As businesses increasingly focus on managing costs, finding the right vendors has become a top priority for procurement teams.
Consequently, the practice of strategic sourcing, which focuses on maximizing value and reducing risk through vendor partnerships, is transforming the way businesses view buyer-supplier relationships.
Spending wisely can make or break your business. Admittedly, this idea isn’t new. Indeed, for finance and procurement teams, it’s an age-old, foundational principle. However, what is new is how they decide what wise spending looks like. As businesses increasingly seek to control costs while maximizing output, the procurement department is faced with the question of how to deliver results. For many, the answer is strategic sourcing.
Strategic sourcing is a growing practice that embraces spend analysis, data-driven supplier selection and ongoing engagement with vendor partners.
This guide will explore strategic sourcing in detail. To start, learn the definition of strategic sourcing as well as key principles and benefits of the practice. Then, explore scenarios that are ideal for strategic sourcing as well as who is involved in the process. Next, you’ll see a detailed plan for implementing strategic sourcing. Finally, the article will share how technology enables strategic sourcing to deliver even more value.
What is strategic sourcing?
Strategic sourcing is an approach to procurement that weighs the overall value delivered through a vendor relationship rather than the simple cost of the product or service provided by a vendor. The practice is a part of supply chain management and emphasizes customized solutions and strategic partnerships.
Furthermore, this big-picture perspective acknowledges and accounts for the many complex factors that influence value. Indeed, strategic sourcing is often viewed as a cycle that includes spend analysis, supplier selection and ongoing engagement.
In addition, an emphasis on building meaningful buyer-vendor partnerships promotes collaboration, accountability and innovation throughout the vendor lifecycle. Ultimately, this approach achieves the overall goal of strategic sourcing – to reduce costs while improving the efficiency and reliability of the supply chain.
Traditional procurement vs. strategic sourcing
Procurement has always been focused on controlling costs and improving company profitability. However, the way that organizations identify and connect with suppliers and vendors has changed significantly in the last several decades.
Historically, vendor selection has largely been based on locality and peer referrals. As technology emerged, organizations gained access to a vast and competitive global network of suppliers.
Now, with visibility to a full range of suppliers, procurement teams focus on controlling procurement costs by finding the vendor offering the lowest price as quickly as possible. This tactical, traditional approach is widely practiced. However, a bad experience with the wrong vendor quickly teaches that the fastest, cheapest solution isn’t always the best fit. Consequently, strategic sourcing recognizes and accounts for factors outside of cost.
Strategic sourcing principles
- Decisions based on big-picture value
- Partnerships preferred over transactional interactions
- Considers total cost of ownership
- Prioritizes the most important elements of a vendor’s offer
- Highlights the value of the procurement department
Strategic sourcing vendor considerations
Taking a holistic approach that weighs all aspects of the vendor relationship, the strategic sourcing process digs into anything that influences value. The subsequent vendor evaluation process then identifies which of these many considerations are most important.
- Quality of goods and services
- Brand reputation
- Financial stability
- Customizability of solution
- Technology adoption
- Customer satisfaction and support
- Vendor innovation
- Subcontracting and outsourcing
- Reliability and responsiveness
- Scalability and growth opportunities
- Seasonality and stability
- Company culture and values
- Sustainability and diversity
Why is strategic sourcing gaining prominence in procurement?
The concept of strategic sourcing isn’t exactly new. In fact, it started sometime in the late 1980s or early 1990s. Initially adopted by large companies to quantify and increase vendor return on investment (ROI), today, the practice is widespread among organizations of all sizes.
Regardless of size, businesses now have the ability to collect and evaluate extensive data between competitors. Indeed, while much of the value of strategic sourcing is derived from it’s in-depth approach, the multitude of factors also make it difficult to attribute procurement savings directly to a single factor. However, organizations that practice strategic sourcing report a number of benefits.
Benefits of strategic sourcing
Let’s discuss a few benefits of strategic sourcing and how they’re used today.
