Strategic Sourcing: Is it for cost gratification only?
At the outset, we need to understand the difference between sourcing and procurement. Procurement is the process by which one gets the required materials from the suppliers. But sourcing precedes that; it is a process by which an organization scrutinizes the data available and makes the following key decisions:
- What to buy?
- How much to buy?
- When to buy?
- From who to buy?
Till not long ago, people were using sourcing and procurement interchangeably. Till World War I, procurement was considered to be a clerical job. Over the last few years, organizations have made a clear distinction between sourcing and procurement. While sourcing is considered as the strategic part, procurement is the process which operationalizes the sourcing decisions. I guess that explains it clearly.
Coming to the main question of this blog: Is sourcing just a cost-leverage initiative? If the answer happens to be "Yes", then one would question the need to distinguish it from procurement processes. Because all along, the merchandisers were the ones who would ensure that the organizations source the materials at the lowest possible price points. So, the answer has to be a "No". Sourcing is a tool that an organization can leverage to enhance its competitive advantage.
Most of the large sized companies carry an enormous number of SKUs. But there is no clear cut process to determine the item profitability and decide which items derive maximum profitability and which are not the ones. Sourcing helps an organization to do that analysis and gives a periodic report on the profitability of the items that they carry. This helps the management to decide to discontinue some SKUs that are less profitable, thereby focusing on profitable items and increase their volume. I do understand that item profitability is not the only criteria to decide whether to discontinue an item or not. There are other factors like customer preference, status, etc. But surely, having the item profitability in their hands gives the management to have a deep look into their item portfolio
Strategic sourcing is itself a benchmark. It relates to getting the best products and services at the best value. It is designed to segment external spend and ensure that procurement resources are focused on the most important categories. What sets strategic sourcing apart is its continuous attention to improving and re-evaluating the purchasing activities of a company, thus enabling organizations to adapt to changing market forces.
