Strategic sourcing and procurement are two approaches to purchasing the components, raw materials, supplies and services a company needs to run its business. Traditional procurement focuses on finding the lowest-cost suppliers. The aim of strategic sourcing is to build longer-term relationships with suppliers that offer quality, value, a willingness to collaborate and the flexibility to meet changing supply requirements.
Cost is an important consideration for both procurement and strategic sourcing. While procurement managers look at price as the key factor, managers responsible for strategic sourcing assess the total cost of doing business with a supplier. In addition to price, they consider the costs of quality control, delivery, purchasing administration and inventory. They aim to reduce the total cost of obtaining supplies, and they may achieve this through simplifying purchasing administration or dealing with fewer suppliers.
Companies that practice strategic sourcing focus on quality as one of the most important issues in the relationship. By integrating their own quality standards with those of suppliers, they can reduce their own costs. Obtaining components and materials to an agreed quality standard means fewer inspections and less waste on the production line. As part of the strategic sourcing relationship, companies may implement joint continuous improvement programs to further reduce costs and improve quality. Suppliers then become an integral part of a company’s own quality process.
While procurement managers may require suppliers to meet quality standards, strategic sourcing managers aim to achieve cost reductions through quality improvements. Companies also can use strategic sourcing to obtain additional value from suppliers. They may select suppliers that offer technologies or materials that enable them to improve their own products or develop new products. This adds value to the relationship and helps a company increase its competitive advantage.
In a procurement environment, companies place orders with suppliers offering the best price. They may obtain multiple quotes each time they want to make a purchase and deal with many different suppliers. This can increase the overall cost and complexity of purchasing, even though the headline price is lower. In strategic sourcing, companies place long-term contracts with selected suppliers. They also may establish simpler ordering and invoicing arrangements to reduce the cost of purchase administration. The long-term relationship provides stability and cost benefits for both parties.
Strategic sourcing helps to build collaborative relationships between customers and suppliers. Customers provide their suppliers with information on future production plans and supply requirements, which enables suppliers to plan and adjust their own production levels. By sharing information, both parties can respond quickly to changing market conditions by adjusting supply. In a traditional procurement environment, customers would have to cancel orders or find new suppliers with additional capacity to meet changes in market demand