Reducing costs is always a top priority for procurement teams. In fact, a recent Deloitte survey reports that reducing costs is a top priority for 76 percent of chief procurement officers (CPOs). Accordingly, cost savings is easily the biggest benefit of strategic sourcing.
The entire process centers around the goal of reducing spend. Starting with the first step of the strategic sourcing cycle, procurement professionals identify current costs overdue for optimization. Then, they gather data, explore stakeholder needs, research the current market and eventually issue a detailed request for proposal (RFP) to evaluate and select the ideal vendor.
Because the selection process is more detailed than a traditional procurement project, both parties are invested in building a mutually beneficial and long-term partnership. As such, the relationship is ongoing and collaborative, ultimately resulting in reduced costs.
At its core, strategic sourcing is just as much about avoiding a bad partnership as it is about finding a good vendor. Again, thanks to the detailed process you can consider every factor, dig into the vendor’s experience, explore their contingency plans and set a framework for ongoing communication. The Deloitte CPO survey indicates that 75 percent of CPOs identify improved vendor information sharing as their top risk-management strategy. Luckily, collaboration is a foundational component of strategic sourcing.
With the unique focus on partnership, strategic sourcing gives you the opportunity to provide your vendors with regular feedback. Likewise, they have a platform to proactively alert you to trends, keep you competitive and collaborate on innovative initiatives.
Longer relationship, fewer RFPs
It won’t surprise you to know that neither your procurement department nor the vendor’s proposal team relish the prospect of opening up a new RFP. For complex, high-value sourcing projects, the process could last months or even years. By leveraging strategic sourcing, you can rest assured that you’ve accounted for every important factor, selected the right partner and you’re both ready to meet your goals together.
When is strategic sourcing a good option?
While there are undoubtedly benefits to strategic sourcing, it’s not a fit for every procurement project. After all, it is an admittedly complicated, and occasionally time-consuming, process. Some projects just don’t require that level of detail. So, it’s important to always find a balance between the value of the item being procured and the time investment required to undertake a strategic sourcing project.
Strategic sourcing is a good fit for projects that are:
- High value, well defined and essential to the organization
- Complex and highly specialized
- High stakes and part of an organizational change initiative
Examples of strategic sourcing scenarios:
- Selection of a new customer relationship management software
- Evaluation of financial services or employee benefits
- Engaging an architecture firm for a new construction project
Scenarios that are better suited to alternative procurement approaches
The detail and time required for strategic sourcing means there are some situations that simply won’t be a good fit for the process. Here are a few examples.
- Low value, low risk procurement like finding a project management solution for a single department
- Collecting bids to meet policy requirements when there is an existing strong preference for a particular vendor
- A routine, transactional purchase of office supplies – try an RFP lite
- Gathering ideas, pricing and planning a potential purchase – consider a request for information (RFI)
- Finding the best expert to consult on a marketing initiative – try a request for qualifications (RFQ)
- Securing the lowest price for a low-complexity purchase — Consider a request for quotation (RFQ)
Who is involved in the strategic sourcing process?
Within your organization, a number of people and departments will play a role in your strategic sourcing efforts. Typically, the process is owned and managed by the procurement department. Indeed, many organizations have recently created strategic sourcing manager roles to encourage specialization in this area.
As with most procurement projects, a number of other stakeholders will inevitably participate. For example, for a CRM procurement project, stakeholders from sales, marketing and operations would contribute to the project. In addition, legal, finance and IT are also often involved. Finally, almost every strategic sourcing project will require executive review and approval.
How to shift to strategic sourcing
Adopting strategic sourcing happens one procurement project at a time. Initially, it may feel like a big change, but parts of the process will feel familiar. Indeed, strategic sourcing shares a number of common principles with traditional procurement.
As you identify purchases or existing vendor relationships that are a good fit for the approach, you’ll move through the strategic sourcing cycle, starting with spend analysis, then supplier selection and, finally, ongoing engagement.
