Strategic Procurement can be considered an organization-wide process involving all functional areas of any business. The main crux is to set the entire direction of procurement to align with the objectives of the organization.
Strategic Procurement is particularly relevant in light of globalization. It has it effects on sales and purchase side. On the Sales front, it increases the pressures on the company’s own prices and on the purchase side it opens up new avenues.
Strategic Procurement helps develop dynamic competition, higher demands for products, an increase in environmental awareness, extended communication helping cost saving, excellent logistics, streamlining processes and most importantly creates transparency in the entire business module. These developments make the traditional purchasing obsolete and in turn, calls for strategical approval with the organization goals in mind.
Strategic Sourcing plays a major role in the implementation of Strategic Procurement.
Most companies are already involved with some form of Strategic Sourcing initiative. Typically, when professionals define Sourcing Strategies, they limit the scope by restricting it to cost-cutting. However, Strategic Sourcing can go well beyond cutting costs. It should result in a scalable impact on a company’s financials and can strongly influence the strategies and objectives.
Strategic Sourcing partially can be defined as the process of evaluating, selecting and aligning with suppliers or consortiums of suppliers to achieve operational improvements in support of an organization’s strategic objectives.
Strategic Sourcing is applicable to almost every procurement activity even though it is usually more relevant to direct materials because of the inflexible nature of price. However, companies need to consider all purchasers as candidates for Strategic Sourcing. Factors such as quality, shortened and reliable cycle times, technological capabilities and services become key negotiation items.
Because Strategic Sourcing is so critical and can have such a strong effect on the bottom line, some buyers prefer managing and developing incumbent suppliers by aligning strategies and working towards common goals for the procurement of direct materials only. Other companies utilize their highly skilled procurement staff to manage and source other purchases including indirect resources, services, utilities, and capital equipment purchases.
The steps in a strategic sourcing process are:
- Assessment of a company’s current spending (what is bought, where, at what prices?).
- Assessment of the supply market (who offers what?).
- Total cost analyses (how much does it cost to provide those goods or services?).
- Identification of suitable suppliers.
- Development of a sourcing strategy (where to purchase, considering demand and supply situations, while minimizing risk and costs).
- Negotiation with suppliers (products, service levels, prices, geographical coverage, etc.).
- Implementation of new supply structure.
- Track results and restart assessment (continuous cycle).
- Negotiate payment terms with vendors.
The above requires a generation of data and analytics to the maximum which can be converted to requisites. As Edward Demings said, “without data, you are just another person with an opinion”.
Outsourcing a business practice to another company may also be incorporated into a sourcing strategy for services. This may involve the transfer of staff and assets to the outsource company.
Results that can be achieved from Strategic Sourcing
One advantage attributed to a well-coordinated Strategic Sourcing initiative is gaining an understanding of how competencies and processes support a clearly defined business strategy. Obviously, it’s impractical to meet the requirements of a business without first understanding them. A Strategic Sourcing initiative presents the opportunity to clarify and communicate corporate goals and objectives. It also is a means to define and document what an organization’s competencies are and what they should be. Non- value-add functions that waste critical time, resources and require financial support can be identified and outsourced or eliminated.
As companies grow, many redundancies tend to occur. These redundancies can be in the form of distributed activities that mirror each other, or they may take the form of similar products being itemized and purchased separately. After these redundancies are identified, aggregation of similar products or consolidation of activities can occur. The processes and workflows can also be redesigned to eliminate the non-value-added work.
Ultimately, an organization will select its suppliers based on their ability to support and assist in improving a process, providing a product/service at a lower total cost, or offering a better product/service that helps to differentiate.
The crux of profitable business lies in managing your procurement efficiently and treating it as a delicate part of your backbone to enable stay fit and achieve your business goals.