Four Key Strategic Sourcing Benefits

Recent business turbulence has increased the awareness among manufacturers for improved communication and collaboration with suppliers. This is certainly true in the area of strategic sourcing where procurement teams rely heavily on manually intensive efforts to identify and select suppliers. Often, the process is a scattered approach that ends up placing too much emphasis on the lowest upfront price rather than accurately determining a comprehensive landed cost that maximizes value across the procurement process. 

Manufacturers face ongoing challenges in selecting the optimal source of supply for the many materials, products and services they procure. It’s often difficult to accurately account for costs beyond the purchase price of goods, like tooling, transportation, lead times, duties, taxes, fees and other factors. Manufacturers place production schedules and quality at risk when selecting suppliers without a full evaluation or established performance record.

Taking a collaborative and organized approach to strategic sourcing better aligns procurement strategies with supplier activities and yields long-term cost savings along with additional business benefits. Let’s highlight four benefits:

Reduce Direct and Indirect Costs

Cost savings is certainly an important benefit, if not the most important benefit derived from strategic sourcing efforts. Many sourcing and procurement leaders point to the fact that realized cost savings from sourcing activities drop directly to a company’s bottom line. Accordingly, the savings has a positive impact on financial profitability. When compared to sales revenue, keep in mind that sales revenue is reduced by commissions, cost of goods sold, overhead costs and other costs resulting in a remaining net profit. For example, if a manufacturer sells a product for $1,000 with a 7% net profit margin, this sale puts $70 dollars into the bottom line. Comparatively, if a sourcing effort saves $1,000, the entire amount drops to the bottom line and improves profitability.

Boost Long-term Supplier Relationships

The global and disruptive nature of sourcing makes effective procurement management with suppliers more complex. Making the right supplier selection plays a key role in creating synergy between manufacturers and suppliers – and this is where sourcing has a role. By fully understanding the sourcing objectives and focusing on the supplier’s core capabilities – along with cost factors – manufacturers can select high-value suppliers with a greater degree of certainty that a long-term and collaborative relationship develops.

Beyond the initial selection and contracting process, the sourcing process needs to include performance measurement and continual feedback to suppliers for continuous improvement to meet and exceed SLAs. Suppliers can better mitigate any issues and maintain focus where efforts are working well. For the sourcing team, the goal of mutual success is better supported and performance data is readily available for future decisions to ensure the right supplier is selected whenever required. 

Gain Efficiency and a Systematic Approach

It’s still common for manufacturers to manage sourcing activities with a mix of spreadsheets, emails, phone calls and buyers’ memories to track hundreds of supplier details. Resulting issues from this reliance on manual efforts include a lack of process governance and overlooked supplier insights. The missed opportunities for manufacturers include an inability to identify the best suppliers with the best overall price, accurately monitor supplier performance and enhance supplier development that could add business value.

Strategic sourcing is one area that is not getting overlooked by the wave of digital transformation efforts. By automating sourcing activities and introducing sourcing standards across the organization, manufacturers gain a systematic approach for accurately selecting the lowest cost and optimal source of supply for the many raw materials, products and services they procure. Automation removes the guesswork and over-reliance on buyer memories to assess and compare costs, quality, capacity, services and other important factors associated with a variety of suppliers. This helps ensure a standard sourcing process results in the right contract with the right supplier.

Mitigate Supplier Risk 

As business requirements and compliance needs become more extensive and complex, so do the risks associated with supplier relationships. One of the top risk priorities for sourcing and procurement organizations continues to be ensuring business continuity by avoiding disruptions with key suppliers. As more digitalization takes place and digital information is increasingly relied upon between businesses, sourcing and procurement groups must include the ownership, management, and use of information into their negotiations with vendors and suppliers. The security of information is now a high priority for many sourcing and procurement teams’ risk management and compliance efforts. In today’s digital world, sourcing activities now play a critical role in ensuring that supplier business continuity remains an area of focus and that cybersecurity is utilized to protect the data shared between the manufacturer and supplier.

Procurement executives are increasingly seeking innovative ways to maximize sourcing efforts and address supply disruption at many levels. Integrated supplier management is a key approach for sourcing to better connect manufacturers with suppliers. The result is a foundation for direct material and strategic indirect cost reductions, efficiency improvements, risk mitigation and improved go-to-market times.

How effective and digital are your sourcing strategies today? QAD is building capability in the area of strategic sourcing with our recent acquisition of Allocation Network. To find out how QAD can progress your sourcing efforts and drive cost savings, please contact us.

Join us on May 19th for QAD Tomorrow, our premier Thought Stream, to learn about today’s supply chain challenges, the root causes and best practices for overcoming them.