Strategic Sourcing Process: 7 Steps Explained

This article will go into depth about the 7 steps that form an effective strategic process, helping you optimize your organization’s supplier base, and increase the overall efficiency of your supply chain!

‍

Let’s begin by understanding what the strategic sourcing process entails.

‍

What is the Strategic Sourcing Process?

The strategic sourcing process is a step-by-step approach to procurement that aims to streamline all purchasing activities in an organization’s procurement lifecycle and thus build the foundation for a lasting vendor relationship.

‍

Some of the purchasing activities that are streamlined under strategic sourcing include:

• Identifying third parties to onboard as vendors
• Vetting potential vendors and suppliers, and
• Evaluating third parties holistically.

‍

However, strategic sourcing is different from vendor selection. Whereas vendor selection only focuses on meeting a business need, strategic sourcing is concerned with structural modifications so that your procurement processes take into account organizational motivations and supplier qualifications for the long run.

‍

The 7-step sourcing process model is implemented and recommended by many procurement teams worldwide. It is known for its proven effectiveness, cost reduction, and time-saving capabilities.

‍

Without further ado, let’s learn more about the seven different strategic sourcing process steps. 

‍

Step 1: Profile The Category

First, you begin by identifying the category you want to source for. This can be a certain type of product or commodity or a collection of related products and commodities.

‍

You need to define your category according to your organization’s requirements, specifying details like

• product size, quantity, or volume,
• your organizational budget,
• current market prices for the commodity,
• other product or supplier specifications,
• your usage and user demographic, and
• seasonal fluctuations for the category.

‍

Once you have the nature of your spend category defined, you can easily understand the different sourcing categories available to you.

‍

Next, we move on to step two of the 7-step sourcing process!

‍

Step 2: Supply Market Analysis

Supply market analysis entails a comprehensive assessment of the market specifically for your selected product, commodity, or service.

‍

Supply market analysis enables you to strategize your procurement process in the most efficient way by helping you understand

• market trends,
• market competitiveness,
• market dynamics and trajectory,
• supply risk and profitability, and
• your supplier landscape.

‍

By the end of this step, you should have a clear idea of where your strategic sourcing focus lies. You should also have a better understanding of your purchasing power and current supplier base, and know where to look for prospective suppliers.

‍

But first, you need to come up with a comprehensive strategy!

‍

Step 3: Develop a Strategic Sourcing Strategy

Developing a strategic sourcing strategy involves taking into account both your existing supplier pool and your potential suppliers. 

‍

According to your business requirements, you can now formulate a strategic sourcing strategy that aligns with your business model!

‍

For this, you need to define your primary business goal for the strategy and carefully consider how it fits in with your broader business objectives. Decide your vendor selection criteria in line with your resources and requirements.

‍

At this stage, you should also assemble a team that spans relevant departments and functions, and keep all involved stakeholders informed of their activities. 

‍

Before you put your sourcing strategy into motion, you need to start by identifying the exact type of strategic sourcing you want to implement.

‍

Step 4: Select the Strategic Sourcing Method

The most popular sourcing strategy is usually the Request for Proposal or RFP. RFP is an official document your organization drafts to solicit proposals from suitable suppliers as part of a bidding process.

‍

The document mentions important details like

• product and service specifications, 
• pricing structure and breakdown,
• your vendor evaluation criteria, and
• legal and regulatory requirements for your business.

‍

Other strategies that are used include Request for Information (RFI), Request for Quotation (RFQ), and Auction. All these methods aid with your bidding process. 

‍

Once you draft your RFP, RFI, or RFQ, you can move on to lotting, where you combine goods and services on offer, supplier lists, your various organizational branches across regions, and order specifications to strategize your requirements in lots for auction.

‍

This is followed by initiating communication with your suppliers by releasing your RFPs, RFIs, or RFQs, or conducting an auction. Suppliers will then submit proposals to work with you.

‍

Your sourcing team now has access to important data points and market insights throughout the RFx process, including 

• your suppliers’ key performance indicators (KPIs),
• supplier market share, 
• your communication channel’s efficiency, and even
• advice for better supplier relationship management!

‍

Thus, selecting your strategic sourcing method is an essential step not only for further shortlisting suppliers but also for adjusting and modifying existing sourcing strategies. 

‍

Step 5: Negotiation and Supplier Selection

Vendor selection is a crucial step in the 7-step sourcing process because it greatly minimizes supplier risk and guarantees better supplier performance. Practice supplier tiering, so that high-value suppliers, lowest-cost suppliers, and potentially long-term supplier relationships are singled out for special attention!

‍

Sometimes, organizations use scorecards and rating systems to evaluate supplier proposals. Negotiations are set in motion with those suppliers whose proposals are likely to get finalized.

‍

During negotiation, you need to ensure that you collect key insights into areas such as

• supplier expectations,
• quality of product,
• cost savings,
• supplier performance,
• delivery schedules, and
• warranty terms.

‍

Your procurement department requires this information to negotiate favorable contract terms, which will benefit the strategic sourcing process in the long run.

‍

Your organization can negotiate with multiple suppliers at the same time, to ensure that you land the best possible contract.

‍

Negotiating with potential suppliers ensures that you minimize supply chain disruptions down the line, thus minimizing supply chain risk. Based on these negotiations, you can shortlist and select vendors who are best able to meet your requirements.

‍

By the end of this stage, you should finalize a list of suppliers who can ensure quality products or services at an agreeable cost to your organization, with consistency and minimal risk.

