Strategic sourcing

Strategic sourcing is an institutional procurement process that continuously improves and re-evaluates the purchasing activities of a company. In a production environment, it is often considered one component of supply chain management. Strategic sourcing techniques are also applied to non traditional area such as services or capital.

The steps in a strategic sourcing process are:

1. Assessment of a company's current spend (what is bought where?)
2. Assessment of the supply market (who offers what?)
3. Total cost analyses (how much does it cost to provide those goods or services?)
4. Identification of suitable suppliers
5. Development of a sourcing strategy (where to buy what considering demand and supply situation, while minimizing risk and costs)
6. Negotiation with suppliers (products, service levels, prices, geographical coverage, etc.)
7. Implementation of new supply structure
8. Track results and restart assessment (continuous cycle)

The term "Strategic sourcing" was popularized through work with a variety of Blue Chip companies by a number of consulting firms such as A.T. Kearney, PricewaterhouseCoopers, KPMG, and Booz Allen Hamilton in the late 80s and early 90s. This methodology has become the norm for procurement departments in larger, sophisticated companies.

Outsourcing is a method that can be employed as part of the overall sourcing strategy for services. This involves the transfer of staff and assets to an external or third-party company which then provides them back as a service.

Sourcing optimization

Operations Research is the discipline of applying advanced analytics to help make better decisions. Optimization, in turn, utilizes mathematical algorithms to rapidly solve a business problem by evaluating all possible outcomes (or many outcomes) and selecting those ones that yield the best solution.

When applied to sourcing and supply chain operations, optimization helps the sourcing professional simultaneously evaluate thousands of different procurement inputs. This evaluation can take into consideration the global market, specific current supply chain conditions, and individual supplier conditions, and offers alternatives to address the buyer’s [and supplier’s] sourcing goals.

Further reading

• Christian Schuh et al.: The Purchasing Chessboard: 64 Methods to Reduce Cost and Increase Value with Suppliers. Springer, Berlin Heidelberg 2009, ISBN 978-3-540-88724-9, online
• Gerd Kerkhoff et al.: The Bermuda Triangle of Business Wiley-VCH, Weinheim Düsseldorf 2005, ISBN: 978-3-527-50123-6

See also

• Reverse auction
• Request for proposal
• Procurement
• Rate contract
• Global sourcing
• Tenders