Wikipedia defines strategic sourcing as an institutional procurement process that continuously improves and re-evaluates the purchasing activities of a company. Strategic sourcing is generally applied to reduce costs, insure supply, and mitigate risks and is becoming vitally important in today's business environment because:
- many companies now spend more than half of their operating costs on direct materials, indirect materials, and services
- customers expect prices to remain flat or drop while product quality and capability increases, even when commodity markets are rising
- investors expect EPS (earnings per share) to continue increasing while prices remain flat (and the salaries of your executives rise)
Strategic sourcing is a multi-step process. The Total Value Management approach defined in the Strategic e-Sourcing Best Practices wiki-paper has seven steps:
- Spend Analysis and Opportunity Assessment
In this phase, sourcing professionals consolidate and analyze spend across the entire organization, categorize the supply base and corresponding spend, enrich the data, develop high level commodity strategies, and then prioritize categories and projects.
- Project Data Collection
The sourcing team collects price and non-price requirements, including benchmarking statistics, market dynamics, and product/service specifications.
- e-RFX and Supplier Management
In this phase the project team reviews the data collected in the previous phase and develops a supplier strategy, creates the RFX, and begins the process of supplier management.
- Bid Collection & Negotiation
The bids are collected, possibly through RFX or e-Auction software.
- Decision Optimization
In this phase, the sourcing team uses strategic sourcing decision optimization and analytics to analyze the bids against the project requirements and identify an optimal award.
- Award and Contract
The selected suppliers are notified of the intended award, final negotiations take place, and the contract is signed.
- Post-Bid Management
Identified savings are not actual savings. In order to insure that savings are realized, the project must be managed to insure all purchases are made in compliance.
For a deeper discussion of the strategic sourcing process, refer to the Strategic e-Sourcing Best Practices and associated Spend Analysis, e-RFx, e-Auctions, Decision Optimization, and Contract Management wiki-papers and the following blog posts.