Importance of Strategic Sourcing

APICS defines strategic sourcing as “a comprehensive approach for locating and sourcing key material suppliers, which often includes the business process of analyzing total-spend-for-material spend categories.”  A firm that possesses high competency in this area gives it a distinct advantage over the competition.  According to a recent study conducted by the Aberdeen Group1, Best-in-Class companies ranked their top strategic sourcing pressures as:

  1. Cost savings
  2. Improve sourcing performance
  3. Mitigate sourcing risk
  4. Improve Supplier Relationship Management (SRM)

Not surprisingly, cost saving directives were the number one pressure facing supply chain professionals.  However, it is important for firms to improve performance and balance in all four areas in order to gain and sustain a competitive advantage over their competition.  More often then not, these four areas are also interrelated.  For example, in order to improve cost savings, a company may search for a supplier in close proximity to where their manufacturing facilities are located.  This would decrease freight-in costs (cost savings) as well as improve overall delivery lead time (improve sourcing performance/mitigate sourcing risk).  The best method by which to improve Supplier Relationship Management (SRM) within the supply chain is to enhance upstream collaboration; this ensures that materials and information flow downstream efficiently and result in high levels of customer satisfaction.

There are several  tools that companies can utilize in order to improve their strategic sourcing strategy.  Online supplier directory marketplaces such as Ariba and MFG.com have proven the strategic importance of eProcurement. These companies facilitate the RFI, RFQ and RFP process between buyers and sellers and also provide a platform for forward and reverse auctions.

Recently, however, trade intelligence (sometimes referred to as competitive intelligence or business intelligence) has become the new “it” tool in the strategic sourcing arena.  U.S. Customs, via the Freedom of Information Act (FOIA), is required to make public bill of lading records and other import data.  U.S. Customs collects this data and makes it available for purchase at the cost of approximately USD $100.00 per day of transactional data.  Trade intelligence companies purchase, cleanse, organize and resell this data via SaaS to their customers for a fee (usually a monthly subscription).  For the purpose of strategic sourcing, this information is extremely powerful; it gives companies the ability to obtain the following information:

  1. Generate new customer leads
  2. Identify new suppliers
  3. Analyze performance in current trade markets and investigate entry into new markets
  4. Gain insight into competitors’ trade activities (i.e. trade lanes, containerization, commodity information)
  5. Manage risk by monitoring current suppliers to ensure contract compliance as well as protection against rerouting/counterfeiting
  6. Compare the percentage of your import shipments versus the overall volume your NVOCC/freight forwarder handles; this knowledge could assist in the negotiation of more favorable rates

Reputable companies such as PIERS, Zepol and Manifest Journals are the market leaders in this arena.  What other strategic sourcing tools does your company use?  Your comments and questions are always appreciated.  Thanks for stopping by!

References:

1. Dwyer, C. J., & Limberakis, C. G. (April 2011). The State of Strategic Sourcing: Building a Context for the Next Decade. Aberdeen Group.

4 Comments

  1. scm

    Reply

    I believe outsourcing to lowest cost countries is still the effective strategy to achieve cost reduction plan. Anyway, I see many firms in the USA in trying to integrate information technology with overseas supplier. Moreover, some suppliers in Asia are asked to join C-TPAT program in order to cut down on cycle time of inspection of imported goods to the US.

    • Reply

      Hi SCM,

      Thank you for your comments! I agree that outsourcing (often called offshoring) is an effective strategy; but effective communication is critical. As you touched on in your comment, collaboration with key suppliers is imperative in order to enhance the effectiveness of the relationship. It is also important to note that companies should avoid outsourcing their core competencies and should have direct control over these functions internally. With the advances in SaaS (software-as-a-service) platforms specifically designed for complex international supply chains it will be even easier for small companies to compete on a global scale.

  2. Reply

    Neat article! I agree with you that cost-effective measures are with the biggest consideration especially when taking into consideration general improvisation of a company. But good thing their are a lot of strategic sourcing/outsourcing options that businessmen can choose from which might help in cost saving. If you are into SaaS, http://lirik.io/ will definitely provide you the best of service they can offer which will suit just what your company needs.

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