What is Strategic Sourcing?
Strategic Sourcing is a formal approach to procurement and supply chain management that authorizes an organization to leverage its joint purchasing power to attain the best value for its spend. In simpler terms, it is a fancy way of saying “shop smarter”. It serves as a roadmap for procuring the goods and services that the organization knows it needs beforehand, thus allowing time for procurement managers to identify the best price, rather than waiting until an immediate need rises. By using a strategic sourcing process to plan ahead, procurement managers can also ensure that they buy the exact goods or services needed from suppliers that meet their delivery and quality requirements. While this may seem daunting, strategic sourcing services can make the process incredibly easy.
Ever wondered why everyday items like a gallon of milk cost more at a convenience store than at a supermarket? Well, that’s because a convenience store likely runs 24 hours a day, thus making it more convenient and easier to buy milk from compared to a supermarket. Since most people prefer to buy milk at a convenience store when they are in a rush or when it is late, these stores take advantage of that customer’s immediate need and hence charge a higher price. The benefits of strategic sourcing can in various ways be seen in the way people shop for everyday items. The same case applies to the procurement world. Keep reading to know how strategic sourcing benefits procurement practices in an organization.
Strategic Sourcing Benefits
Let’s have a look at some of the most important benefits strategic sourcing can offer.
- Cost
This is what primarily draws organizations to the idea of strategic sourcing. To lower the cost of goods and services, procurement leaders can negotiate lower prices for high-volume purchases. This allows the business to maintain low prices for their goods and increase profit. Suppliers also benefit from this arrangement in that they can sell a large portion of their product, thus making it easier to plan for the long-term and maintain long-term cash flow visibility. The same case applies to services, as using a strategic sourcing model to purchase essential needs can provide savings.
- Supply Stability
The strategic sourcing process helps in building stable supply partnerships, ensuring that organizations do not find themselves in a situation where they require something and do not have it. Lacking the proper goods or services ahead of time can leave businesses stuck, hence ultimately compromising the quality of their product and relationships with their customers. Strategic sourcing ensures that these future procurement needs are planned on time, avoiding possibly risky situations that could cause harm to the reputation or bottom line of the business. When it comes to supply stability, good leaders recognize the importance of strategic sourcing.
- Risk Management
Strategic sourcing can help lessen the amount of risks companies encounter with their supply chain. Close supplier relationships help companies to point out and resolve potential challenges quickly. If a supplier has cash flow problems, a primary customer may allow some working capital advance to enable it to continue operations. Strategic sourcing also enhances business-supplier communications, ensuring that there are no unexpected shocks between the two. This type of working relationship benefits both sides.
- Organizational Excellence
The process of strategic sourcing forces business leaders to plan the long-term future. It allows them to step away from the daily exertion that can at times consume leadership. Strategic sourcing assists businesses in preparing for the future for different good or bad scenarios. For both small and large businesses, it offers a lot of benefits and is simply a smarter way to procure. As businesses grow more mature, the importance of strategic sourcing becomes more crucial in greatly enhancing their supply chain management. Strategic sourcing is the best way to consistently work closely with suppliers, which is incredibly important for businesses.