Strategic Sourcing: Definition, Importance, and Best Practices

Introduction

Consumers are increasingly searching for the best deals available in the market, especially when it comes to high-ticket items like houses, cars, and electronics. 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 with sourcing, and strategic sourcing is among the most prominent. This paper reviews relevant literature on strategic sourcing and its importance. The discussion includes an analysis of a completed strategic sourcing initiative and an examination of the implications of its 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 an 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 considered most effective for 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. It 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 fully understand what strategic sourcing is or why it matters. This lack of understanding has made strategic sourcing a persistent 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 along with its lessons and importance for real-world practice. To achieve this, a review of California's Strategic Sourcing Initiative (CSSI) will be carried out. The CSSI was completed in 2010 and represents one of the major success stories of strategic sourcing in recent history. 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 a 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.

Literature Review: Defining Strategic Sourcing and Its Importance

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, rather than merely suppliers 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 — such as research and development, engineering, manufacturing, and marketing — may need to be moved outside the organization. The need to move these core functions outside implies that organizations must 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 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, the 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 continuous feedback to suppliers and enhance supplier pruning activities. According to Patowarya (2019), strategic sourcing provides four major benefits to organizations, as outlined in the table below.

Table 1 – Key benefits in support of strategic sourcing solutions

Increased cost savings: One of the most obvious benefits organizations will obtain from strategic sourcing is 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 on a continuous basis.

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 greater 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. 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 over 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 ensuring the right suppliers are matched to 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)

References

Gottfredson, M., Puryear, R. & Phillips, S. (2009, February). Strategic sourcing: From periphery to core. Harvard Business Review, 37(4), 19–21.

Hanson, W. (2005, August 1). California implements strategic sourcing: An interview with project director Terese Butler. GovTech. Retrieved from https://www.govtech.com/archive/California-Implements-Strategic-Sourcing-An-Interview.html

Hanson, W. (2010, February 21). Update on California's strategic sourcing initiative. GovTech. Retrieved from https://www.govtech.com/e-government/Update-on-Californias-Strategic-Sourcing-Initiative.html

Jensen, P. A. (2017). Strategic sourcing and procurement of facilities management services. Journal of Global Operation and Strategic Sourcing, 10(2), 1–14.

Kim, M. & Chai, S. (2017, May). The impact of supplier innovativeness, information sharing, and strategic sourcing on improving supply chain agility: Global supply chain perspective. International Journal of Production Economics, 187, 42–52.

Patowarya, J. (2019, February 15). Understanding the what, why, and how of strategic sourcing. Procurement Technology. Retrieved from

Talluri, S. & Narasimhan, R. (2009, May 16). A methodology for strategic sourcing. European Journal of Operational Research, 154, 236–250.

"The importance of strategic sourcing in procurement." (2020). ProcurePort. Retrieved from https://procureport.com/strategic-sourcing-importance/