15 Strategic Sourcing Best Practices to Implement

Align sourcing goals with corporate strategy

To create long-term value, you need a sourcing strategy that aligns with what you want to achieve as a business. 

For example, in the fashion industry, it might be important to take a lead on workers’ rights, as there is much customer and investor scrutiny over the conditions under which garments are manufactured. This would require a strategic approach to procurement that seeks out partners who are aligned with positive human rights practices and are transparent about their operations. Previously, many companies might just have looked for the supplier with the best price or quickest delivery times rather than those that prioritize sustainability. 

Other goals you can align with your sourcing strategy could be: 

• Cost savings: Identifying long-term savings through supplier consolidation, volume discounts, or low-cost region sourcing.

• Supplier risk mitigation – Diversifying suppliers to reduce reliance on single sources or high-risk regions.

• Innovation and product quality – Partnering with suppliers who can co-develop new technology or processes.

• Speed to market – Prioritizing suppliers with agile production and logistics capabilities to accelerate lead time.

Understand total cost of ownership (TCO)

TCO is a key metric for strategic supplier relationships. Rather than simply finding the best initial price, a more strategic approach is to consider the cost of the entire lifecycle of your partnership with that supplier. 

For example, one supplier might charge more than another, but provide better quality components that lead to fewer malfunctions and returns. This saves both time and money over the course of the relationship, making choosing the initially more expensive supplier a better strategic move for your business. 

Action point

When calculating the TCO, think about:

• Direct costs, which usually means the headlined purchase price

• Indirect costs, like storage, maintenance, disposal, training output, quality control, reliability, and more.

There is no point having a cheap supplier if they can’t deliver on time and you end up having to let down consumers or slow down production.

Conduct an internal needs assessment

Understanding what you require of suppliers at a micro level helps you be more specific and can guide you to make more effective decisions. An internal needs assessment ensures that your procurement is aligned with your actual business requirements. By analyzing demand forecasts and usage patterns, as well as requesting stakeholder input, you gain a better understanding of which products or services you truly need, when, and in what quantities. 

This enables you to define precise procurement specifications and avoid both overbuying and underbuying. It also makes it easier to identify suppliers capable of meeting your exact needs. In addition, the assessments reveal hidden costs, inefficiencies, and opportunities for standardisation, providing valuable insights for supplier negotiations and long-term sourcing strategies.

Secure executive buy-in early on

It is much easier to implement a strategic sourcing process within your business if you have the buy-in of senior leaders. This is especially important if you need to justify higher initial costs in order to save money and develop stronger, more compliant relationships in the long term. 

Consult with executives before putting in place your strategy to help you align procurement with the broader business agenda. It will also help you gain the support of other departments as they can see that senior management has signed off on the project. 

Form a cross-functional team

Sourcing may once have been a low-key area of the business, but in today’s landscape, it can make a huge difference to the success or otherwise of your business. This is why you require input from a range of departments to ensure you make decisions that take into account all of the factors that impact the sourcing process of selecting the right suppliers. 

Your cross-functional team for strategic sourcing should include: 

Identify the best strategic sourcing opportunities

Prioritize your strategic sourcing efforts in the areas of procurement where you can uncover the greatest benefit. 

Depending on your goals, this could be high-spend procurement categories, where even a small saving on the TCO of a certain raw material can add up to a significant saving over the course of a year for the business. 

Alternatively, prioritizing high-risk categories and finding safer alternatives can reduce your exposure to disruption and compliance issues. 

Example

If you use conflict minerals in your production, you might seek to concentrate your efforts on sourcing these goods from suppliers who can demonstrate their transparency through a complete and comprehensive Conflict Minerals Reporting Template. 

Analyze market trends and supply dynamics

It can be easy to be insular when it comes to adjusting your sourcing strategy, but part of optimizing your workflows involves understanding your place in the market and how you and your supply chain are impacted by changing market conditions. 

Thankfully, it is possible to not only monitor these issues, such as geopolitical tensions and severe weather incidents that could disrupt your supply chain’s operations, but also to predict problems and accurately forecast demand that prevents you from running short of inventory or, alternatively, over-ordering. 

