Strategic sourcing for indirect spend categories

What it is and how to make it work

September 05, 2018

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Sourcing at its most basic simply means identifying, locating and working with suppliers. The more ambitious and comprehensive activity of “strategic sourcing” refers to the process of optimizing a company’s purchasing to achieve a larger goal. Aligning procurement efforts with a company’s strategy and thus creating value for the entire organization is the aim of strategic sourcing.

Cost savings can be significant. According to an Accenture report quoted on spend, “high-performing procurement and sourcing organizations save $82.00 for every eight dollars in sourcing costs, equating to more than 10 times return on investment.”

Traditional sourcing is simply a procurement strategy that maximizes the purchasing power of an organization to negotiate the best vendor prices and services. Its aim is to manage indirect spend categories such as office supplies, information centers/libraries, operating services and telecommunications.

Strategic sourcing supports critical objectives to achieve bottom-line gains

However, in contrast with simple sourcing, strategic sourcing looks to go beyond merely cutting costs and managing vendor relationships. It attempts to realize operational improvements that not only influence the procurement process itself but that support an organization’s overarching strategic objectives and ultimately positively impact a company’s financials.

A strategic sourcing strategy looks to achieve three overarching objectives:

  • To achieve an accurate understanding of needs that includes mapping the existing supply market
  • To create a plan that realizes both short- and long-term sourcing objectives
  • To bring a company’s or firm’s sourcing strategy into alignment with its overall operational strategy

By its very nature strategic sourcing aims to be comprehensive. Inevitably the effort will require that procurement departments move beyond their historic transactional focus and that departments and roles across the entire enterprise think strategically about spend. It will take into account both internal and external processes to accomplish strategic goals. It will actively work with vendors as partners to gather information about the market to gain a competitive position.

The goal is to realize both operational improvements (for example, costs, service levels, quality, asset utilization) and strategic objectives (business growth, competitive position, financial stability, profitability).

Strategic sourcing considerations

Strategic sourcing uses an ongoing process of gathering information, analysis and monitoring to make the most of the consolidated purchasing power of an organization. It looks to continuously utilize, understand, manage and maximize spend activities through:

  • Proactive, information-informed sourcing
  • Executive commitment to the strategy
  • Understanding the supply market landscape overall
  • Using total cost evaluation to reveal savings opportunities
  • Partnering with vendors to realize a mutual advantage
  • Embracing role change within the organization requiring new responsibilities and engaging internal customers such as sales or marketing
  • Fostering a culture of continuous improvement

As a way for companies to leverage procurement to drive value and support a larger organizational strategy, strategic sourcing has been around for a number of years.

But what organizations are now coming to realize, according to a 2017 report from Harvard Business Review (HBR) is the importance of moving beyond the transactional focus of procurement activities to draw value from the sourcing function itself—working with vendors to identify opportunities that further a company’s strategy: “to succeed in serving customers, besting the competition, and achieving growth and profitability objectives, companies ultimately must rely on a group of critical collaborators: their suppliers and vendors.”

Leveraging sourcing includes efforts such as:

  • Supplier research, assessment, and development
  • Contract negotiation
  • Supplier relationship management (including risk management)

While traditionally seen as a back-office function, strategic sourcing moves the procurement/sourcing function front and center, and promises to help companies:

  • Maximize efficiencies
  • Respond more flexibly to marketplace demands
  • Address business challenges
  • Build strategic partnerships
  • Amplify opportunities

As smaller, newer vendors are increasingly entering the marketplace, companies are facing increased risk (data protection issues, for example), but greater potential opportunities for cost savings and even innovation that younger vendors can bring, as well. A strategic sourcing focus can help to both mitigate such risk and maximize the innovative potential of such vendor-partners. The result is a win for the organization’s overall strategy and a huge positive impact on the company’s bottom-line too.

Natalya Berdzeni

Natalya Berdzeni

Natalya Berdzeni is Executive Vice President for spend management services at LAC Group. She oversees operations and client development, including the execution of spend programs and their operational support, with responsibility for the company’s financial growth and profitability.
Natalya Berdzeni
Natalya Berdzeni

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