Role of Strategic Sourcing

The Importance of Strategic Sourcing

Abstract

One of the major constraints that adversely affect the procurement process is the potential tendency for managers to forge long-term personal relationships with vendors. This may cause them to overlook opportunities for improved reliability, lower cost, and enhanced customer service elsewhere. The strategic sourcing approach provides procurement managers with a proven framework that can help continuously improve an organization's purchasing activities and add value along the entire supply chain continuum. The purpose of this paper is to provide a systematic review of the relevant literature to develop a working definition of strategic sourcing and a general description of its importance for organizations of all sizes and types, but especially multinational corporations with global supply chains in particular. The paper also provides a comprehensive analysis of the recently completed 3-year California's Strategic Sourcing Initiative to identify lessons learned and best practices that have widespread applicability today. Finally, a summary of the research and key findings concerning the importance of strategic sourcing and how it can help companies achieve and sustain a competitive advantage are presented in the conclusion.

Consumers are increasingly searching for the best deals that are available in the market, especially when it comes to high-ticket items like houses, cars, and boards. This implies that searching for the best deals is important in today’s increasingly competitive market. Similarly, the same sourcing rationale applies to organizations of all sizes and types as they seek to develop and sustain a competitive advantage in an increasingly globalized marketplace. However, sourcing is an increasingly complex process for many organizations because of the intense competition in today’s marketplace. There are various approaches that have been developed to help organizations in sourcing including strategic sourcing. This paper reviews relevant literature on strategic sourcing and its importance. The discussion will include an analysis of a completed strategic sourcing initiative and an analysis of the implications of the findings for real-world practice. Additionally, the paper summarizes the research and significant findings on strategic sourcing and provides an analysis of directions for future research based on these findings.

Background

Sourcing is an increasingly complex process for many organizations because of the intense competition in an increasingly globalized marketplace. Similar to any consumer, companies are looking for the best available deals in the market in attempt to develop and sustain a competitive advantage over their rivals. The need for sustained competitive advantage has contributed to the establishment of different approaches for sourcing. Sourcing is viewed as a strategically peripheral, corporate function that is linked to procurement (Gottfredson, Puryear & Phillips, 2005). One of the approaches to sourcing that is considered effective toward developing and sustaining competitive advantage is strategic sourcing. Strategic sourcing has emerged as a critical corporate function because of the impact of globalization and rapid technological innovation on competition in the marketplace. Strategic sourcing represents one of the latest innovations in supply chain management though it remains a critical challenge for many organizations (Talluri & Narasimhan, 2009). Despite being an innovation in supply chain management, many organizations do not understand what strategic sourcing is and its importance. The lack of understanding has made strategic sourcing a critical challenge for organizations as they attempt to create and sustain competitive advantages in the market.

Therefore, it is important to define strategic sourcing and analyze its importance as a corporate function and innovative supply chain management approach. Such understanding can be developed by examining a completed strategic sourcing initiative and its lesson and importance for real-world practice. To achieve this, a review of California’s Strategic Sourcing Initiative (CSSI) will be carried out. CSSI was completed in 2010 and represents one of the major success stories of strategic sourcing in the recent past. This initiative provides insights regarding salient challenges and opportunities for optimizing strategic sourcing solutions in real-world supply chain management. Using insights from this initiative and synthesis of existing literature, relevant lessons learned and best industry practices for procurement professionals interested in applying strategic sourcing to their own organizations will be discussed. A synthesis of research concerning strategic sourcing is provided in the findings section, followed by a summary and directions for future research.

