Prime Advantage Blog

That Isn't Strategic Sourcing

Thyra Nelson on Jan 14, 2016 6:30:00 AM

That-isnt-strategic-sourcingPeople in procurement use the phrase "strategic sourcing" frequently. It means using a fact-based approach for optimizing an organization's supply base to improve the overall value proposition. With this definition in mind, let's walk through some traditional procurement behaviors to see where they may be lacking the strategic component.

Sourcing behavior #1:

A procurement department's success is usually determined by some type of savings based measure; commonly it is the savings found or purchase price based. Generally when working under these parameters you are talking to your suppliers about the price you pay and your overall focus is on the cost of an item.

How to make it more strategic?

Price is one aspect of the purchasing decision, but you need to look at the whole picture. If you are practicing strategic sourcing then you are looking at Total Cost of Ownership (TCO) as well as the impact throughout the life of the product. This takes into consideration how the choice is affecting your customer and the overall goals of your organization.

Sourcing behavior #2:

Most organizations find suppliers via what they know -- whether it is who they know, the area they are in, or what they happen to come across in their daily activities. Who your existing suppliers are could merely be due to a long standing relationship that was formed before your time with the company. This "if it isn't broke, don't fix it" approach is sourcing, but there isn't anything strategic about it.

How to make it more strategic?

To truly implement strategic sourcing you need to pursue suppliers based on facts that came from analysis and market intelligence. These facts should point you to the supplier(s) that would best serve your needs. You may have not previously heard of some of the suppliers you discover, but they could be a much better match for your organization.

Sourcing behavior #3:

Procurement generally only thinks about altering suppliers when contracts are coming due or if the suppliers aren't performing to expectation. Once the decision has been made, procurement tends to move on, and only revisit the supplier when the cycle comes back around.

How to make it more strategic?

When using a strategic approach you are continuously engaged with your suppliers. Metrics are put into place and you and your supplier work together to meet expectations. The partnership that is formed through strategic sourcing will grow over time and the value of having an active relationship will pay dividends.

The key to implementing strategic sourcing is finding the suppliers and categories where there is a benefit to a long-term relationship. If you're not using the best supplier option available on a critical component, you could cause catastrophic damage to your brand. But this isn't a philosophy to use universally with all of your suppliers. There are some areas that require a proposal and a one-time, cost based decision. Know where you can draw the line with your supplier line-up and change your behavior accordingly to really benefit your organization.

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Topics: Strategic Sourcing, Procurement

Thyra Nelson

Posted by Thyra Nelson

Thyra is the Marketing Manager for Prime Advantage, a Chicago based Group Purchasing Organization for mid-market manufacturers. She works with the group’s Endorsed Suppliers to share products and services with Members.

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