Whether you’re evaluating an existing vendor relationship or undertaking a brand new procurement project, you’ll start with research and analysis. The goal of this step is to define your current state, establish needs and goals, and research solutions.
Define your current state
Often, procurement projects start with a need. Either a new problem has emerged or a current process just isn’t working as expected. Regardless of the circumstances, clearly defining your current circumstances sets the foundation for everything that comes next.
As you engage with stakeholders, ask: What is the existing process or strategy? Who are the stakeholders and decision makers? What gaps or roadblocks exist? Are there internal or external factors influencing the current state? Who will have final approval?
Establish needs and goals
Before you buy, you have to know what you need. Furthermore, you also must understand what you’re trying to achieve. So, gather current contracts, talk to stakeholders and brainstorm a list of solution features as well as goals for the purchase. Try to get the perspective of a range of people involved in the current process at various stages. Once you have your list, it’s time to categorize your considerations.
Making smart purchasing decisions requires a clear understanding of which features and factors are must-haves, which are nice to have and those that are out of scope. Review your list of requirements and label each accordingly to create your scope. Each of your must-have elements should tie directly to the stated goal of the project.
With your clearly defined needs and goals in mind, it’s time to explore potential solutions. The business landscape is constantly changing, so staying abreast of new developments requires some research. Explore online resources, gather supply market analysis reports, check customer reviews and tap into your network for recommendations. Ideally, this step will give you a framework as you determine next steps.
Strategic sourcing considers the return on investment at every step. Consequently, you must now weigh the potential benefits of engaging with a new vendor against the time and cost required to move forward.
Ask yourself: do the potential vendors offer a cost savings that offsets the investment required to find a new solution? Can you invest time in an existing vendor relationship to avoid undertaking a new strategic sourcing project? Do you have benchmark data to validate future ROI? Which vendors are most likely to meet your immediate needs as well as empower future growth?
If you decide to move forward to engage with a new vendor, you’ll now focus on finding the right partnership. On the other hand, if your research and analysis indicates that the best course of action is to focus on improving your current vendor relationship, you’ll skip this step and move forward to ongoing engagement.
Supplier selection is where strategic sourcing significantly diverges from traditional procurement. Indeed, you’ll find that creating a strategic sourcing RFP is more detailed and complex than routine RFPs. Likewise, the proposal evaluation process is more involved.
Writing your RFP
When it comes to strategic sourcing, your standard RFP template offers a good start, but updates are required. Indeed, by definition, a strategic sourcing RFP should be thorough and highly specific when it comes to the background information it provides as well as the questions it asks. Remember, comprehensive RFPs are more likely to yield thoughtful, relevant proposals.
RFP background and information
Strategic sourcing projects are often complex and require a customized solution. So, before you ask a single question, it’s important to provide as much information as possible about your company’s background, needs and goals. This enables potential vendors to fully understand your business and tailor their proposed solution to meet your unique requirements.
Information to include in your strategic sourcing RFP:
- Company information: History, about us, mission, vision, industry position and glossary
- Project information: Background information, problem/need statement, current state summary, project contact and key stakeholders
- Solution scope: Minimum vendor qualifications, project deliverables, vendor evaluation process details and proposed implementation timeline
- Submission information: RFP timeline and milestones including proposal due date, evaluation criteria and proposal submission instructions
After you’ve provided key company background and project information, it’s time to ask the questions that will provide you with crucial decision-making data.
Standard RFP questions
Your RFP should ask a combination of straightforward questions as well as more in-depth, nuanced questions. Luckily, your RFP template provides a foundation to build upon. For example, your template likely already includes these standard sections:
- General company information
- Product and service descriptions
- Business philosophy and approach
- Competitive differentiators
- Customer references and case studies
- Cost model and proposed pricing
- Customer success policies
- Data security information
Strategic sourcing RFP questions
Beyond the standard questions, strategic sourcing RFPs also address more in-depth topics. Naturally, the specific questions you’ll ask in your RFP depend on your project priorities and goals. However, here is a selection of sample strategic sourcing sections and questions to consider.