Action point

Use predictive analytics to analyze historical data and make proactive decisions based on what you can expect to happen. You can also identify bottlenecks and alleviate them by seeking out alternative suppliers that can work around these issues.  

Run a structured RFP process

The Request for Proposal (RFP) process is ideal for complex projects where there are multiple potential solutions for moving your goods from your vendor to your business. It allows you to receive suppliers’ suggestions and consult internal stakeholders to identify the most beneficial strategic option. 

Action point

You should create evaluation criteria that align with your strategic goals before issuing the RFP and then compare suppliers’ proposals in an objective and transparent manner, in accordance with these criteria. By structuring the sourcing process for this purpose, it makes finding the best strategic partners more straightforward. 

This also encourages suppliers to be competitive with their pricing and innovative with their supply solutions, leaving you with a pool of potential vendors who will help you meet your goals. 

Use win-win negotiation techniques

Strategic sourcing is all about building long-lasting relationships with suppliers to enjoy mutual benefits. If both parties are satisfied with the terms of the deal, it is more likely to be sustainable and both companies are more inspired to put the work in to make a success of the partnership. 

Trying to barter a supplier down to the lowest possible price is only a short-term solution that will initially save money, but is also likely to lead to a breakdown of the relationship and the need to run the procurement process again in the near future. 

The most effective supply chains are built on close collaboration that leads to successes for all concerned. By leading with this intention in your procurement negotiations, you set the foundations for a successful partnership. 

Build flexibility into long-term agreements

The world seems to be moving faster than ever before, which is exciting and provides limitless possibilities. However, it also means that a working relationship you negotiate one year might change completely twelve months later. 

Markets change, demand fluctuates, geopolitical issues arise in different territories, climate change causes disruption in new locations, and innovations change the way we work completely. If you have rigid agreements with your suppliers, this inflexibility could be detrimental to both parties. 

When building contracts for strategic suppliers, allow for agility within the negotiations to make sure you can continue to create value for each other even in the face of changing conditions. 

Identify and mitigate supplier risks

When working with other parties, it is important to understand the potential risks that could arise from that relationship. For long-lasting strategic relationships, it is key to identify, understand, and be able to mitigate such risks. 

Example

• Geopolitical risk: Monitor global developments and map supplier locations to identify their exposure to political instability or trade restrictions. Diversify your sourcing to reduce dependency on just one region.

• Financial risk: Assess your suppliers’ credit ratings, financial statements, and payment history to flag risks such as the potential for insolvency. Implement early warning systems and onboard backup suppliers so you can enjoy continuity in the event a partner goes bankrupt.

• Operational risk: Evaluate supplier capacity, quality controls, and disaster recovery plans to predict any potential disruptions. Require them to carry out regular audits and put in place contingency planning.

• Reputational risk: Investigate supplier practices related to ESG matters. Ask to see their code of conduct and insert compliance clauses in contracts to hold them to account for their actions.

Use performance reviews and KPIs

Once you sign an agreement with a supplier, that should not be the end of the story. Set key performance indicators (KPI) for them so that you can monitor their performance over time. This can alert you to underperformance earlier, giving you the chance to intervene before it impacts too heavily on your supply chain operations. 

Carry out regular performance reviews to assess how well the process is working towards creating value and helping your company meet its goals. This inspires a culture of continuous improvement and adds accountability to the relationship. 

Make data-based decisions

Use the supplier performance metrics not only to assess progress so far, but also to make more accurate predictions about the structure of your future relationships, too. Look at supplier metrics such as delivery reliability, quality rates, and responsiveness. Be sure to check external data, like pricing trends, emerging risks, and competitive offerings so you can negotiate with suppliers in a confident manner that helps you find the best-fit vendors for future partnerships. 

Instead of relying on instinct or legacy relationships, you can use quantifiable evidence to make sourcing decisions with transparency. This demonstrates a degree of due diligence and strategic intent that empowers your business to anticipate your needs, minimize risk, and adjust your strategy to meet the market conditions.