Empty store shelves. Second-rate materials. Service delays. Price hikes. Such are the unfortunate hallmarks of doing business in the 2020s. These challenges tend to shine a bright light on strategic sourcing, one of the key tools companies can use to blunt the impact of global forces like inflation and supply chain disruption.
Seven in 10 small companies have seen rising prices make a significant dent in their business— particularly their cost of goods and supplies, according to the U.S. Chamber of Commerce’s Small Business Index for Q4 2021, a quarterly phone survey of 1,000 small-business owners and operators done in partnership with MetLife. About six in 10 surveyed small businesses have had to rethink their supply chains due to cost, availability, and other factors.
As they do so, strategic sourcing is apt to become an important chapter in many small business resilience stories. Even more, strategic sourcing can be a key driver of business performance whether in good times or bad.
What Is Strategic Sourcing?
Strategic sourcing helps companies plan long-term procurement pipelines and manage near-term supply chain disruptions by establishing a framework to guide purchasing and outsourcing decisions. The modern version of strategic sourcing involves a continuous, data-driven process of setting priorities, establishing your company’s needs, evaluating available options for procurement, and hitting the reset button when it counts.
Companies use sourcing strategies to a greater or lesser extent—depending on the size of the business or the order being placed—to get the best value for their spending on supply chain management and procurement.
Weighing Strategic Sourcing Tradeoffs
“Value for money” often rests in the eye of the beholder. What’s most important to your business: cost, quality, timely delivery, risk management? Answering this question sets the stage for strategic sourcing. For example:
- A single source may simplify procurement but leave your business in the lurch when demand spikes or that single source falters.
- A low-cost supplier may deliver inferior quality or service.
- A long-term, high-volume supplier may provide stability, a cost advantage, or even a valued strategic partnership, but expose you to more risk from fewer points of failure.
- A much-in-demand, quality supplier may impinge on your flexibility and delivery time, especially if the supplier’s subcontractors experience disruptions.
Launching a Strategic Sourcing Process
Though the definition of strategic sourcing is basically the same for large and small companies, the execution is likely to differ. Procurement experts such as the Association for International Procurement Technology & Standards (AIPTS) advise using some variation of the following seven-step strategic sourcing process:
- Profile the category: to understand the market in which you’re hoping to buy.
- Select a sourcing strategy: based on the trade-offs of cost, quality, speed, and risk discussed above.
- Plan to implement: by developing selection criteria, weightings, and a standard request for proposals (RFP).
- Generate a supplier portfolio: to delve more deeply into the pros and cons of available suppliers and weight each one, based on your criteria.
- Negotiate and select: by running your RFP process, analyzing the bids, and negotiating.
- Integrate suppliers: following a transition plan for new suppliers.
- Monitor continuously: tracking changes in the overall market, supplier performance, and lessons learned for the next strategic sourcing process.
A process like this would usually apply to high-volume, strategic purchases—those with the greatest impact on fundamentals like your business’s cost base or its need to compete for speed-to-market. Multiple expert sources break down each step in detail, with some including sample templates on their websites. It’s important to gain the support of company leadership for strategic sourcing—for example, by forming a high-level committee—since the process takes time and effort. For smaller companies and purchases, an “RFP-lite” approach to sourcing could instead incorporate only some of the seven steps above.
Realizing the Benefits of Strategic Sourcing
Strategic sourcing delivers in good times or bad. Here’s how some companies realize its benefits:
Taming Disruption
Many businesses are ordering supplies and inventory much earlier than before, diversifying their vendor portfolios for more options to source goods and materials, but keeping an eye on inventory in case of fluctuations in demand.
Fighting Inflation
Small businesses are particularly susceptible to inflation, since they often operate with limited cash flow. While many companies are raising prices where they’re not locked into fixed-price contracts, experts also advise fighting inflation in sourcing, too, including:
- Analyzing current spending for selective trimming
- Deciding which purchases need to be “best in class” to sustain competitive advantage and which don’t
- Evaluating alternate suppliers
- Establishing “preferred vendor” programs to increase buying power
- Writing longer-term purchase agreements to lock in prices
- Stockpiling critical supplies against future inflationary increases
Partnering for Stability
Whether the prevailing economic winds are favorable or not, companies that build strategic partnerships based on clearly communicated future procurement needs can avoid jarring disruptions in availability and pricing. Partners also help identify and resolve problems more quickly.
Using Best Practices in Strategic Sourcing
Like so much else, sourcing can be streamlined and automated, with digital workflows replacing old technologies like spreadsheets and email chains. Cloud-based technology platforms for sourcing have particular advantages, including:
- Integrating previously siloed processes and people, including remote workers
- Eliminating the hours and errors of manual processes
- Providing visibility into the process to everyone involved
- Keeping the company aligned with a single sourcing strategy
- Enabling buyers and sellers to work together more effectively in real time
Even more advanced technologies such as sourcing tools powered by artificial intelligence can generate automated insights, flagging potential savings and other opportunities for sourcing to improve company performance.
The Takeaway
Strategic sourcing can shore up your business’s performance in challenging times and take it to the next level when times are good. The process can be rigorous, but these days it is increasingly automated so businesses large and small can reap the benefits.