Literature Review

Defining and Importance of Strategic Sourcing

Although there are no universally accepted definitions, a number of researchers have advanced one version or another that highlights the main characteristics of strategic sourcing. Talluri & Narasimhan (2009) state that strategic sourcing “deals with managing the supply base in an effective manner by identifying and selecting suppliers for long-term strategic partnerships and enhancing their performance” (p. 236). Kim & Chai (2017) define strategic sourcing as the process of supply network design and supplier management that is utilized to realize performance and operational goals. This process has had a positive impact on the relationship between buyers and suppliers, sourcing performance, and supplier evaluations. Strategic sourcing is also defined as an approach to supply chain management that formalizes how information is collected and used by an organization to leverage its combined purchasing power in identifying the best values. Consequently, this process serves as a roadmap for the timely purchase of goods and services needed by an organization. Since this process is carried out ahead of time, procurement managers have enough time to find the best price rather than waiting until emergencies occur (“The Importance of Strategic Sourcing in Procurement”, 2020). Jensen (2017) conceptualizes strategic sourcing as an ongoing process that seeks to find the best vendors to serve as strategic supply chain partners instead of just supplies of goods and services. Therefore, strategic sourcing differs from conventional procurement and is important for today’s globalized marketplace (Gottfredson, Puryear Phillips, 2009).

Strategic sourcing is important for organizations as it focuses on a continuous search for optimal downstream procurement opportunities that can facilitate the delivery of upstream products and services (Gottfredson et al., 2009). This is essential for organizations’ competitive advantage because outsourcing has become more sophisticated to an extent that core functions like research and development, engineering, manufacturing, and marketing should be moved outside. The need to move these core functions outside implies that organizations have to change their thinking about their value chains and competitive positions. Strategic sourcing provides a framework for companies to restructure their value chain and supply chain management approaches by facilitating a continuous search for procurement opportunities. As a result, organizations embrace capabilities sourcing while using sourcing as a strategic opportunity.

Strategic sourcing is also important because it facilitates the establishment of appropriate information-sharing with strategic supply chain partners to optimize the strategic sourcing approach (Kim & Chai, 2017). As a result of improved information-sharing, organizations engage in a continuous process to find the best suppliers who serve as strategic supply chain partners rather than just suppliers of goods and services (Jensen, 2017). In this regard, this process promotes the identification and selection of the best vendors for strategic long-term partnerships (Talluri & Narasimhan, 2009). The process changes an organization’s value chain by promoting the effective allocation of resources to enhance supplier performance as part of supplier development initiatives. Using strategic sourcing, these initiatives provide benchmarks and never-ending feedback to suppliers and enhance supplier pruning activities. According to Patowarya (2019), strategic sourcing is important because it provides four major benefits to organizations as outlined in Table 1 below.

Table 1 – Key benefits in support of strategic sourcing solutions

Reason

Description

Increased cost savings

One of the most obvious benefits organizations will obtain from strategic sourcing would be higher levels of cost savings. This benefit emerges as companies identify and select suppliers that will provide the highest value at the right pricing, which generates higher cost savings continuously.

Improved alignment of sourcing and business objectives

The core of strategic sourcing activities is aligning a business's sourcing activities to its organizational goals and objectives. Consequently, organizations achieve higher business performance with higher efficiency and minimal risks on the supply chain.

Optimization of ideal suppliers

Organizations need to assess suppliers, their profiles, and their core capabilities in order to effectively implement strategic sourcing in organizations. Following the evaluation, an organization is equipped with information that facilitates matching business objectives to the ideal suppliers resulting in the highest value-creation at the lowest possible cost.

Long-term relationship building with suppliers

Through strategic sourcing, organizations develop sustained relationships with their suppliers for a long period of time. Strategic sourcing helps to create a synergy between an organization and its suppliers by emphasizing the companies’ focus on the suppliers' core capabilities and assuring the right suppliers for the right sourcing objective. Suppliers tend to improve their performance to meet the objectives of the organization when they feel valued and are included in different sourcing decisions. This in turn creates sustained relationships between the organization and its suppliers.