Customer landscape and competency
- Does the company already work with your competitors?
- Can you talk directly with a customer that has a similar use case to you?
- Ask what challenges commonly face customers like you and how the vendor participates in collaborative problem solving?
- Is the company publicly or privately owned? If private, who are the current investors?
- Are earnings, assets or profit and loss statements available for review?
- Has the company been involved in a merger, acquisition or reorganization in the last few years?
Supply chain stability and infrastructure
- Who are the vendor’s primary suppliers? Subcontractors? Consultants?
- Can the company’s production accommodate an increase in volume or change in scope?
- How robust is their supply chain and how have they overcome supply chain challenges in the past?
- What technology do you use to communicate with customers?
- When is customer support available and how can they be contacted?
- What is the average response time to customer questions?
Implementation and time to value
- Describe your standard customer onboarding process.
- How long does onboarding take and what is the current timeframe for implementation if you are selected?
- What resources or preparations are required from your organization to ensure on-time implementation?
Ethics and social responsibility
- Request a copy of the company’s corporate and employee policies.
- What are the company’s sustainability policies?
- Does the organization support social responsibility and charitable giving?
RFPs are a useful data collection tool. However, as a procurement professional, you must be able to use that data to find the best vendor. With hundreds of data points per proposal, simply viewing the information side-by-side won’t make the best choice obvious. Fortunately, team proposal evaluation and weighted scoring offer a way to summarize the results of any procurement project.
Team proposal evaluation
Once you’ve received your RFP responses, it’s time to score your proposals. Start by verifying that each proposal meets your minimum requirements. Then, score any closed-ended questions. Finally, it’s time to engage your stakeholders again to help score the more nuanced responses.
A strategic sourcing proposal covers a lot of detailed and technical topics. So rather than having a single procurement professional score the proposals, split the scoring into several groups. For instance, the legal team should score responses to questions that deal with terms and conditions. Likewise, your IT team is best equipped to score RFP responses about software integrations and capabilities.
As you engage with individual and team proposal reviewers, provide a scoring guide to ensure everyone is on the same page. Indeed, you’ll find your initial spend analysis documents helpful as you create a scoring rubric.
While strategic sourcing considers a vast number of factors, not each of those factors have the same importance to the business. For example, the vendor’s history of on-time delivery is likely far more important to you than their fax number. To properly account for these different priorities, many strategic sourcing teams leverage weighted scoring.
Weighted scoring assigns each question a point value based on its importance to the business, often a scale from one to five. Then, it weighs the score based on its value to the business. For example, several questions in the capabilities section may each be worth five points while a question about must-have functionality is worth 20 points. Then, the capabilities section as a whole is worth 40 percent of the entire proposal.
To get the final weighted score, multiply the point total for each section by weight percentage and then add the section scores together to get a total score for each vendor. Admittedly, it sounds complicated. However, when you break it down, a simple weighted scoring calculation may look something like this:
Certainly, it’s the best practice to ensure as much objectivity as possible by assigning an individual score for each question. However, some businesses prefer to score and weight each section collectively to save time. As with most procurement practices, your approach will vary based on the needs of the project.
Final vendor selection
Once you’ve scored your proposals, made your comparisons and called customer references, hopefully you have a clear winner. If not, consider narrowing your vendors to a short list and requesting live RFP presentations or issuing a supplementary RFP.
When you identify the best vendor fit, begin negotiations and contracting. During this step, it’s important to define and put in writing your expectations, strategy for meeting goals and metrics for evaluating performance. Indeed, make sure your team and the vendor are on the same page when it comes to timelines, deliverables and quality control. Proactively establishing this framework will make the next step in the strategic sourcing cycle significantly easier.
