Strategic Sourcing Strategies for Manufacturers
Last updated: August 5, 2021
Knowledge is powerful in procuring supplies for your company. Procurement sourcing strategies involve careful research that gives you information about the best vendors to get your supplies from. With good sourcing methods, your company can benefit in several ways. Boost your business practices through an evaluation of your existing sourcing and procurement strategy to see if it has room for improvement.
What Is Strategic Sourcing?
Strategic sourcing is more than cutting costs on supplies a few times. Instead, it is a continuing process that constantly analyzes available sources. Through this close study of the market, strategic sourcing allows your business to find the lowest-cost suppliers while reducing the risk to your business’s supply line.
Think of the strategic sourcing process as a research phase of procuring supplies. During this stage, your business looks at market prices and vendor reputations to find the best balance of cost and reliability for your supplies. Once you’ve identified vendors for your supplies, the vendor management and procurement stages begin to create relationships with the suppliers and set up contracts for bringing the supplies to your company.
One of the main focuses of strategic sourcing is your company’s long-term goals. Often, these goals align with your company's identity and branding. Do you want your business to have more ethically sourced goods? Do you want to cut costs on your supplies? Do you want to support innovative suppliers? The answers to these questions will drive your sourcing strategy.
For instance, if one of your business goals is to make your business better for the environment, you will want to identify supply sources that use green technology for their production and delivery. Or, if you want to only source organic products for a food manufacturing business, that will narrow down your sourcing options. Other examples of strategic sourcing may be finding the most stable vendors to ensure consistent supplies or finding high-quality supplies to improve your product production.
With a strong sourcing and procurement strategy, your business can strengthen its supply chain while saving money.
What Are the Benefits of Strategic Sourcing for OEMs?
When choosing strategic sourcing techniques, your company benefits in multiple ways. Once you understand how helpful strategic sourcing can be for your business, you may want to upgrade your procurement methods. Its advantages include the following:
Cost savings is a bottom-line boosting benefit of choosing strategic sourcing. Choosing suppliers that can offer greater value for their products can reduce procurement costs. Plus, when choosing a company to create a long-term vendor relationship with, both companies can negotiate for terms to be more cost-effective. For instance, the supply vendor could be willing to cut per-unit prices in exchange for a higher volume order.
To ensure the supplier continues to offer better value to your company, request they undergo regular comparisons of their services and costs to other companies. Knowing they will go through regular evaluations of their pricing, the supplier may work hard to keep its prices within a range to maintain your company as a customer.
Lastly, make sure you understand the cost margins of your supplier. Having a long-term relationship with the supplier can give you greater insight into their overhead and why they charge you specific prices for the supplies. Understanding their cost margins can make it possible for you to request more realistic prices for your supplies.
2. Ensuring Quality
Choosing your suppliers through strategic sourcing makes it easier to attain a given level of quality for your products. Good production starts with quality raw goods. Finding a partner to provide goods that meet your quality requirements is easier with the deep level of research the strategic sourcing process requires.
With customers paying more attention to where the goods they purchase come from, greater visibility throughout the supply chain is vital. In fact, businesses with greater supply chain transparency have more trust from their customers.
3. Aligning With Business Objectives
Your business objectives do not exist in a vacuum. All your suppliers must also meet those needs. When you and your suppliers have similar goals, you can better work together for common aims. Working closer together builds stronger bonds between you and your supplier. Plus, you will both have reasons to continue to support each other in business. Mutual objectives with your suppliers can improve the strength of your supply chain overall.
4. Identifying New Suppliers
With strategic sourcing, you can also identify new vendors who better meet your company's needs, cut costs or operate more efficiently. By constantly looking for new options, you can maintain your savings and know your business works with the company that will best serve you.
Plus, your business can find secondary suppliers as alternatives to obtain materials if your primary sources experience shortages or delivery issues. With backup suppliers or additional vendors in your supply chain, you can optimize your production levels with more reliable, consistent materials arriving from the vendors to your business.
5.Building Relationships With Suppliers
Sourcing looks at the long-term. Ideally, you want your business to establish relationships with the vendors you find during sourcing. By building connections, you can have better communications and more negotiating power with the suppliers. Suppliers will work to optimize their products, delivery and costs to retain your business. Better vendor relationships help all parties get and keep lasting business.
6. Managing Risks
The supply chain faces risks, especially if there is weakness at any point. By carefully choosing vendors with healthy histories and experience, your company can reduce the chances of having those suppliers not meet your needs. The strong bonds and relationships your business creates with your suppliers also improve communications. Better communication with your vendors allows you to know if they will have a problem with delivering products to you. Then, you will have the chance to use another of your suppliers for your source.
Using multiple vendors for your business spreads out the risk to your supply chain. Consider this mitigating effect when conducting sourcing research. A single supplier could experience an issue that causes delays. The chances of your business getting interrupted by a lack of supplies decrease when you have multiple vendors you can trust.
