time with less risk to the business.

Key Principles of Strategic Sourcing

Strategic sourcing depends on a number of key principles and practices that help businesses identify trends, gather insights that can improve supplier performance and manage ongoing sourcing risks. The following are the four most important principles of strategic sourcing.

Comprehensive Spend Analysis

Comprehensive spend analysis stands at the heart of strategic sourcing. Strategic sourcing teams conduct this analysis by tapping into internal data from purchase orders, invoices and expense reports and analyzing it alongside contextual external market intelligence and benchmark data to get a pulse on important purchasing trends. Doing so helps spot opportunities for savings and identify potential risks in the supply chain, such as overreliance on a single supplier. Comprehensive spend analysis also provides insights to evaluate supplier performance and create bargaining points for improved vendor negotiation. Finally, regular spend analysis supports compliance by meticulously documenting spending activities and tracking them against policies and regulations governing procurement practices.

Market Research and Supplier Evaluation

The market research and supplier evaluation done as part of strategic sourcing ensure that a business thoroughly understands the dynamics at play in applicable purchasing environments. Strong market research helps strategic sourcing teams pick up on new trends, find innovative new suppliers and identify risks, including supply shortages, price fluctuations and geopolitical instability. The information gleaned from market research helps winnow a list of potential suppliers that can then be further evaluated based on key criteria, such as price, quality, reliability and sustainability. Supplier evaluation may also dig deep into the financial stability and operational reliability of suppliers, as well as assess their maturity in areas such as quality management systems, security and industry compliance. This principle of deep research in strategic sourcing can help an organization plan for improved supplier diversity.

Total Cost of Ownership (TCO) Analysis

The hallmark difference between strategic sourcing and more traditional procurement practices is the commitment made to total cost management. Strategic sourcing teams regularly conduct total cost of ownership (TCO) analysis to evaluate the full costs of acquiring and managing goods and services across their entire life cycle. TCO analysis deepens a company’s understanding beyond just what it’s paying in terms of a purchasing price by digging into other relevant costs, such as transportation, storage, maintenance, training and disposal. TCO analysis often includes risk analysis of potential (or historical) costs caused by supplier lack of reliability or product quality issues. When paired with supplier evaluation, TCO analysis can help strategic sourcing teams make better apples-to-apples comparisons among suppliers.

Risk Management and Mitigation

Proactive risk management and mitigation are as integral to strategic sourcing as cost management and supplier performance management. Strategic sourcing can level up procurement processes by identifying, assessing and mitigating a range of potential risks to the reliability of suppliers and their goods and services. Strategic sourcing teams accomplish this by pushing the business to diversify suppliers and establish contingency plans. These teams embed risk management and mitigation principles into procurement by incorporating risk assessments into supplier evaluations and contracts and continuously monitoring ongoing supplier relationships for emerging risks. Strategic sourcing can also help drive down risk by negotiating contractual provisions that address potential pitfalls related to delivery schedules, quality standards and indemnification.

Strategic Sourcing Process

Strategic sourcing evolved from the business consulting movement of the 1980s and 1990s and applies lessons from Japan’s manufacturing and economic successes to other industries. Even as strategic sourcing has matured in the decades since, the following eight key steps in the strategic sourcing process as laid out by Toshihiro Nishiguchi in 1994 still stand as the foundation for this discipline today.

1. Evaluate Current Expenditures

The first step in strategic sourcing is to assess current spending to identify spending patterns — who buys what, from where and for how much. This assessment includes analysis of patterns by department and business function, along with categorization by classifiers, such as services, direct materials, indirect materials and so on. At this stage, many strategic sourcing teams will compare spending with industry benchmarks and start looking for underperforming vendors, potential overspending and opportunities for purchase consolidation. According to The Hackett Group, approximately 56% of organizations have incorporated a large-scale deployment of spend analytics into their procurement or strategic sourcing functions, with another 29% navigating pilot projects.

2. Perform Supply Market Analysis

After looking inward, strategic sourcing professionals must also examine the external market forces at play. They do this by conducting supply market analysis that pores over industry reports, market studies and supplier information to understand market trends and pricing dynamics. This evaluation digs into the structures of relevant supply markets, examining the number of suppliers, their market share and competitive actions. In this phase of the strategic sourcing process, a company gathers intelligence to understand supplier positioning and evaluate risks, including geopolitical and supply chain issues. This is also when strategic sourcing teams start to understand supplier cost drivers that could impact their company’s raw material, labor and other overhead costs.

