If you ask a group of procurement professionals about the difference between tactical and strategic sourcing, you’ll get a similar answer:
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.
What is strategic sourcing?
Strategic sourcing is a systematic, long term and holistic approach to acquiring current and future needs of an organization. This type of sources does this 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 three key areas:
- Delivery; and
- Cost and service
By focusing on these areas, businesses can achieve optimal efficiencies in both customer and supplier organizations. There are three very important components of strategic sourcing:
- Spend analysis
- Market research
- Supplier evaluation (or selection and relationship management)
When we look at these components closely, there are several steps involved within each area. A flawless execution of these steps requires human resources with specific skill sets and expensive ERP technology to achieve desired results.
What is tactical sourcing?
Tactical sourcing, on the other hand, is a short term, transactional activity, commonly practiced in small to medium size manufacturing organizations.
This type of sourcing takes a routine and sometimes reactive approach to purchasing materials and supplies. Instead, it uses quote and 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. It also doesn’t strive to deeply understand vendors’ core capabilities to support a company’s broader needs.
What’s the difference?
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 a sub-optimal sourcing processes instead of embracing best practice?
Let’s take a look at couple of examples to better understand.
A medium-sized manufacturing company
Consider a medium-sized manufacturing company where purchasing 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 don’t have time.
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. Tactical sourcing is the best choice in such operational environments. Essentially, tactical sourcing is the appropriate approach by ‘doing things right’ at these companies.
An enterprise business
Now compare this to another organizational environment. In this scenario, the procurement function has access to a full suite of ERP technology and dedicated commodity teams. Procurement has downsized the vendor base by selecting a small number of ‘preferred suppliers’ after evaluating their core capabilities.
Here, procurement has the appropriate IT support to run enterprise-wide spend reports, perform spend analysis, and conduct market research on various commodities. With these tools and talents at its disposal, procurement can negotiate lowest total cost of ownership (TCO), taking into consideration:
- Lead Times; and
- Other critical terms.
This scenario means that buyers use only approved suppliers based on deeper understanding of the company’s requirements. Needless to say, strategic sourcing is ‘doing the right thing’ for this purchasing organization.
Introduce hybrid procurement
A third approach would be a hybrid procurement system. This is supported by ‘affordable ERP technology’ and a small team of two to three commodity specialists. Separation of responsibilities will ensure adequate operational support. It will also offer strategic focus on small number of key commodities. By ‘doing things right’, 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.