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Comprehensive Guide to Strategic Sourcing

Comprehensive guide to Strategic sourcing or esourcing
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What is Strategic Sourcing or eSourcing

eSourcing, also known as strategic sourcing, is the process of using online tools and software to manage the procurement process, including identifying, evaluating, and selecting suppliers. eSourcing tools can automate many of the tasks involved in sourcing, such as sending out requests for information (RFIs), requests for proposals (RFPs), and requests for quotations (RFQs), and comparing supplier responses. In order to mitigate risks related to supply chain disruptions, contract risk, and regulatory penalties eSourcing comes in really handy. In other words, eSourcing is a strategic process that helps businesses to identify and realize savings opportunities by finding the best suppliers for their needs and managing the procurement process efficiently.

Steps in Strategic Sourcing

Strategic sourcing is not about discovering and engaging with the supplier, the primary purpose of strategic sourcing is to prioritize saving opportunities. This involves analyzing past spending, supply risk, contract performance, supplier performance, and other factors to identify savings. According to Mckinsey, eSourcing can help businesses to shorten the sourcing cycle time by 25-40%. It can be explained in few simple steps:

STEP 1 – Analyze the sourcing requirement

  • Identify and critically prioritize your sourcing needs.
  • Map global spend data with normalized supplier information.
  • Track compliance leakage if any in the process.

STEP 2 – Identify/discover suppliers

  • Search for potential suppliers and evaluate their ability to meet your sourcing needs.
  • Use supplier portals, networks, or other means to discover the right supplier.
  • Build a supplier network which becomes highly relevant for smooth functioning of procurement.

STEP 3 – Build RFI (for new suppliers)

  • Create a Request for Information (RFI) that is sent to potential suppliers
  • Gather information about their capabilities, experience, and pricing.

STEP 4 – RFP or RFQ

These documents help in communicating the clear requirements for the goods or services, as well as the evaluation criteria for selecting a supplier.

  • Select a group of suppliers who meet the organization’s sourcing criteria.
  • Create and send Request for Proposal (RFP) and Request for Quotation (RFQ) to these suppliers.

STEP 5 – Event roll-out

  • Launch an e-sourcing event.
  • Potential suppliers can submit their proposals during this event.

STEP 6 – Evaluate supplier bids & basic information

  • Review and analyze the supplier proposals.
  • Financial and legal records are checked to determine exact fitment of supplier.

STEP 7 – Negotiate the Contract

  • Negotiations with the chosen supplier.
  • Determine granular specific terms and conditions of the contract.

STEP 8 – Award the Contract

  • Finalize the contract with the selected supplier.
  • Award contract based of negotiated terms and conditions.

STEP 9 – Begin Supplier Tracking

  • Track performance and compliance of the awarded supplier.
  • Ensure they meet the requirements outlined in the contract.

Download this report on: 7 Step Guide to Strategic Sourcing

Let’s go a little detail of the most difficult process of strategic sourcing.

The RFx process encompasses various stages and can range from a simple one-time Request for Quotation (RFQ) to a more elaborate multi-stage process involving Request for Information (RFI), Request for Proposal (RFP), and Request for Quotation (RFQ). The complexity of the process depends on the specific needs and scale of the project. This gets tacked as end to end project and required rigorous Project Management.

Get this report on : Stepping Up The Sourcing Game With Project Management

RFX Process - strategic sourcing

As a general outline, the RFx process typically includes the following steps:

Collecting stakeholder requirements and supplier lists:

  • Define project objectives and collect requirements from all stakeholders.
  • Ensure that the sourcing process aligns with the project objectives.
  • Includes a comprehensive pool of suppliers.

Gauging supplier interest:

  • Check the interest and availability of potential suppliers.
  • Filter interested suppliers and streamline the subsequent stages.

Pre-qualification through RFI:

  • Pre-qualification step known as Request for Information (RFI) is conducted.
  • Suppliers submit information about their capabilities, experience, and other relevant details.
  • Shortlist suppliers who meet the project’s specific requirements.

Open RFP phase:

  • Request for Proposal (RFP) is issued to the pre-qualified suppliers.
  • Suppliers are invited to provide detailed proposals that outline their offerings, solutions, and suggestions.
  • The RFP phase allows for creative and innovative proposals from suppliers.

Final RFQ/RFB phase:

  • Post evaluation of the proposals, a Request for Quotation (RFQ) or Request for Bid (RFB) is launched.
  • Suppliers submit their final bids with detailed pricing information.
  • Compare and evaluate the pricing and contractual terms offered by suppliers.

Comprehensive RFx process can ensure that all stakeholder requirements are met and that they can select the most suitable supplier for the project, considering both qualitative and quantitative aspects of sourcing.

We have created a comprehensive seven step guide to strategic sourcing.

Evolution from Traditional to Strategic Sourcing

A study by Deloitte found that organizations with a strategic sourcing program in place achieved an average of 8-12% cost savings on direct spend categories and 10-20% savings on indirect spend categories. Hi-tech companies raise the stake for eSourcing. This demonstrates the effectiveness of strategic sourcing in driving cost efficiencies across different spend categories.

Here’s a breakdown of the paradigm shift:

Sourcing - A Paradigm Shift

1. Reactive sourcing to proactive sourcing: In the past, sourcing focused only on responding to specific requests for goods or services. Now, organizations anticipate their needs which helps driving more strategic approach and creating a more proactive approach to source suppliers.

2. Tactical sourcing to strategic sourcing: Moving away from just thinking about indirect spend was a difficult journey but the times have changed where now the focus of sourcing has shifted from cost reduction to optimizing total spending under management. In turn the strategic sourcing solution analyzes supplier relationships, supplier performance, and market trends to identify opportunities on one hand to save cost and on other hand to improve quality of supply chain over a long term.

3. eSourcing as a bidding tool to a strategic enabler: The only purpose of eSourcing solutions for suppliers in the past was to bid on projects. But the times have changed and now the eSourcing tools are viewed more as strategic enablers that provide organizations with greater visibility into their sourcing process, these solutions help identify inefficiencies and provide great opportunities for improvement.

4. Unavailability of data to data led decisions: Data from various factors, such as the total cost of ownership, sustainability, diversity, CSR, strategic partnerships, and risk are facilitating improved award decisions. With relevant data identifying the best-fit supplier has become much easier. Hence there is a significant paradigm shift from reactive to proactive that has raised the stakes for strategic sourcing. More and more organizations are taking data-driven approaches to sourcing, that leverages technology and analytics to gain visibility into their sourcing process and gain the most out of supplier relationships.

Read our blog on: Generative AI in Sourcing

What are the challenges with current sourcing practices?

Manual sourcing process

A manual sourcing process is the traditional way of finding and selecting suppliers for goods and services.

Enforcing process compliance: This poses a greater risk of human error. Additionally, tracking compliance across different departments and stakeholders is an extremely difficult task to manage.

  • Reducing sourcing time: Time taken in conducting a traditional sourcing process is high, especially for complex or high budget procurements. Multiple manual tasks, are undertaken such as soliciting quotes from suppliers, evaluating responses, and negotiating contracts.
  • Gaining enterprise-level visibility: Manual processes don’t give businesses enough visibility into their supply chains, making it difficult to identify and manage risks.
  • Sharing internal best practices: Creating and maintaining best practices across different departments and stakeholders, especially in large organizations can get tiresome. This can also lead to inefficiencies and inconsistencies in the sourcing process.

Dependence on the ERPs

ERPs are general-purpose systems these are not tailor made for procurement. ERP solutions can’t meet the niche needs of procurement teams.

  • Dependence on technical team: ERP solutions are complex and not easy for procurement teams to understand this creates a high business dependence on their IT teams, this effectively causes delay in the implementation of new sourcing initiatives.
  • Tedious process for configurations and updates: These systems create a rigid architecture which hinders the businesses’ ability to adapt their sourcing processes to changing market and industry conditions.
  • Failed value realization with low adoption: Traditional ERP solutions can be difficult to use and learn, this leads to low adoption among procurement teams. Hence a lot of saving opportunities get missed.
  • Lack of innovation and procurement focus: Just converting manual processes into automated processes doesn’t solve the needs of strategic sourcing. While some ERPs can automate their primary focus is not procurement which leads to archaic solutions with lack of innovation.

Third-Party software

Most third-party software is difficult to integrate. This integration can be a complex and time-consuming process, and it can be difficult to ensure that the integration is done correctly.

  • Lack of scalability and flexibility in hosting complex events: Organizations are growing at speed and third-party solutions do not provide the capability of scaling up fast to meet the changing needs of large businesses. These systems are not flexible enough to accommodate complex sourcing events, such as auctions or reverse auctions.
  • Trade-off between ease-of-use and functionality: Solutions that are not built for complete procurement needs often lack the features and functionality needed to support complex sourcing requirements and are also difficult to use.
    Download Report on: Procurement Automation: Overcoming dearth of supplier adoption
  • Challenges with integration: Understanding the technical architecture of multiple systems and making sure a seamless integration is done with smooth data flow can be complex and time-consuming. This kind of implementation takes longer and results in increased cost.
  • Data security concerns: Sharing data with third-party solutions can raise data security concerns. Procurement teams need to be sure that their data is protected and that they have control over who has access to it.

Check out how leading global bank invests in Zycus for procurement transformation Transformation

Why choose eSourcing or Strategic Sourcing combats the challenges?

Larger enterprises often have complex supply chains and high-volume procurement needs. eSourcing can help larger enterprises to manage their supply chains more effectively and efficiently. eSourcing can also help larger enterprises to reduce costs and get the best value for their money.

  • Reduces operational costs to maximize margins: By accessing a broader range of suppliers, and leveraging different eAuction strategies, eSourcing presents significant cost savings for procurement teams.
  • Saves time and boosts efficiency: Electronic sourcing also speeds up the time it takes to award a contract. It does this by reducing the amount of time procurement specialists spend on the tendering process, and therefore, freeing up time to spend on other tasks.
  • Leverages detailed supplier information: eSourcing improves transparency between buyers and suppliers. A portal is typically used, where suppliers can see all tender opportunities from a supplier, with deadlines, status and other key information.
  • Bolsters compliance: With all procurement-related documents stored in one place, auditing is made simpler, and therefore, so is compliance with regulatory procedures, with a system transparently showing how and why a supplier was selected
  • Limits Procurement frauds: Level playing field where all bidders have the same information and the same chance at success. It also eliminates the possibility of the buyer company’s employee viewing bids before the event is closed.
  • Seamless functioning of businesses with agile supply chain: Minimize delays in awarding business by eliminating manual analysis and shorten sourcing cycle time by 25%-40%. This is a huge advantage for fast moving businesses and helps in fulfilling urgent/time bound sourcing requests (through QuickSource)

We have built a cheat sheet for sourcing optimization that can be accessed here.

Strategic Sourcing Best Practices

Here are key best practices to elevate your strategic sourcing efforts.

Define Clear Objectives

Establishing clear, measurable objectives is crucial for successful strategic sourcing. Determine what you aim to achieve, such as cost savings, quality improvement, risk mitigation, or innovation. These objectives will guide your sourcing strategy and decision-making process.

Conduct Comprehensive Market Research

Thorough market research is fundamental to understanding the landscape and identifying potential suppliers. Analyze market trends, supplier capabilities, and competitive pricing. This knowledge will enable you to make informed sourcing decisions and anticipate market changes.

Develop a Robust Supplier Selection Process

A well-defined supplier selection process ensures you choose the best partners for your needs. Create criteria based on quality, cost, reliability, and alignment with your company’s values. Use a structured evaluation process, such as RFIs, RFPs, and RFQs, to compare suppliers objectively.

Foster Strong Supplier Relationships

Building and maintaining strong relationships with suppliers can lead to better collaboration and performance. Communicate openly and regularly with your suppliers, addressing any issues promptly. Consider developing long-term partnerships that encourage mutual growth and innovation.

Leverage Technology

Utilize advanced procurement technologies to streamline your sourcing processes. Tools like e-sourcing platforms, spend analysis software, and supplier management systems can enhance efficiency, transparency, and data accuracy. Embracing digital solutions can also provide real-time insights and analytics.

Focus on Total Cost of Ownership (TCO)

Instead of solely focusing on the initial purchase price, consider the total cost of ownership. TCO includes all costs associated with the acquisition, use, maintenance, and disposal of a product or service. This approach ensures a more comprehensive understanding of the true cost and value of your sourcing decisions.

Implement Risk Management Strategies

Identify potential risks in your supply chain and develop strategies to mitigate them. This could involve diversifying your supplier base, conducting regular risk assessments, and establishing contingency plans. Proactive risk management helps ensure supply chain resilience.

Continuously Monitor and Improve

Strategic sourcing is an ongoing process that requires continuous monitoring and improvement. Regularly review your sourcing strategies, supplier performance, and market conditions. Solicit feedback from stakeholders and suppliers to identify areas for improvement and drive continuous enhancements.

By adopting these strategic sourcing best practices, organizations can achieve greater efficiency, cost savings, and competitive advantage. Effective strategic sourcing not only optimizes procurement processes but also strengthens overall business performance.

Zycus Strategic Sourcing Solution

Zycus offers an easy-to-use eSourcing solution which facilitates sourcing automation, increases savings and facilitates quicker return on investment. With its advanced sourcing optimization features, Zycus eSourcing enhances the sourcing performance by:

  • Scalability: iSource can support up to 10,000+ items and 200+ suppliers and high number of Q&A, cost elements and custom information columns. With iLogix advanced sourcing optimization module, we can support 50,000+ line items for a complex sourcing event.
  • Flexi-Price builder: Allows users to build complex pricing tables or Bill of Material (BOMs within the solution itself, or import pre-existing excel files, preserving all conditional formatting, formulae, etc.
  • Quick source: Allows creating one-page RFx’s and creating suppliers on the fly to support tactical sourcing events, time bound/emergency purchasing activities, low-dollar value buys, etc.
  • Negotiations: Most price-based negotiations are done over the phone or email, thus losing out on a valuable source of business intelligence. iSource addresses this gap with its unique negotiation feature.
  • Multi-Round event: Multi-round events can be created. An RFI can be turned into an RFP/RFQ and then extended to an Auction which helps in drilling down to minimum suppliers and further, details can be copied over from one stage to other.
  • Conditional workflows: Conditional Workflows can be provided for internal reviews and at award stage to support award recommendation.
  • Surrogate biddings: Buyer can bid instead of a supplier. You can place surrogate bids in auctions. This is useful if a supplier does not have access to the application at the time of the auction and uses some other means to communicate the bid to the buyer.
  • Integration with customer’s systems: API can be integrated with customer’s systems to pull the awarded cost from iSource to move into paying system at customer’s end.

If you would like to learn more about Zycus eSourcing solution – Request a Demo

Related Reads:

  1. 5 Ways eSourcing Tools Deliver ROI for Procurement
  2. The eSourcing User Experience: Why User-Friendly eSourcing Solutions Matter for Adoption
  3. The Stages of Strategic eSourcing: A Comprehensive Guide
  4. The Road to Procurement Efficiency – How eSourcing Automation Streamlines Processes
  5. Sustainability, Innovation and Efficiency- eSourcing Platforms’ Triple Play in Procurement
  6. White Paper: Making Strategic Sourcing a Reality
  7. Analyst Report: The Four Pillars of Sourcing Success
  8. Ebook: Building a Business Case for Strategic Sourcing Suite
  9. Press release – Voltas Ltd. Engages Zycus for Sourcing Event Management
  10. Check out our procurement related web stories
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Sonal is leading product and content marketing initiatives at Zycus. She is a problem solver. She has a proven track record of defining positioning and messaging for various product modules, creating go-to-market strategies for new features and product launches, and fostering collaboration between Product Management, Sales, and Customer Success teams.
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