3. Conduct a Comprehensive Cost Assessment

The goal of a comprehensive cost assessment is to examine the totality of costs involved in doing business with a supplier that extend beyond the purchase price of goods and services. This could include direct costs, such as freight, duties and labor associated with installing or customizing a product, as well as indirect costs, such as inventory carrying costs and supplier management. In addition to this TCO analysis, a comprehensive cost assessment categorizes costs into groupings to better define cost structure for potential opportunities for optimization. Companies are increasingly including value analysis in this mix, considering total value contribution estimates alongside TCO calculations.

4. Define a Supplier Identification Process

With assessments about current spending, the supply market and total costs in hand, businesses are ready to move into the supplier identification phase of strategic sourcing. This is when procurement professionals begin to screen and vet vendors to find the ones best equipped to help their company balance long-term requirements around cost, reliability and quality of procured goods and services. Some common factors to consider when vetting suppliers include a supplier’s strategic importance to the business, performance (quality, reliability, on-time delivery), financial stability, innovation, commitment to sustainability and ethics, geographical coverage and, of course, cost structure. This process classifies and evaluates criteria based on the objective that the acquisition is helping to fulfill. For example, a manufacturer sourcing raw materials may heavily consider supply chain risk, while a company marketing its environmental commitment to consumers may screen suppliers based on their history in sustainable practices.

5. Formulate a Sourcing Strategy

The next step in strategic sourcing is to devise a strategy that synthesizes all the information gathered up to this point. In many instances, this may not be a singular unified strategy, but instead a collection of strategies to direct different purchase categories, be they by department or business function. Either way, a sourcing strategy should provide guidance on supplier selection and performance criteria. Some plans may create an official preferred supplier program, while others may offer suggested options to purchasers. As strategic sourcing teams develop their overall plan, procurement experts recommend a high level of engagement with stakeholders most affected by the sourcing strategy and, ultimately, the acquisition of goods and services. Involving these stakeholders early in the process and communicating the rationale behind proposed choices — with data to back it up — will ensure success when it comes time to operationalize the plan.

6. Negotiate With Suppliers

In addition to research and planning, another key function of strategic sourcing is to build relationships with preferred vendors and negotiate terms, service levels and prices in advance. The structured analysis done during the research phase of strategic sourcing should provide procurement professionals with the insights they need to strike deals that deliver more value and savings over the long term. Recent studies show that companies that excel at supplier negotiation stand to save an average of 15% in procurement costs. And long-term relationship building can help establish contractually guaranteed quality standards, maintenance terms and service add-ons that might otherwise be difficult to extract from a larger vendor on a one-off basis.

7. Implement Sourcing Changes

Ultimately, the goal of strategic sourcing is to provide the analytics that power ongoing procurement transformation. The sourcing strategies and negotiations with suppliers should give procurement teams the tools they need to more easily acquire goods and services in the most efficient and cost-effective manner. The implementation stage is when everything comes together and a company executes on its revamped sourcing strategy. This requires a disciplined commitment to effective change management and stakeholder buy-in, which is why it’s important for procurement and business stakeholders to work collaboratively in the preceding six steps. The goal of the implementation phase is to slowly change day-to-day operational processes to align with the long-term objectives laid out by the strategic sourcing plan. Key to this effort is getting procurement staff to use vetted and preferred vendors whenever possible.

8. Continually Monitor and Assess Supplier Performance

Strategic sourcing isn’t meant to be a one-and-done process; it’s a big-picture procurement discipline that’s meant to continuously improve. This means that sourcing and procurement teams should view these steps as ongoing, using supplier performance metrics and cost data to tweak the sourcing plan and adjust supplier structures as needed. KPIs that strategic sourcing should track for continuous assessment include TCO, total procurement return on investment, quality performance ratings, on-time delivery, compliance and risk, spend by category and inventory turnover.

Benefits of Strategic Sourcing

Companies engaging in strategic sourcing reap a range of benefits that not only reduce costs, but also drive significant value to the business. The following are four main benefits of strategic sourcing.

