What Is Strategic Sourcing?
Strategic sourcing is a practice that aims to ensure timely delivery of products and services in line with the company's business goals while lowering supply chain risk and expense. The practice is further streamlined with the help of strategic sourcing software.
Strategic sourcing software enables sourcing teams to go beyond simplistic supplier award decision-making that is driven solely by a lowest-cost model. It facilitates that approach by allowing for data gathering, expenditure analysis, market research, negotiation and contracting, thus allowing businesses to devote greater attention to their revenue-generating operations.
The main benefits of strategic sourcing software include identifying new cost savings, reducing operational risk, speeding sourcing decisions, improving sourcing process quality, and discovering new supplier innovations.
How Does Strategic Sourcing Work?
Strategic sourcing begins with a review of company needs and previous spending, followed by the development of a strategy plan, data collecting, market analysis, and finally the selection of a supplier roster.
After the selection and negotiations are completed, strategic sourcing includes continuously monitoring performance and refining the process. Big firms with a large number of suppliers are more likely to use strategic sourcing software.
Today, with strategic sourcing software such as Sourcing Optimization, buyers and their stakeholders can collect a wide range of price and non-price bid information from suppliers, and then more easily analyze various awarding scenarios based on those criteria and other constraints.
Why Is Strategic Sourcing Necessary?
Sourcing is getting more complicated, and the tools of yesteryear are no longer sufficient at uncovering the value or capturing the vast quantities of data needed for business success in a competitive market. Spreadsheet and desktop tools that rely on manual, email-based collection of supplier bids and analysis have the perception of being quick, easy and familiar, even though they likely may not be.
When basic e-sourcing tools are used in sourcing events featuring many suppliers, issues can arise when data that is “unclean” or introduce conditionality in their bids that Excel is not able to interpret and defend against.
Additionally, buyers often choose to limit the type of data they collect in their RFPs to avoid dealing with the analytical complexity that results, and this often means savings and other value are sacrificed for simplicity. These issues are just the tip of the iceberg -- as none of this practice becomes centralized, easily auditable, scalable, or capable of decision innovation.
When To Consider Using Strategic Sourcing?
Everything from new business requirements, changing stakeholder preferences, supply-side innovations and limitations, pricing variability, and competitive pressures are all areas that can and do affect the practice of both strategic and tactical sourcing. The sourcing tools that support that work must be able to adapt over time to those evolving needs, or risk obsolescence.
1. You Need to Model More Than a “Lowest Price” Decision
Lowest-price-only buying decisions may be fine for some simple e-auction events, but in many cases, buyers and their spend stakeholders want to evaluate other criteria. Many sourcing award decisions must weigh price alongside other factors, such as sustainable sourcing practices, delivery speed and reliability, contract terms, capacity, and more. Even if that data is collected through an emailed spreadsheet or eRFP tool, it may not be incorporated into an optimization model that allows you to analyze and cost various scenarios with those bid attributes. This is where sourcing optimization truly shines as a solution category.
2. You Want To Give Suppliers Flexible Bidding Options
Suppliers want to put their best foot forward in a competitive bidding process. If the bidder has a financial incentive, favorable terms, or even an innovation or alternative item or lane to submit that the buyer might view as better overall, they want a tool to accommodate those offers. Many e-sourcing tools don’t allow for more flexible event setups that give suppliers those creative bidding options. Not only does this tie the hands of the suppliers, but the procurement team also misses out on getting insights into new areas of potential savings or risk reduction.
Conversely, suppliers want to avoid being awarded items where they know they have weaknesses or challenges. Suppliers often want to offer conditional bids, so that they will only supply a certain item if they win some other item they value more that makes it worthwhile. Having more flexible capability allows suppliers to bid more aggressively and avoid adding premiums for items where they see more risk. Permitting suppliers to communicate both economies and diseconomies of scale or scope drives better outcomes.