Step 6: Implementation and Integration

After shortlisting your suppliers, you need to begin the implementation of strategic partnerships by building strong supplier relationships.

‍

This step involves notifying all critical stakeholders about your vendor selection and, of course, informing the vendors who have been selected for your organization to partner with. Your cross-functional team is now responsible for fostering collaborative relationships with your suppliers and ensuring their smooth integration into an efficient supply chain!

‍

Communication with suppliers needs to be prioritized at this stage, with your procurement strategy relying on extensive communication across all organizational tiers and ensuring that all parties and stakeholders are regularly updated on the implementation stage proceedings.

‍

Step 7: Benchmarking

The last of the strategic sourcing process steps is benchmarking. Benchmarking ensures that your supplier’s performance is consistently measured at regular intervals over a long period, allowing you to best gauge how successful your implementation stage has been.

‍

Benchmarking is done by continuous evaluation and monitoring, and can involve the following:

• Ensuring that your suppliers are adhering to delivery schedules,
• Ensuring that your business model has been appropriately adapted to evolving needs of the sourcing process, and
• Bookmarking any room for process improvements by collecting key insights from involved stakeholders.

‍

Benchmarking makes sure that your strategic sourcing process maintains a clearly defined trajectory from its conception to implementation. It makes it easy to notify suppliers in case of an issue and quickly resolve it to ensure business continuity.

‍

Remember continuous monitoring means continuous improvement!

‍

Top 4 Strategic Sourcing Best Practices

1. Conduct a Thorough Market Analysis

Comprehensive sourcing activities cannot be complete without a thorough market analysis. Studying the supply market can help you identify suppliers and compare them to other competitors, ensuring that you only choose the best for your strategic sourcing plan.

‍

A market analysis is indispensable to strategic sourcing because it helps to

• Identify market opportunities,
• Kickstart relationships with suppliers,
• Identify tendencies of leverage,
• Understand the cost of switching suppliers,
• Analyze competitors and save costs, and
• Improve your overall operational efficiency going forward.

‍

2. Define Spend Categories

Before you embark on your sourcing journey, make sure to closely analyze your organization’s spending tendencies by taking into account both historical spend and current spend.

‍

Current spend will help you determine the areas in which to concentrate your current sourcing activities, while historical spend can aid you in trend forecasting.

‍

Defining spend categories can help with costing when it comes to potential suppliers. It can also ensure that your expectations are set based on concrete data, leading to better negotiation and supply chain management.

3. Use Request for Proposal (RPF)

As mentioned above, Request for Proposal or RFP is the most popular method used in strategic sourcing. This is because it is an incredibly comprehensive supplier sourcing strategy that allows to access to 

• product specifications,
• product pricing,
• legal terms and status of compliance regulatory frameworks, and
• service requirements.

‍

Having access to this information means that you can quickly identify discrepancies or hidden costs, and thus, minimize supplier risk.

‍

A successful sourcing strategy relies on careful vendor selection, making the RPF an important tool!

‍

4. Use Strategic Sourcing Software

The implementation of automation in strategic sourcing can offer many benefits. Many steps of the process can be streamlined by using a procurement software to manage your data and coordinate workflows.

‍

Your strategic sourcing team can use automated software such as Spendflo to analyze spending patterns across your organization and make informed sourcing decisions accordingly.

‍

Automation can offer data driven insights into supply markets, helping you to mitigate potential risks and negotiate favorable terms with potential suppliers.

‍

Why Choose Spendflo 

Spendflo is a Saas Spend Management tool that seamlessly manages your strategic sourcing activities, offering procurement services that are on par with international standards at a reasonable cost.

‍

The AI-driven software tool serves as a one-stop solution for all your Saas needs. Some key features offered by Spendflo that make it the expert-recommended spend management platform include:

Spend analysis

Spendflo conducts a thorough spend analysis powered by Flo AI for Saas businesses, identifying areas where you can cut down on expenses. It ensures maximum savings from the get-go, with customers seeing an ROI of up to five times the platform cost.

‍

The tool guarantees to trim your organization’s spending by streamlining your tech stack and saving up to 30% of your annual Saas expenditure!

‍

It even offers a free savings analysis that can show you how much you can save by using the AI-powered platform.

Vendor intelligence

Spendflo offers keen insights into average contract values, Spendflo customer savings, contract procurement TAT, and more, helping you make informed vendor sourcing decisions.

‍

The platform also lets you access a library of accurate price insights data and a negotiation playbook, helping you to make more informed decisions when it comes to supplier management.

Centralized procurement

Spendflo is a comprehensive solution that handles everything from supplier risk management, license management, contract management, negotiations, and procurement workflows.

‍

No part of the procurement process is left unchecked, ensuring that your sourcing activities are continuously analyzed, evaluated, and updated.

‍

You no longer need to spend hours negotiating contracts or ensuring that your compliance frameworks are in place because Spendflo does that for you!

Effective procurement workflows

Spendflo offers automated procurement workflows for seamless collaboration. 

‍

Every Saas intake request is proactively managed and conveyed to relevant stakeholders, along with intuitive accountability nudges in the form of checklists to mark task completion. Stakeholders can even collaborate in real-time, leave comments, and have full access to audit logs. 

‍

Spendflo also facilitates approval signatures from relevant stakeholders on legal and financial contracts and keeps everyone updated on the status of all requests.

To access these features and streamline your procurement needs, book a Spendflo demo today!