  • Long-term cost reduction: Strategic sourcing can drive cost reduction on numerous fronts. Spend analysis identifies opportunities to consolidate vendors and negotiate better pricing. Total cost analysis shows when indirect costs are driving up procurement costs beyond price. And analysis of the external market and internal buying trends fuels more cost-efficient supplier arrangements that cross business silos and produce more favorable terms.
  • Increased operational efficiency: The procurement workload is expected to increase by 8% this year, with little increase in headcount or operating budget to keep up with the added work. The upfront research, planning and negotiation groundwork laid by strategic sourcing can help take the operational burden off the procurement team and achieve a higher level of operational efficiency.
  • Enhanced business intelligence: Strategic sourcing helps businesses gain a deeper understanding of supplier performance, cost dynamics, supply chain risks and market conditions. The enhanced business intelligence driven by strategic sourcing gives procurement and business leaders better data and analysis to make decisions about how they structure supplier relationships and identify opportunities to optimize procurement processes. Similarly, this business intelligence makes it easier to capitalize on market opportunities and emerging innovation.
  • Ethical and sustainable procurement: In addition to driving cost savings and efficiency through strategic sourcing, companies can use the practice to uphold other important business goals of procurement — chief among them ethical and sustainable procurement. By incorporating standards of ethical and sustainable practices into supplier evaluation, strategic sourcing professionals can hold their vendors to a consistently higher level of performance in these areas.
strategic sourcing
Strategic sourcing helps companies reduce costs and drive significant value for their business.

Strategic Sourcing Examples

Strategic sourcing has increasingly become a crucial component of procurement strategy among companies today. Manufacturers use the practice to optimize their supply chains for raw materials; retailers and distributors leverage it to identify and build relationships with suppliers that help them gain a competitive edge; and technology firms use it to expedite go-to-market strategies and find emerging innovative suppliers. Here are some companies known for their strategic sourcing processes.

  • Amazon uses strategic sourcing to negotiate favorable pricing and keep total costs, including inventory management, low.
  • BMW fuels cost savings and powers its just-in-time inventory management practices by using strategic sourcing principles.
  • Johnson & Johnson employs strategic sourcing to enforce diversity, equity and inclusion (DEI) across its supply chain as part of its commitment to DEI initiatives.
  • Nestle uses strategic sourcing to build relationships with and source from environmentally responsible suppliers.

Maximize Profitability and Simplify Purchasing With NetSuite

Effective strategic sourcing depends on a high degree of sophistication in data collection and analysis across a wide range of financial and operational processes. In order to conduct the kind of evaluation necessary to understand the total cost and value generated by suppliers, a strategic sourcing team needs real-time data on supplier pricing, direct and indirect costs, defect rates, on-time delivery rates and more.

NetSuite Sourcing Management provides a unified suite of tools to help businesses take procurement to the next level of sophistication by enabling strategic sourcing best practices. NetSuite provides a centrally managed vendor portal that feeds strategic sourcing teams all the data they need to conduct complex total cost analysis. The platform offers a vendor performance tracking function to simplify ongoing measurement of KPIs and enables better communication with vendors to help strategic sourcing professionals manage and maintain relationships with suppliers.

Strategic sourcing represents a critical practice for organizations aiming to optimize procurement decisions and fortify the resilience of their supply chains. By moving beyond simplistic, price-based evaluations, strategic sourcing offers a methodical approach to procurement, leveraging data analytics and market research to drive long-term value. Through comprehensive spend analysis, market research, total cost assessment and proactive risk management, strategic sourcing empowers businesses to make informed sourcing decisions, streamline operations and foster sustainable supplier relationships. As companies increasingly recognize the pivotal role of procurement, strategic sourcing will stand as a cornerstone practice for driving efficiency, innovation and ethical procurement practices across industries.

Strategic Sourcing FAQs

How is strategic sourcing different than sourcing?

Strategic sourcing is different than traditional sourcing methods in that it examines supplier decisions using factors beyond price, such as total cost of ownership, quality and risk considerations.

What is the difference between strategic sourcing and outsourcing?

Strategic sourcing improves the way procurement departments identify suppliers and build relationships with them, while outsourcing is the practice of contracting tasks or services to external vendors.

What is the most popular technique of strategic sourcing?

The most popular technique of strategic sourcing is conducting total cost analysis in selecting suppliers based on long-term cost savings.

What are the eight steps of strategic sourcing?

The eight steps of strategic sourcing are to 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 and monitor and assess supplier performance on a continuous basis.

What are the four pillars of strategic sourcing?

The four pillars of strategic sourcing are cost management, supplier performance, risk management and supplier relationship management.