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Strategic Sourcing and Procurement: A Comprehensive Guide
Use proven CPO approaches to advance your strategic sourcing and procurement
Robust sourcing strategies are critical to support margins and deliver on traditional procurement priorities like cost and quality, and emerging needs like innovation and sustainability.
Download this guide to discover five strategic sourcing best practices. CPOs will get:
Tips for more effective negotiations
Must-have metrics for the supplier scorecard
A view into how category management is evolving
CPO performance hinges on the effectiveness of strategic sourcing
Cost savings are the top procurement priority, making strategic sourcing a critical lever in the CPO toolbox to achieve best overall value.
Procurement Negotiations
Build Sourcing Expertise
Optimize Sourcing Process
Inflation is changing the way strategic sourcing leaders negotiate
Chief procurement officers (CPOs) across industries would agree that negotiating with suppliers is challenging even in the most favorable economic conditions. Today a unique set of compounding challenges — inflation, labor market shortage and global supply constraints, which Gartner calls the triple squeeze — is shrinking margins across the supply chain. Consequently, vendors are proposing renewal pricing increases ranging from 10% to as much as 30% in some cases.
The triple squeeze introduces new challenges to successful supplier negotiations, as buyers risk not getting adequate value out of their contracts. While procurement’s typical negotiation strategy is to obtain price concessions, the above challenges pressure supply chain strategic sourcing leaders to look for other opportunities to maximize supplier value.
Start by recognizing your business partners’ strategic value drivers beyond cost reduction — mitigating supply chain risks, driving supplier innovations, increasing supplier diversity and advancing sustainability goals, to name a few.
Also, demonstrate to your business partners how procurement affects revenue generation despite increased overall cost. Examples include introducing new sources of supply and seeking lower-cost alternatives such as offshore providers with lower labor rates.
Now that you understand where to look for value with the supplier, you can use the negotiation conversation to look for hidden costs. Ask questions to understand: purchase price and leasing options; pricing tiers and rates; features/software; services and training; shipping/installation details; warranty information; maintenance and upgrade schedules; and acceptance criteria. Assess the validity of the answers by consulting economic indicators like the Consumer Price Index, Employment Cost Index and Producer Price Index.
Then match procurement’s negotiables with supplier values. Showing willingness to cooperate — especially during a supply chain crisis — will advance your organization as a customer of choice. In today’s business environment, suppliers have as much opportunity to choose their customers as procurement does with their suppliers. As such, supply chain strategic sourcing leaders should explore opportunities for mutual gain with their top-tier suppliers.
Target key strategic sourcing skills to capture scarce, in-demand talent
Demand for strategic sourcing talent is extraordinary. Gartner research on the U.S. labor market found that the hiring difficulty score for a strategic sourcing manager is 10 out of 10, indicating that this position is very challenging to fill compared to other open roles locally. The research also finds the following:
Competition for strategic sourcing manager talent is 81% higher than the average for all other open positions locally, and it continues to increase.
The supply of strategic sourcing manager candidates is very low, with an average of just six candidates per opening.
Competition for strategic sourcing talent is highly concentrated among major employers.
The typical job requisition for a strategic sourcing manager remains open for 56 days.
The basic function of a strategic sourcing manager is to accomplish the lowest total system cost and savings objectives among the supply base by driving strategy for a group of spend categories.
Primary responsibilities of the strategic sourcing manager are:
Generating and implementing sourcing and category management strategies
Building strong partnerships with top-tier suppliers via supplier relationship management (SRM)
Negotiating contracts with new suppliers and/or renegotiating existing contracts for equity and cost-effectiveness
Evaluating the efficiency of sourcing policies and procedures and advancing improvements
Creating cost estimates and expenditure forecasts related to the company’s procurement and developing strategies to improve the enterprise cost structure
To compete for strategic sourcing talent and grow the company’s strategic sourcing capability, CPOs should target these skills critical to strategic sourcing:
Influencing skills: ability to effectively persuade others to listen, commit and act on a new approach
Exhibiting “grace under fire” during supplier negotiations and amid supply chain disruption
Project management skills
Advanced analytical ability and adeptness with digital procurement tools
Avoid common traps to ensure strategic sourcing and procurement success
Supplier identification, qualification and selection are key steps in the strategic sourcing and procurement process. Compiling a preliminary list of suppliers helps uncover potential suppliers you may not have otherwise considered in supply chain planning. Furthermore, evaluating those suppliers’ qualifications with consistency provides you with a manageable shortlist to work with. Finally, selecting a supplier based on established evaluation criteria for each response in the RFP gives you an objective view of which candidate can provide the solution best fit to your supply chain strategy.
