The Six Critical Components of a Strategic Sourcing Initiative

Recently, nextSource produced webinar together with Azul Partners and Jason Busch of Spend Matters titled, “The Strategic Sourcing of Talent in 2020: Balancing Cost, Compliance and Agility.” It was chock full of high impact ideas and actionable strategies. One of the most interesting segments of the webinar (which you can review here) examined the six critical components of a strategic sourcing initiative. We thought this list would be valuable to our readers, so here is the synopsis.

1. Category Profile/Spend Analysis is the first of these six critical components. Conducting spend analysis to determine labor categories used, the number of suppliers engaged and how buyers are impacted ensures more strategic purchasing of services. The analysis should examine such factors as where buyers are located, the categories they buy, the number of suppliers used and the processes they’re using to engage suppliers and onboard workers. You can manage it unless you can measure it!
2. Demand Analysis/Forecasting is next. Reviewing the current state of utilization and market conditions is paired with educated estimation of demand in the immediate future. The objective of this step is to consider the optimal workforce mix for your organization and how to achieve it in light of supplier relationships and external market forces. Considerations when gauging current state operations should include the status of existing supplier relationships, adoption levels and any external factors affecting decision-making. Weigh the potential business impact of skills shortages, generational retirements, emerging workforce trends like the “Gig Economy” and the influx of Generation Z workers—even the advent of artificial intelligence and its impact on the labor picture.
3. Supplier Market Analysis is step three. This analysis is performed to review existing suppliers and the overall competitive landscape. The output of this review provides review of existing contract requirements and also lends new perspective to sourcing strategies, buyer integrations and costs. Armed with that information, the supplier market analysis can be used to perform competitive analysis. Existing suppliers’ competitors are considered to determine if they represent a better option for the program and whether they should be offered the opportunity to provide support.
4. Sourcing Strategy/KPIs, step four, helps understand the supplier market supporting your organization. Recent research from the Hackett Group revealed, “World-class procurement organizations consolidate their purchases among 78% fewer suppliers than typical companies. And world-class organizations use a documented strategic sourcing strategy for their procurement spend 56% more often than their average-performing peers.” In this step, KPIs are established and then aligned with the optimal criteria for supplier selection to achieve superior performance.
5. RFx/Supplier Selection is where the rubber meets the road. This step promotes alignment of suppliers by criteria. Strong standardization is urged in the RFx process as well as in the contract process. Best practices call for multiple rounds of negotiations to ensure not just cost compliance with business requirements, but also that suppliers chosen are wiling and able to align with the goals and objectives enunciated by workforce management leadership.
6. Optimization/Continuous Improvement is the “lather, rinse, repeat” step and is focused on ensuring continuous improvement upon the solid foundations established in steps 1 through 5. Here, best practices involve benchmarking performance so that there is a yardstick against which to regularly measure, score and rank suppliers. Revisiting your demand forecast regularly, adjusting supply mix and expanding partnerships with top adherents to the SLAs drives overall performance in a positive direction.

Follow these six steps and build a world-class strategic sourcing initiative.