The Four Stages of Strategic Sourcing

The value of strategic sourcing lays in improved supply strategy execution and the continuous improvement of the entire supply chain. So how do you achieve true strategic sourcing? Build on a foundation that includes technology, tools, knowledge and people.

Strategic sourcing is a disciplined approach for selecting suppliers and procuring goods and services that has delivered strong return-on-investment (ROI) for many enterprises. Based on a series of business processes, strategic sourcing helps a company transform itself from being a tactical organization focused on transactions to one that is strategic, focusing on processes that maximize supply value.

Enterprises that adopt and implement strategic sourcing undergo a constant progression, a sort of "evolution," that fundamentally transforms them on both an organizational and technological basis. Relevant business processes evolve and become realigned in an effort to extract maximum value from supply. The manner in which technology is deployed also evolves, as key managers and users become more adept at taking full advantage of new and powerful technological tools.

The pace at which companies evolve depends on many factors, including their relative sophistication in strategic sourcing and the technological experience and expertise of key managers. But strategic sourcing is not about technology; it's about defining and using processes that continuously create supply value. If company management focuses too much on one aspect of strategic sourcingsuch as technology tools or e-enabled online "events" like reverse auctionsprogress will be slowed or stopped.

The true, long-lasting value of strategic sourcing lays in improved supply strategy execution and the continuous improvement of the entire supply chain. Improved business processes that employ technology tools, as well as the experience and creativity of key supply managers, produce these benefits. Strategic sourcing also unleashes untapped value from various links in the supply chain.

Companies often focus too much on automating the transaction process that connects transaction systems to other information systems. While transactions and system integration are important, they do not produce competitive advantage by themselves. Strategic sourcing does provide a solid competitive advantage by capturing supply data and knowledge and using it to create world-class supply strategies and supply chains. In addition, managers can use this knowledge to continuously improve how strategies are created and executed. Technologies used in strategic sourcing enhance a company's ability to institutionalize best practices across its entire enterprise and then through its supply chain, both to upstream suppliers and downstream entities such as customers and business partners.

To achieve true strategic sourcing, companies need a foundation that includes technology, tools, knowledge and people. These four elements evolve through the various stages of strategic sourcing, but all are absolutely essential to long-term success.

Companies that adopt strategic sourcing do not always follow the same exact path, but for simplicity's sake we can segment the strategic sourcing progression, or evolution, into four stages. Note that no single path exists for the first three phases  they take place at different rates and in different ways from one company to the next, and they each have process and technical paths that may be attempted separately. However, any company hoping to achieve the fourth stage must come through a process and a technology evolution.

Stage One

In the first stage, an enterprise recognizes that it must change the way it acquires goods and services. The company's top-level management realizes the tremendous potential value to shareholders and customers that can be produced through strategic sourcing, and that the organization has been "leaving money on the table" when it comes to supply value. The company examines its strategies and the processes used to acquire outside goods and services, and it invests accordingly.

Typically, high-performing people from both inside and outside the company are shifted into the strategic sourcing group, often from functions other than purchasing/procurement, such as finance, technical, sales, marketing and others.

Stage one is nearly always characterized by the presence of an outside entity that helps the company to build the foundation for strategic sourcing. This outside entity may be an e-sourcing software and service provider, a consultant or similar advisor, or newly-hired but highly experienced supply professionals. These professionals work closely with company management to first identify the need for change and then set a plan in place to implement that change, often in a rapid manner.

At stage one, key individuals begin working with suppliers to educate them on the goals of strategic sourcing and to train appropriate people within supplier companies to use the new tools that enable strategic sourcing. A comprehensive company-wide "spend analysis" usually is needed to provide a baseline for strategy formulation and continuous improvement.

Many companies at stage one are very focused on the tools, such as software, and the "events," such as online reverse auctions, that are instrumental in producing major cost savings. As they progress through strategic sourcing's four stages, however, these companies begin to realize that auctions and other online events are only a relatively small part of strategic sourcing, and that longer-term benefits can far outweigh the cost savings produced by auctions and similar events.

