Strategic sourcing plays an important role when it comes to the cost structure and competitiveness of a business. Analyzing high-volume purchases, as well as developing long-term partnerships with suitable suppliers that can provide quality products/services at relatively low costs, can have a great impact on lowering cost structures.

Strategic sourcing can help in improving the value to price relationship, by the continuous process of reducing cost while improving service quality. Employing a rigorous collaborative approach, it depends on decisions that are based on market intelligence as opposed to personal opinions/preferences.

Here are some reasons, why strategic sourcing is so essential for any business organization:

• Managing Costs: Strategic sourcing is beneficial for both buyers, as well as suppliers. For buyers it’s beneficial, since negotiating lower unit price for purchases that are high volume, reduces the cost at which goods are sold, thus maintaining the pricing of their products competitively. For suppliers, the ability to sell a significant chunk of their output making planning as well as managing the visibility of long-term cash flow is quite beneficial. Apart from this, companies can also use strategic sourcing for procurement of services. For e.g. for a start-up technology firm, outsourcing of non-core activities, like payroll processing, can enable them to focus more on core activities, like product development/marketing.

• Supply Stability: Strategic sourcing can also facilitate the building of supply partnerships that are stable. Close relationships eventually lead to improvements in quality, as suppliers and customers can work in tandem to measure the defect rates, as well as their root cause. Apart from this, strategic sourcing can help in vendor consolidation, which would in turn streamline the procurement process and lead to considerable cost-saving.

• Risk Management: Close supplier relationships, can help companies identify/resolve potential problems in a timely manner. Strategic sourcing can thus be helpful when it comes to risk management. For e.g. if a strategic supplier is facing cash flow problems, a customer may facilitate some advance capital flow for allowing operations to continue. Risk management can also involve the development of alternate sourcing strategies, in case of disasters/financial problems, that may cause a disruption in the supply chain.

Businesses, thus need to champion the cause of strategic sourcing initiatives, as it takes time to identify/qualify suppliers. The inspection of supplier’s facilities and the integration of order-management/inventory-management systems usually a time-consuming process. The benefits, however, are far-reaching and thus worth the investment. What do you think about strategic sourcing initiatives and their importance to a business? Tell us more in the comments section below.