Source: Adapted from Patowarya (2019)

Evaluation of a Completed Strategic Sourcing Initiative

One of the success stories of strategic sourcing is the 3-year California Strategic Sourcing Initiative (CSSI), which was completed in 2010 (Hanson, 2010). The initiative entailed transitioning from a 3-year contract and focused on developing a stronger dependence on internal procurement expertise. The initiative involved the use of the share-in-savings model and was carried out at a time when there were no big procurements existing under the previous contract and no new procurements with CGI-AMS (Hanson, 2010). The state embarked on this initiative to help address the shortcomings that had characterized its procurement system for a long time. Prior to the launch of this initiative, California’s procurement process was time-consuming, costly, complicated, and unable to ensure that state programs obtained quality goods and services for their effective operations.

The strategic sourcing initiative was designed to enable the State of California to procure the best goods and services for the best value. Through this initiative, the State would analyze what it is buying, existing market conditions, and existing suppliers of the goods and services (Hanson, 2005). This information would be combined with innovative contracting techniques to identify the best values existing in the marketplace for the best goods and services. The State of California teamed up with CGI-AMS for the project to create a benefits-based procurement model using the shared and savings framework. The initiative involved huge investments in Information Technology hardware products in efforts to streamline and innovate the procurement process. After a period of three years, the State of California completed strategic sourcing integration through which the process became one of the tools for carrying out procurements. This implies that the plan was initially designed as a project that would be fully integrated into the procurement department to handle sourcing events.

Findings

As evident in California’s Strategic Sourcing Initiative, strategic sourcing is critical toward streamlining procurement processes for modern organizations. For the State of California, this process helped to streamline and innovate procurement processes that were characterized by numerous challenges in the past. One of the lessons obtained from an evaluation of this initiative is that strategic sourcing is an innovative way for supply chain management and procurement processes. This innovative approach enables organizations to purchase the best goods and services existing in the marketplace for the best possible value (Hanson, 2005). By promoting the purchase of the best goods and services for the best value, strategic sourcing helps to avoid costly and time-consuming procurement processes. This reflects one of the key benefits of strategic sourcing, which is an increased level of cost savings (Patowarya, 2019).

Secondly, the initiative demonstrates that strategic sourcing simplifies procurement processes through various measures including promoting the development of long-term supplier partnerships. Unlike in the past, the integration of strategic sourcing enabled the State of California to develop innovative contracting techniques that simplified procurement processes. The State also benefited from better alignment of sourcing to organizational objectives as strategic sourcing allowed the procurement division to handle procurement events (Hanson, 2010; Patowarya, 2019). Since sourcing events are handled in-house, procurement activities are better aligned to organizational goals and objectives. This also contributed to the optimization of ideal suppliers since strategic sourcing enables the state to analyze existing goods and services, market conditions, and existing suppliers prior to making purchase decisions.

Real-world organizations competing locally and internationally currently and in the future can gain significant insights from this initiative. First, CSSI demonstrates that integration of strategic sourcing requires huge investments in IT. Real-world organizations considering implementing strategic sourcing need to invest in IT as part of integrating this process into procurement events. When integrating strategic sourcing, the State of California first completed IT procurements as the first cycle of the process. Investments in IT are essential in strategic sourcing initiatives in order to facilitate innovative procurement processes. Organizations should invest in IT to establish strategic sourcing software that helps procurement leaders to purchase the best goods and services for the best price (“The Importance of Strategic Sourcing in Procurement”, 2020). Investment in IT also enables organizations to establish a suitable framework for information-sharing, which is essential to developing long-term relationships and promoting supplier innovativeness (Kim & Chai, 2017).

The second best practice obtained from CSSI is the need to design strategic sourcing as a project in the initial stages of transition and implementation (Hanson, 2010). This implies that principles and standards of project management should be adopted in this process. For the state of California, the integration of strategic sourcing was carried out for a period of three years and involved contracting another company. Real-world organizations need to design strategic sourcing plans as projects to promote seamless integration and minimize disruptions to procurement. Moreover, this enables procurement leaders and officials to learn how to carry out strategic sourcing prior to full-scale implementation. In this case, training is done to augment staff expertise when strategic sourcing is designed and implemented gradually as projects.