Why is Strategic Sourcing Essential for Purchasing Teams
With the impact of global forces like inflation and supply chain disruption, many suppliers are passing their material increases on to their customers and some are using rising prices as a chance to increase prices more broadly. This is creating continued challenges for purchasing teams and puts more emphasis on how they can better control costs and mitigate risks.
The question is how do they execute on this? For many organizations, the answer is strategic sourcing.
Strategic Sourcing Explained
The Chartered Institute of Procurement and Supply (CIPS) defines strategic sourcing as:
“Strategic sourcing involves the process of finding, evaluating and choosing suppliers which meet the agreed organization’s need. This strategy isn’t just about reducing the cost of products or services, it’s about driving efficiency within the supply chain in the long term”.
As this states, strategic sourcing is a perfect mechanism for allowing companies to align their business goals and requirements with those of their suppliers. It also focuses on maximizing value and reducing risk through transparent buyer-supplier relationships.
When done right, purchasing can set up a network of trusted suppliers that will align with their operations for the lowest, most efficient price. That’s why it is essential for purchasing teams to adopt effective strategic sourcing skills and processes in today's complex supply chain.
Benefits of Strategic Sourcing
Adopting strategic sourcing can bring many significant benefits to businesses such as:
Increased Level of Cost Savings
The most obvious benefit businesses experience from strategic sourcing is higher levels of cost savings. A company can spend more than 60% of its revenue on buying goods and services, so even a modest reduction in purchasing costs can have a significant effect on profit. Identifying and selecting suppliers who will provide the highest value at the right pricing enables purchasing to continuously achieve higher cost savings for their organization.
As Gartner says in this cost optimization playbook, “When contracting with strategic suppliers, it is important to structure agreements with mutually beneficial outcomes. Critical links between price, business volume and evaluation of supplier performance will not only motivate improvements in service levels, but also foster opportunities for suppliers to consider proactive opportunities for cost savings and efficiencies”.
Drive Rebate Visibility and Performance
The role of strategic sourcing doesn’t end once the contracts are signed. Purchasing is also instrumental in evaluating and driving supplier performance and in ensuring the chosen supplier delivers on its contractual obligations. Especially when this involves rebates that can deliver a lot of strategic value and boost the bottom line.
In a competitive business landscape, companies need to adopt technologies and processes that can heighten their rebate visibility and boost efficiency. By having a holistic view of their supplier's performance, they can take better control of rebates and avoid any missed opportunities.
Another benefit of taking a strategic sourcing approach includes fewer risks for buyers and suppliers alike. Purchasing teams are encouraged to conduct quality, financial, supply and customer support risk assessments. This will allow purchasing to identify any real or potential risks in the supply chain. Once the risks are identified, they can specify measures to avoid or mitigate any risks.
Collaboration With Your Supplier Base
At the heart of strategic sourcing is the opportunity to build long-term relationships with suppliers. In a recent survey conducted by Gartner, 70% of respondents selected “enhance supplier collaboration” as their primary tactic for how purchasing teams are looking to generate more business value.
Rather than taking an old-school approach of beating suppliers for a price reduction, many companies are now focusing on collaborating with suppliers to identify opportunities. If the suppliers feel valued and considered in various sourcing decisions, they feel motivated to optimize their performance to meet the organization’s objectives.
The Future of Purchasing is Strategic
As purchasing teams evolve at a rapid speed and contribute to propelling the strategic agenda, they need the right tools to do so. That’s where Enable comes in. With our cloud-based rebate management system, purchasing teams can avoid discrepancies with suppliers by accessing a single source of truth and collaboration portal that allows transparency and joint business planning around their rebate programs.
While you’re here, check out our blog: Three Cost-Optimization Strategies (and Four Helpful Tips) for Sourcing and Procurement Leaders