The 7 Steps to Implement a Sourcing Strategy Process
To implement a sourcing strategy, follow these seven steps:
1. Create a Procurement Planning Team
First, identify those who will be on your planning and procurement team. These team members will make vital decisions about sourcing. Plus, they will analyze the market and articulate the specific requirements your business has for its suppliers. This team is essential to the success of your strategic sourcing. You may want to include a procurement consultant company to assist your business, especially if you’ve not had experience with strategic sourcing before.
2. Analyze the Supply Market
Part of strategic sourcing is capitalizing on trends to use changes in the market to your advantage. Therefore, analyzing the supply market is essential. Look at trend forecasts for various suppliers to identify ideal times of lower costs to procure supplies. By examining market trends, you can estimate supply costs over time as prices rise and fall.
Another aspect of analyzing the market is finding potential new suppliers. Being open to changing suppliers to meet your company’s changing needs can ensure that your goals are always being met.
3. Identify Requirements for Selecting Suppliers
Outline your company’s specific requirements for suppliers. What type of company profiles do you require they have? Do you want them to have a history of success? Do their methods of production or acquiring products matter? How does the company’s work fit with your business’s objectives and branding?
These requirements and others will help your procurement team narrow down supplier options, which will help them in the next phase of researching these remaining possibilities.
4. Research Possible Suppliers
After eliminating some suppliers based on general information about their operations or branding, your procurement team will need to conduct additional research about the remaining ones. They should find deeper information about the suppliers’ experience and history. This is also the time when your team can directly question suppliers about how they can help your business.
Potential questions may include how the suppliers could meet your company’s quality or cost needs. Or how they might respond to a short timeline for supplying. Do they have connections they can leverage to help your company find other suppliers? Questions about how the supplier can benefit your company beyond providing products will help you to choose a partner for your operation.
5. Choose Suppliers and Negotiate Terms
Once you’ve researched and questioned suppliers, make your decisions and negotiate terms with them. Discuss which supplies you need, what happens if the supplier needs to provide alternatives and what you want from the partnership. Engage the supplier in the discussion to arrive at a mutual agreement that can help both of your businesses. After negotiating and signing a contract, the supplier will fall under your procurement’s vendor management services.
Under vendor relationship management, your supply chain team will continue to communicate your needs and wants with the supplier. They will also encourage the development of a long-term connection between your companies to keep both parties benefiting each other.
6. Plan Your Implementation
Create a plan for how you will initiate the supply acquisition from your new vendor. Scheduling, communications, work strategy and benchmarking will be aspects of this plan to set forth your agreement. Make sure to include a means to allow for vendor feedback and to compare estimated costs to actual costs to evaluate savings.
By planning how you will set up and implement your vendor relationship, you can avoid problems during the process and ensure your supplies arrive as expected.
7. Continue to Evaluate and Reevaluate Your Strategic Sourcing Process
Though there are seven steps in a sourcing process, the method is not linear. You will continue to reanalyze the market and your vendors to ensure you always have suppliers who meet your needs and save your company money. Strategic sourcing will always require that you look for areas of improvement and make changes to improve your supply strategy. Striving to constantly improve will optimize your business’s production and keep your operation running with suppliers that always offer the greatest value for your needed products.
The Relationship Between Strategic Sourcing and Procurement
There are distinct differences between strategic sourcing and procurement, though the two have a close relation. Procurement is the broader category under which strategic sourcing is a part. The two processes have slightly different focuses and do not occur during the same stages of supply acquisition.
First, strategic sourcing involves researching options for supplies, which happens before establishing contracts or vendor relationships. It also includes a long-term focus to ensure suppliers meet the company’s ultimate goals for branding, objectives, quality and cost. Most of the process of strategic sourcing happens internally as teams discuss decisions about company aims and supplier options.
Procurement has a specific goal of getting the supplies the company needs based on the information from the strategic sourcing analysis. The overall procurement extends through establishing and maintaining vendor relationships identified through sourcing.
Having a procurement partner can make the phases of analyzing options and maintaining vendor relationships easier. Procurement consultants can research the sourcing phase and help to build connections with vendors that will match your company’s needs. To make getting supplies more streamlined, you may want assistance with the entire procurement process, from strategic sourcing through acquisition.
Contact Dryden Group for Strategic Procurement Consulting
Dryden Group provides the consulting services your company needs to improve its procurement and sourcing strategy. We excel in assisting businesses with the indirect spend, as this area has many complications that businesses need help sorting through. Plus, indirect spend gets less attention in sourcing and procurement plans, though indirect spend includes funding vital supplies. Examples of indirect spend we help with include print, document management, MRO, shredding, office supplies, lab equipment and transportation.
At Dryden Group, we’ve served businesses in a variety of industries for more than a decade. Our knowledge and experience help us improve our customers' bottom lines. Our process includes three main components — audit, benchmark and optimize — which we use to fine-tune indirect spend. For researching the market and analyzing options, contact us at Dryden Group to become your expert partner in procurement consulting.