What is Strategic Sourcing in Supply Chains?

By: Olivia Montgomery, PMP on January 21, 2020

Today’s consumer is increasingly concerned with where products come from and the values a business holds. Businesses need to be able to factor this in as they strive to be as profitable and efficient as possible.

For procurement managers, this means initial purchase price is just one component to consider—total cost of ownership, partnership opportunities, and the transparency of supply chains are now important as well. A strategic sourcing plan can help achieve each of these.


What is strategic sourcing?


Strategic sourcing is the method of designing and executing a procurement plan with the end-to-end costs and opportunities taken into consideration. Cost factors include the total cost of ownership not just purchase price of materials. Opportunities include consumer-demand driven supplier partnerships and showing transparency in the supply chain to build customer trust.

Let’s break down the major components of strategic sourcing.

Total cost of ownership

The initial purchase price and that impact on the retail price you can set used to be the main, and sometimes only, factor in the procurement plan. Now you need to evaluate the total cost of ownership (TCO).

To calculate the TCO of your product, capital investments and ongoing expenses need to be factored in. Capital investments include production and warehouse equipment, the rent or mortgage on building space, vehicles, software licensing, etc. Ongoing expenses include maintenance costs on physical assets.

Your brand’s reputation for sustainable and responsible sourcing is a new factor in the TCO. This leads us to the next point.

Consumer-demand driven supplier partnerships

Let’s say you’re looking for a car. After the purchase price, do you then consider the features offered such as a Bose sound system? How about if the infotainment system is powered by Apple? The odds are good that these features influence your selection of a car, but the car manufacturer doesn’t make these options. They’re partnering with in-demand partners to gain a competitive edge. This is an example of consumer-demand driven supplier partnerships.

In your strategic sourcing plan, evaluate your supplier partnerships looking for opportunities to not only reduce purchase price but also improve your brand’s reputation. The ethics and values held by those suppliers can either help or hurt your competitive edge in this new consumer culture of supply chain awareness.

When your supply chain values are in line with your customers’ expectations, the next section on transparency is much easier.

Transparency in supply chains

Speed of delivery seems to be a top expectation of consumers based on the undeniable success of Amazon and other similar companies, but ethics across the supply chain is proving to become a make it or break it factor. People want to know that the products they’re buying are eco-friendly and that working conditions in warehouses are fair. This means your ability and willingness to be transparent in your sourcing plan can give you a competitive edge.

An action you can take today is sharing your business’s supply chain values on your website. In our recent study of 312 consumers, 40% report they go to a company’s website to learn about their environmental impact.

Another free and effective way to show transparency is via your social media accounts. Share photos and stories of your team and post tips for eco-friendly disposal of your product, if applicable.


Patagonia’s strategic sourcing success


Patagonia, a global outdoor outfitter, is focused on responsible and sustainable sourcing of their clothing and gear materials. A good deal of their success can be attributed to this. They openly share their values, strategies, and even an interactive traceability map on their website

However, no company is perfect and Patagonia seems to be transparent with their struggles, especially when it comes to their partnerships. Not every garment manufacturer pays a living wage and some businesses who want to embroider their logo on the coveted Better Sweater vests don’t align with Patagonia’s values.

Their strategic sourcing plan that prioritizes eco-friendly products and actions continue to be their competitive edge.

How software can help

Contract management and spend analysis are best managed in a software system designed with strategic sourcing in mind. Strategic sourcing supply chain software offers features such as supply base management, automated workflows, and electronic bidding to support your efforts to reduce costs and speed up the procurement process.

[null](https://software-advice.imgix.net/managed/other_pages/external-link-icon.png) Here is a Buyers Guide for strategic sourcing software that dives into more detail on how software can help.

Or if you’re ready to start checking out vendors, our Software Advice experts are here to help you narrow down the best choices for your business. They’ll take a few minutes to learn about your needs and can provide you with a short list of products that best suit your business. There’s no charge for the consultation. Schedule a call here or start a live chat with an advisor here.

Chat with me on Twitter @AnalystOlivia.