If you ask this question to a group of procurement professionals from different organizations, you will probably get the following answer: it depends.
Before we discuss the merits of these answers, let’s briefly examine both sourcing strategies so that we can establish a baseline to better understand how procurement professionals justify adopting one sourcing strategy or the other.
Strategic sourcing is a systematic, long term and holistic approach to acquiring current & future needs of an organization at the lowest total cost of ownership (TCO) and lowest risk to the supply line. This process creates a closed loop link between customer and the supplier to ensure continuous improvement in quality, delivery, cost and service while providing the means to achieve optimal efficiencies in both (customer & supplier) organizations. There are three very important components of strategic sourcing; spend analysis, market research and supplier evaluation/selection & relationship management. When we look at these components closely, there are several steps to each component. A flawless execution of these steps requires human resources with specific skill sets and expensive ERP technology to achieve desired results.
Tactical sourcing on the other hand is a short term, transactional activity, commonly practiced in small to medium size manufacturing organizations. Tactical sourcing takes a routine and sometimes reactive approach to purchasing materials & supplies using quick quote & order processes to support the production operations. It is however, pro-actively managed within the purchasing organization to ensure the organization has the right material at the right price and right time. Unlike strategic sourcing, purchasing organization doesn’t particularly focus on requirements of the entire organization nor does it strive to deeply understand vendors’ core capabilities to support company’s broader needs.
Based on the above explanation, one would agree that strategic sourcing is the best known practice when compared to tactical sourcing within procurement organizations. So why do some companies choose to use the sub-optimal sourcing processes instead of embracing the best practice of strategic sourcing? Let’s take a look at couple of examples to better understand.
Consider a medium size manufacturing company where purchasing organization has the flexibility to use just about any one of the suppliers in the supply base. Typically, buyers in these situations will use their best judgment to place the order with the supplier who offers lowest price and best delivery dates. This scenario plays out in many purchasing organizations where buyers do not have the luxury of ample time on their hands. Managing day to day manufacturing operations is quite different from managing long term strategic responsibilities. Sometimes, these buyers do not have the procurement technology (ERP) platform or the higher skill set necessary to shift from tactical to strategic purchasing. Their number one priority is to keep the production lines running and tactical sourcing is the best choice in such operational environments. Essentially, tactical sourcing is the appropriate approach by “doing things right” at these companies.
Now compare this to another organizational environment, where the procurement organization has access to full suite of ERP technology and dedicated commodity teams. Procurement would have down sized the vendor base by selecting a small number of “preferred suppliers” after evaluating their core capabilities and alignment of mutual expectations. Procurement organization in this scenario has the appropriate IT support to run enterprise-wise spend reports, perform spend analysis and conduct market research on various commodities to understand supply & demand dynamics. With these tools & talents at its disposal, procurement would have negotiated lowest total cost of ownership (TCO), taking into consideration, Quality, Delivery, Lead Times and other critical terms. Here, buyers would use only the approved suppliers based on deeper understanding of organization’s overall needs & requirements. Needless to say, strategic sourcing is “doing the right thing” for this purchasing organization.
A third approach would be a hybrid procurement system supported by “affordable ERP technology” and a small team of two to three commodity specialists. Separation of responsibilities will ensure adequate operational support as well as strategic focus on small number of key commodities. By “doing things right” or “doing the right thing” depending on the situation, this procurement organization will find the right balance between both strategies. While both approaches are critical to success, tell us what works best for your organization.
This is a guest post by Omar Khan. If you’re interested in sharing your knowledge with Spend Culture readers please contact us.