Stage Two

In stage two, a company brings the strategic sourcing plan and execution inside its own enterprise. It adopts technology-based processes and software through an enterprise license with a strategic sourcing software provider  some even develop their own tools for everything but the electronic auctions. The company begins to conduct strategic sourcing events themselves and starts to accumulate data and knowledge about supply markets.

At stage two, many companies become more aware of the tremendous potential that strategic sourcing offers to transform the enterprise. Key supply managers become "owners" of the initiative, and momentum begins to build for future success.

Stage Three

In stage three, company management clearly understands that to fully exploit the potential of strategic sourcing, new tools and business processes must be institutionalized across the entire enterprise. A strategy is put in place to transform not only the company's sourcing processes, but also the way key people think about acquiring outside goods and services. This transformation usually takes place business unit by business unit. The company may establish one or more "center(s) of excellence" that accumulates and analyzes all collected data and other information, and directs the spreading of strategic sourcing processes throughout the enterprise.

Strong change management is required in stage three to help users adapt to new processes and new tools that enable maximum supply value to be realized. All business units adopt process discipline, which prevents leakage of the savings and other benefits produced by strategic sourcing.

Stage Four

In stage four, the enterprise achieves end-to-end implementation of best practices and processes that maximize supply value. Systems are put in place that create the foundation for capturing all savings and value, and for measuring and controlling key supply parameters. Contract management and supplier performance measurement systems are deployed to monitor and track all supply parameters. All collected data and other knowledge is fed back into the process of strategy formulation, and future supply strategies are greatly enhanced.

A strong strategic sourcing team with both the authority and accountability to enact major, long-term changes also characterizes stage four. This team often is complimented by major efforts toward collaboration with business units, suppliers, customers and other stakeholders.

At stage four, many companies experience for the first time the benefits that result when customers and suppliers are linked directly, and knowledge transfer occurs in both directions. New efficiencies and new technologies can be created where an informational vacuum existed in the past. Companies that reach stage four in the strategic sourcing process may receive benefits of which they had never before dreamed

At stage four the enterprise is employing highly-advanced technology tools that help procurement manage all key relationships  with business units, suppliers, customers and business partners. This highly-advanced software might be called "procurement relationship management," or PRM, software.

When a company reaches stage four, the pieces are now in place for continuous improvement, year-over-year, in the value extracted from supply. Companies that reach stage four achieve a new competitive position in their markets. Shareholder value is enhanced, and a flexible framework works towards continuous improvement of supply value well into the future.

Key Factors for Success

Before any organization can even begin to move through the four stages of the strategic sourcing process, company executives must consider elements that will be needed to achieve true organizational transformation. Some critical elements are:

Executive sponsorship. Like any major organizational transformation, strategic sourcing requires strong and active support from the very top of an organization. Supply executives who want to implement strategic sourcing should demand support from their organization's leader or entire leadership team.

A strategic sourcing "champion." A leader and visionary, the strategic sourcing champion is an early recognizer of the potential of the process. The champion stakes his or her career on the success of this initiative. A champion has connections to senior management, and is empowered with the authority and budget to accomplish the strategic sourcing goals.

The "super user." All successful strategic sourcing transformations involve what we call a super user: One who is directly "in the trenches" of procurement/supply management and commands both the attention and respect of his/her peers. The super users are action-oriented and have a huge bias for success. They do not stop when small technology or organizational issues arise; instead, they surface the issues and develop solutions.

Advanced technology. Leading-edge technology, especially Internet technology, is needed to sustain the cost savings and other benefits that are produced by strategic sourcing. Electronic sourcing is not about reverse auctions or electronic requests-for-quotes of any kind  instead it is about enabling the entirety of the strategic sourcing processes.

Alignment of business processes. Business processes involved in procurement/supply management should be evaluated and changed if necessary to align with strategic sourcing goals. The outcome of the strategic sourcing process must be financially linked to the business units' goals. If not, the efforts will fail.

Buy-in from key stakeholders. Change is hard and will not happen by accident. It's crucial that change management and coaching be employed to help internal users, heads of business units, suppliers, business partners and other effected stakeholders smoothly transition to strategic sourcing practices, processes and thinking.

Orville Bailey is the co-founder, president and CEO of B2eMarkets