3. You Need To Support Larger-Scale Sourcing Events
Strategic sourcing teams need to support their largest annual RFPs with greater ease and efficiency. It’s the perfect use case for sourcing technology, but many e-sourcing tools simply can’t handle an event over a certain number of items/lanes/SKUs (rows), bid attributes (columns), and invited bidders. That means the buyer is back to using the spreadsheet that is home to the RFP and manually collecting all the bids -- or sub-optimally breaking it up into smaller events.
4. The Need For Setting Up New E-Sourcing Events More Easily
Another common challenge heard from sourcing practitioners is that moving their existing bid sheet templates into the e-sourcing tool, or designing the event within the tool, may not have been as easy as hoped. This is particularly true if the event needs to go beyond simple price-focused bid collection and analysis as described in the previous point.
Some teams even rely heavily on consultants to do this work for them, adding further to the total cost of ownership for their solution. Here it’s important to have an onboarding and customer success methodology for making an e-sourcing switch. Customers want (and need) this process to be as simple and seamless as possible to minimize operational disruption and drive internal adoption.
5. Future-Proofing With Innovation And Automation
Procurement organizations increasingly rely on technology to help them achieve scale, efficiency, and measurable savings to meet their responsibilities. That means sourcing solutions should continue to innovate. Sourcing leaders seeking competitive advantage and agility are looking more closely at technology product roadmap plans to determine if they are partnered with a solution provider that will carry them forward.
One of the newer advancements proven to drive real-world results is the application of automation features that utilize artificial intelligence (AI), machine learning (ML), and natural language processing (NLP) to take on the more tedious tasks.
That type of sourcing automation makes it possible to have better responsiveness to execute new sourcing events faster and at higher quality and compliance than ever before -- particularly around market-reactive spot bidding, routine mini-tendering and e-auctions.
What Are The Benefits Of Strategic Sourcing Software?
Cost Savings: For many spend categories, further increasing competitive tension through a more creative bidding process can generate clear savings. Depending on the category and its attributes, savings can range from 5% to more than 20%.
Time Savings: Trying to accomplish what a sourcing optimizer product can do through more basic tools or through manual effort can consume significant time and resources. These products are built for computational speed.
Reduced Risk: Spend stakeholders can work cooperatively with their sourcing team members to evaluate various awarding scenarios that model for risk. Factors such as incumbency, reliability, supplier scores, certifications, and more can be weighted with optimization.
Process Consistency: Standardizing the sourcing bid collection, negotiation, and awarding process brings benefits in consistency, predictability, transparency, and traceability. This is a key win for Sourcing Centers of Excellence as they seek to scale best practices.
Supplier Satisfaction: It can be easy to overlook the supplier experience, but giving them a more user-friendly bidding tool that allows them to submit their most favorable proposals is a win for all. A fast, efficient tool also makes it easier to include more eligible suppliers because scalability is no longer a concern.
Keelvar’s Strategic Sourcing Software Can Help
For sourcing functions still relying on Excel spreadsheets and email to manage their event processes, a very high level of manual effort is required across the board, from gathering bid responses all the way through to making the final award decision.
Teams using standard eRFP tools are still likely to require significant manual effort in the preparation and the analysis/award phases, but can expect some time savings, efficiencies and process improvements in the response-gathering phase as bids are directly entered into and validated by the e-sourcing tool.
By comparison, strategic sourcing software such as Keelvar’s Sourcing Optimizer allow teams to drive a lot more efficiency across the entirety of the sourcing event lifecycle, with some customers reporting as much as 50% (or more) in time savings overall.
Benefits of Keelvar’s sourcing solutions include:
• Cost Savings averaging 15-22% as more spend categories are optimized
• Operational Time Savings averaging 50% by supporting process excellence
• Sourcing Risk Reduction by improving supplier award decision quality
By marrying optimization power with usability, Keelvar’s modern sourcing optimization platform has delivered results for global companies for transportation, direct materials, packaging, and indirect materials and services. We are driving even more innovations in the area of intelligent sourcing automation that helps extend the value of optimization.
If you would like to learn more about how Keelvar's sourcing optimization and automation products can benefit your sourcing journey, contact us here. Find out more about the benefits of Keelvar's solutions in this short video: