Strategic sourcing is an institutional procurement

Procurement

Procurement is the acquisition of goods or services. It is favourable that the goods/services are appropriate and that they are procured at the best possible cost to meet the needs of the purchaser in terms of quality and quantity, time, and location...

 process that continuously improves and re-evaluates the purchasing activities of a company. In a production environment, it is often considered one component of supply chain management

Supply chain management

Supply chain management is the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers...

. Strategic sourcing techniques are also applied to non traditional area such as services or capital.

The steps in a strategic sourcing process are:

1. Assessment of a company's current spend (what is bought where?)
2. Assessment of the supply market (who offers what?)
3. Total cost analyses (how much does it cost to provide those goods or services?)
4. Identification of suitable suppliers
5. Development of a sourcing strategy (where to buy what considering demand and supply situation, while minimizing risk and costs)
6. Negotiation with suppliers (products, service levels, prices, geographical coverage, etc.)
7. Implementation of new supply structure
8. Track results and restart assessment (continuous cycle)

The term "Strategic sourcing" was popularized through work with a variety of Blue Chip companies by a number of consulting firms such as A.T. Kearney

A.T. Kearney

A.T. Kearney is a global management consulting firm, focusing on strategic and operational CEO-agenda concerns. It was founded in 1926, and its head office is in Chicago, Illinois...

, Booz Allen Hamilton

Booz Allen Hamilton

Booz Allen Hamilton Inc. , or more commonly Booz Allen, is an American public consulting firm headquartered in McLean, Fairfax County, Virginia, with 80 other offices throughout the United States. Ralph Shrader is its Chairman and Chief Executive Officer. The firm was founded by Edwin Booz in...

, KPMG

KPMG

KPMG is one of the largest professional services networks in the world and one of the Big Four auditors, along with Deloitte, Ernst & Young and PwC. Its global headquarters is located in Amstelveen, Netherlands....

, PricewaterhouseCoopers

PricewaterhouseCoopers

PricewaterhouseCoopers is a global professional services firm headquartered in London, United Kingdom. It is the world's largest professional services firm measured by revenues and one of the "Big Four" accountancy firms....

, and PRTM

PRTM

PRTM is a management consulting subsidiary of PwC. The firm’s business centers on the areas of operational strategy, supply chain innovation, product innovation, and customer experience innovation...

 in the late 80s and early 90s. This methodology has become the norm for procurement departments in larger, sophisticated companies.

Outsourcing

Outsourcing

Outsourcing is the process of contracting a business function to someone else.-Overview:The term outsourcing is used inconsistently but usually involves the contracting out of a business function - commonly one previously performed in-house - to an external provider...

 is a method that can be employed as part of the overall sourcing strategy for services. This involves the transfer of staff and assets to an external or third-party company which then provides them back as a service.

Sourcing optimization

Operations Research

Operations research

Operations research is an interdisciplinary mathematical science that focuses on the effective use of technology by organizations...

 is the discipline of applying advanced techniques to help make better decisions. Optimization

Optimization (mathematics)

In mathematics, computational science, or management science, mathematical optimization refers to the selection of a best element from some set of available alternatives....

, in turn, utilizes mathematical algorithms to rapidly solve a business problem by evaluating all possible outcomes (or many outcomes) and selecting those ones that yield the best solution.

When applied to sourcing and supply chain operations, optimization helps the sourcing professional simultaneously evaluate thousands of different procurement inputs. This evaluation can take into consideration the global market, specific current supply chain conditions, and individual supplier conditions, and offers alternatives to address the buyer’s sourcing goals.

Cooperative Sourcing

Cooperative Sourcing is a collaboration or negotiation of different companies, which have similar business processes. To save costs, the competitor with the best production function can insource the business process of the other competitors. This is especially common in IT-oriented industries due to low to no variable costs, e.g. banking. Since all of the negotiating parties can be outsourcer or insourcer the main challenge in this collaboration is to find a stable coalition and the company with the best production function. This is difficult since the real production costs are hard to estimate and negotiators might be tempted to portray their real cost much higher than they actually are. This way, they are able to demand higher fees for Insourcing. High switching costs, costs for searching potential cooperative sourcers and negotiating often result in inefficient solutions.

Further reading

• Christian Schuh et al.: The Purchasing Chessboard: 64 Methods to Reduce Cost and Increase Value with Suppliers. Springer, Berlin Heidelberg 2009, ISBN 978-3-540-88724-9, online
• Gerd Kerkhoff et al.: The Bermuda Triangle of Business Wiley-VCH, Weinheim Düsseldorf 2005, ISBN: 978-3-527-50123-6
• Daniel Beimborn: Cooperative sourcing: Simulation studies and empirical data on outsourcing coalitions in the banking industry. Gabler, Wiesbaden 2008, ISBN 978-3-8350-0946-2

See also

• Reverse auction
  Reverse auction
  A reverse auction is a type of auction in which the roles of buyers and sellers are reversed. In an ordinary auction , buyers compete to obtain a good or service, and the price typically increases over time...
  
  
• Request for proposal
  Request for Proposal
  A request for proposal is issued at an early stage in a procurement process, where an invitation is presented for suppliers, often through a bidding process, to submit a proposal on a specific commodity or service. The RFP process brings structure to the procurement decision and is meant to...
  
  
• Procurement
  Procurement
  Procurement is the acquisition of goods or services. It is favourable that the goods/services are appropriate and that they are procured at the best possible cost to meet the needs of the purchaser in terms of quality and quantity, time, and location...
  
  
• Rate contract
  Rate contract
  A Rate Contract or a Rate Agreement is a procurement cost reduction strategy aimed at standardizing procurement prices for commonly procured, homogenous and price varying inputs.-Timing:...
  
  
• Global sourcing
  Global sourcing
  Global sourcing is a term used to describe practice of sourcing from the global market for goods and services across geopolitical boundaries. Global sourcing often aims to exploit global efficiencies in the delivery of a product or service...
  
  
• Tendering