When it comes to maximizing the value of your vendor relationships, continual communication is key. Far too often in traditional procurement approaches, the relationship falls into maintenance mode after the contract is signed. Your vendor goes quiet and the partnership has a ‘no news is good news’ approach.
Unfortunately, this greatly limits the value that the vendor partnership can provide your organization. Luckily, strategic sourcing leverages ongoing evaluation through regular performance reviews, continual communication and market research.
Regular performance reviews
Using the metrics established during negotiations and contracting, establish regular check-ins with your vendor contact. Generally, setting quarterly reviews provides enough oversight to proactively address problems while delivering sufficient feedback for continual improvement. Before these reviews, gather feedback from the individual departments and users that regularly interact with the vendor, so you get a complete picture of how the engagement is going.
Ask what is working well in the partnership? Is the vendor delivering the products and services as expected? How can the process become more efficient? Where is there room for improvement?
Vendor evaluation factors
- Quality control metrics for products and services
- Consistent and timely delivery
- Customer support and responsiveness
- Quantity and cost invoice accuracy
- Expected and actual return on investment
If you encounter challenges outside of the regular review period, reach out to your vendor. Don’t just assume that the vendor is aware of and apathetic to the problem. An article from business.org summarizes saying:
“Even the most reliable supplier can occasionally slip up. Make sure they have a direct contact point at your company and conduct regular performance reviews. This will help you keep tabs on their work and make sure they’re fulfilling their end of the agreement. These reviews will also help you when it comes time to talk about contract renewal, so you know where you stand.”
Your partnership should be a two-way street that provides feedback to your vendor and encourages them to do the same. Ideally, transparent communication enables your vendors to become a trusted part of your network.
Ongoing collaboration between your company and your vendors encourages efficiency, identifies roadblocks and fuels creativity. Unfortunately, vendor communication doesn’t always happen spontaneously, it must be planned for and encouraged.
An article from Entrepreneur puts it like this:
“Not every customer wants to buddy up to suppliers, so the fact that your suppliers aren’t offering to work closely with you to improve quality, reduce defects and cut costs doesn’t necessarily mean they don’t want to. They may be under the impression that you are the reluctant one. So, if you want a tighter working relationship with suppliers, let them know.”
Each vendor in your supply chain has a unique perspective and valuable set of experiences. Indeed, staying in sync with your providers will help you identify trends, anticipate market changes and collaborate to find creative ways to improve efficiency.
It’s no secret that the business landscape is continually changing and evolving. Accordingly, you must watch for potential shifts in customer demand that may impact your needs. Even when you have a positive relationship with a current vendor, it’s important to stay up to date with what their competitors can offer.
Fortunately, creating and maintaining vendor profiles enables you to catalog key information and updates from potential suppliers. Staying abreast of the latest developments enables you to have a backup plan if your vendor fails to meet your needs. In addition, because these profiles contain background information and differentiators, they can help speed up shortlist selection in the event that a new RFP must be issued.
Tools for strategic sourcing
For organizations prioritizing procurement savings, strategic sourcing software is a must. Designed to centralize and automate strategic sourcing, these platforms are typically cloud-based and collaborative, enhancing efficiency and effectiveness in strategic sourcing.
Strategic sourcing software may include features like:
- Project management
- Savings tracking
- Digital RFP issuing and evaluation
- RFP template library
- Data collection and analysis
- Internal and external collaboration
- Vendor relationship management
- Category management
- Supplier marketplace
Make strategic sourcing work for you
Ultimately, strategic sourcing is the process of collecting data, partnering with the best vendors and ensuring ongoing procurement value and efficiency. It goes beyond basic, transactional purchases and focuses on the big picture – how to help achieve the goals of the organization. Likewise, the vendor partnerships that result from strategic sourcing help navigate challenges as they arise while improving outcomes and reducing costs.
Naturally, the specifics of strategic sourcing will change from one organization to the next. However, the foundation and goals of the process remain the same. Luckily, you can start your strategic sourcing efforts one project at a time.