Gartner advises following a few guiding principles to successfully navigate the strategic sourcing and procurement process. First, identify a broad range of viable suppliers — large and small players, as well as suppliers beyond those used before. Then, before shortlisting, determine scoring criteria. Among the criteria must be your organization’s ESG goals (e.g., supplier diversity, sustainability). To select suppliers from the shortlist, ensure you systematically evaluate all proposals against the scoring criteria; call references and document feedback; conduct thorough site visits; and examine the supplier’s financial ability, risks and capacity levels. It’s important, too, that you inform losing bidders of the outcome and explain why they lost in order to keep future opportunities open.
CPOs often encounter pitfalls during the supplier identification and qualification stages of the strategic sourcing and procurement process, including the following:
Discarding smaller or newer suppliers. In fact, smaller or newer suppliers may offer better contract terms, better products or new innovations.
Considering suppliers based primarily on past experiences. Known suppliers may take advantage of the existing relationship, so it’s important to consider other suppliers. Consulting your peer network for supplier recommendations is a good idea.
Conducting only a quick web search for new suppliers. Larger suppliers can manipulate web results, which hinders better suppliers from appearing in searches.
Over-relying on past experience with suppliers to define their service capability set. In fact, your existing suppliers may provide excellent services in areas you have not yet explored with them.
Mistakes made during the supplier selection stage of the strategic sourcing and procurement process include the following:
Over-favoring familiar suppliers. You may not be considering a good proposal from an unfamiliar supplier that better fits current needs.
Using inconsistent supplier selection guidelines. For example, simplifying scoring criteria as you go down the shortlist may put a potentially good supplier at a disadvantage.
Conducting only a quick “health check” on top suppliers’ financial abilities. If you don’t verify the supplier’s estimates or if you focus on their current service capabilities without understanding past performance, you risk blind spots in nonfinancial and operational risks.
Failing to follow up with unselected suppliers or providing unclear reasons for not being selected. You are not protecting future opportunities with other well-qualified suppliers.
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FAQ on supply chain strategic sourcing
What is strategic sourcing and its importance?
Strategic sourcing is a standardized and systematic approach to supply chain management that formalizes the way information is gathered and used. Strategic sourcing enables organizations to leverage their consolidated purchasing power to find the best possible value in the marketplace. To remain competitive, organizations should expand their procurement expertise beyond purchasing to include strategic sourcing and negotiation to optimize cost and risk.
What are the key steps in strategic sourcing?
Supply chain strategic sourcing spans seven steps:
Problem definition: Ensure you receive a solution that fits your needs.
Supplier identification and qualification: Evaluate all possible suppliers.
Sourcing strategy initiation: Determine timing and budget up front.
RFP distribution: Clarify the statement of work.
Supplier selection: Choose the best-fit solution.
Contracting and negotiation: Establish project scope.
Contract monitoring: Address issues and build partnerships.
What are the benefits of strategic sourcing?
Strategic sourcing enables organizations to leverage their consolidated purchasing power to find the best possible value in the marketplace. To remain competitive, organizations should expand their procurement expertise beyond purchasing to include strategic sourcing and negotiation to optimize cost and risk.
What are some challenges in strategic sourcing?
With organizations more reliant on suppliers than ever before, it is the role of strategic sourcing and procurement to unlock new value from the supply base and protect the supply chain from disruption. But there is a lack of discipline in the strategic sourcing and procurement process, specifically on cost management and business value creation through category strategies. Other challenges include supplier relationship management, risk mitigation and digital technology adoption.
What are some best practices for strategic sourcing?
To create robust sourcing strategies, we advise CPOs to advance supply chain strategic sourcing via these best practices:
Leveraging advanced analytics for cost savings, mitigated risk and improved efficiency
Standardizing both value optimization drivers and supplier performance drivers to enable performance management
Evolving category management to target sourcing strategies to individual spend areas
Enabling business-value-driven operating models to ensure competitive advantage
How do we measure the success of strategic sourcing?
While traditional operational metrics such as on-time delivery, quality and cost savings are fundamental, you must also consider suppliers’ innovation capabilities, their ability to support new product introductions, the quality of the relationship and the responsiveness of the supplier’s service team. Incorporating these value-oriented metrics enables supply chain strategic sourcing to be predictive and future-focused.
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