Strategic sourcing skills play an important role in the cost structure and competitiveness of small and large businesses. These skills involve analyzing high-volume purchases and developing long-term partnerships with a select group of suppliers that are capable of providing quality products and services at low costs. High-volume purchases are the best candidates for strategic sourcing because they are likely to have the greatest impact on lowering cost structures.
Cost Management
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Strategic sourcing benefits both buyers and suppliers. It benefits buyers because they can negotiate lower unit prices for high-volume purchases, thus reducing cost of goods sold and maintaining the ability to price their products competitively. It benefits suppliers because they are able to sell a significant portion of their output, which makes planning easier and gives management long-term cash flow visibility. Companies can also use strategic sourcing to procure services. For example, a start-up technology company could outsource its non-core activities, such as payroll processing, which would allow management to focus on core activities, such as product development and marketing.
Supply Stability
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Strategic sourcing can help build stable supply partnerships. For example, restaurants rely on their suppliers for key ingredients, such as meat and produce, because a disruption in the quality or quantity of these supplies could affect their ability to serve customers. Close relationships can also lead to quality improvements over time because suppliers and customers can work together to measure defect rates and identify the root causes of these defects. Strategic sourcing may lead to supplier consolidation. For example, a retailer can consolidate all of its clothing purchases from one supplier instead of using several suppliers for different brands. This would streamline the procurement process and save costs.
Risk Management
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Strategic sourcing can help in risk management. Close supplier relationships can help companies identify and resolve potential problems quickly. For example, if a strategic supplier is having cash flow problems, its main customer may advance some working capital to allow it to continue operations. If the financial problems are severe, a company may have to look for alternative suppliers or consider acquiring the supplier. Risk management may also involve developing alternative sources in case natural disasters or financial problems cause disruptions in the supply chain.
Considerations
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Senior management has to champion strategic sourcing initiatives because it takes time to identify and qualify suppliers. Companies usually have to inspect suppliers' facilities, and integrate order-management and inventory-management systems. Businesses should establish high-level steering committees for managing and monitoring these initiatives, and at least one member of this committee should have supply management expertise.
