Strategic sourcing is an important first step to start the procurement process. The main goal of a sourcing and procurement strategy is to improve profitability through a single, integrated system.
It makes sure that all spend categories are as efficient as possible thus minimizing risk and building lasting relationships with suppliers on whom the business can rely on in the long-term.
Follow this guide to understand strategic sourcing and procurement, and how to implement it.
Strategic sourcing and procurement are two processes that are related, but different. These terms are often used interchangeably, but this shouldn’t necessarily be the case.
Here is a breakdown of the differences between strategic sourcing and procurement.
Sourcing is the stage of the procurement process that comes before conducting any purchasing. Prior to procuring any goods or services, you first need to find the right supplier.
A sourcing strategy helps businesses find quality, reliable, and affordable suppliers to match their procurement demand.
Sourcing is an essential part of getting the procurement process started.
All procurement starts with an internal business need for goods or services. Strategic sourcing during the procurement process then identifies potential suppliers and considers the most suitable ones.
The entire sourcing process includes finding the right suppliers, negotiating suitable payment terms, and building solid supplier relationships.
With a strong sourcing strategy in procurement, the entire procurement process that follows becomes more efficient and it is easier to manage spend.
It also ensures that the gains in procurement efficiency benefit the company as a whole as much as possible.
There are a range of factors that should be considered prior to conducting sourcing.The goal is that sourcing goods and services should strike a balance between quality and affordability.
Sourcing involves many different steps that relate to each supplier. This includes requesting quotes for new products, understanding pricing, minimum order quantities, lead times, and uploading all relevant vendor information into your procurement software.
For the rest of the procurement process to run smoothly, it is essential to get the sourcing part done right.
Procurement is the process that follows sourcing. Once the goods or services have been sourced, the process of purchasing begins.
Once potential vendors are identified, tendering or competitive bidding is conducted.
Procurement focuses on making buying decisions, receiving ordered goods, and keeping up-to-date records of the end-to-end purchasing process.
It entails a long-term process that aims to build lasting, strategic relationships with the right suppliers. When done correctly, procurement helps organizations take on quality goods and services at the best price, and within the most convenient time frame.
Procurement has a major impact on the overall running of an organization. It directly affects bottom line profitability as well as the efficiency of business operations.
The procurement process is all about making sure a business strategically purchases goods or services from the right suppliers.
Ideally, this needs to be done through a detailed procurement plan. This plan outlines the company's procurement goals and lists strategies that should be applied in order to achieve the defined targets.
For an organization to meet procurement goals, it is key to focus on the best strategy to find the right suppliers for goods and services. This is where strategic sourcing comes into practice.
If you want to develop a powerful procurement network that adds maximum benefits to your organization, then you will need to have an efficient sourcing system in place.
Essentially, sourcing is used to find the right vendors to supply goods or services, and procurement is used to purchase these goods and services.
You can’t have an effective procurement process without sourcing suppliers early on.
Strategic sourcing is a process that carefully considers the right suppliers for a business based on an organization’s spend profile.
Strategic sourcing is a long-term process that continually reconsiders the sourcing actions within a business.
The overall aim of strategic sourcing is to achieve the lowest possible Total Cost of Ownership (TCO) to the organization while reducing the risk in the supply chain to a minimum.
This means that strategic sourcing isn’t just a one-way process, but a circular process to continually build strong, collaborative relationships with suppliers.
This circular approach ensures that the company’s needs are always being met and procurement targets are being realized.
Implementing strategic sourcing and procurement involves multiple steps. While this process may look different for every business, here is a step-by-step guide to implementing strategic sourcing at your organization.
The first step to implementing strategic sourcing is to identify all the different spend areas across each sphere of your business.
Categorize these spend areas based on importance to help prioritize sourcing activities.
Develop a strategy for how you’ll tackle each spending area. To achieve this, you’ll need to identify the business objectives and requirements for each area and then define what is needed to fulfill these requirements.
This process should also involve a communication workflow that keeps all relevant stakeholders in the loop.
Analyze and understand all supplier profiles that could be relevant to the sourcing demands of your organization.
Conduct thorough research to grasp how each supplier is performing in the market, and what risks, if any, are associated with working alongside them.
Once suppliers are identified, the next step is to request their information through RFIs, RFPs, or RFQs.
To do this effectively, you’ll need to document your specific business requirements and goals so that the suppliers know what is needed to fulfill your business objectives.
Once all supplier information has been taken into account, you’ll choose and onboard the right supplier to fulfill the defined business needs.
Strategic sourcing is an ongoing process so even after the supplier has been selected, it's important to continually measure how they’re performing to ensure that they are in line with the overall objectives of the business.
Finally, strategic sourcing includes supplier relationship management to improve collaboration with vendors.
This includes both parties getting involved in how they can continually enhance the supplier process and optimize the organization's sourcing needs.
This is necessary for delivering optimal value to the business.
Once strategic sourcing has been finalized, the procurement process follows.
Here are the different steps involved in the procurement cycle.
The procurement process starts by identifying a demand for goods or services. This demand kicks off the strategic sourcing process.
Once the right vendors have been identified, the process of procuring goods or services from these suppliers rolls out.
Next, a requisition is created. This is the official procurement request sent to the vendor to respond with a quote.
The requisition will often require approval from senior personnel before moving on to the next stage. This is to make sure that the requisition aligns with the organization's needs and overall procurement strategy.
Once the purchase requisition is approved, a purchase order is created and sent to the selected vendor.
A purchase order is the official offer from the buyer to the seller and outlines the terms and conditions of the procurement deal.
Once the purchase order has been accepted by the vendor, it becomes a legally binding contract. Both parties are liable to the terms and conditions listed in the purchase order.
This forms the guidelines of what is expected in the procurement deal.
The supplier accepts the purchase order and issues the agreed upon goods or services.
When the buyer receives this order, they need to carefully review the issued purchase order. This is to ensure that the correct quantity and quality of products or services were delivered.
If any issues are identified at this point, the buyer can request a refund, a return, or choose another suitable alternative to make sure that the original purchase order is fulfilled.
Once the purchase order has been fulfilled, the supplier sends an invoice to the buyer. This invoice needs to be checked for accuracy and compared to the original purchase order and requisition.
In case any inaccuracies are identified in the invoice, the supplier needs to adjust them accordingly.
Once the invoice has been approved by the buyer, it is sent onwards for payment. The invoice also needs to be recorded and stored in the buyer’s database.
Finally, the buyer's accounts payable department issues a payment to the vendor. They will need to update their payment records to reflect this procurement deal and mark the procurement cycle as closed.
Strategic sourcing and procurement involve two separate, but interconnected, processes.
Strategic sourcing involves data collection, spend analysis, market research, contracting, and managing supplier relations.
The process stops before the actual purchase of the goods or services takes place.
By sourcing strategically, businesses can optimize their procurement process and achieve better long-term results.
Ultimately, this means a more value-driven procurement process with greater profit potential.