What is Strategic Sourcing/ eSourcing?

Charlotte Sutton
Charlotte Sutton,
Definition of Strategic Sourcing/ eSourcing
Strategic sourcing and eSourcing delivers savings by automating and streamlining the ongoing, long-term procurement of materials and services; providing the necessary tools to find and qualify best suppliers - at the right price, quality and service, and least risk. Methods typically used by private and public sector organizations for competitive bidding include; supplier questionnaires (e.g. RFI), formal bids (e.g. RFQ or RFP), formal bids (e.g. RFQ or RFP) and regulated public posting.
The business process includes:
  1. Collection of requirements and determining service level requirements
  2. Development of supplier questionnaire or RFx document
  3. Researching and analyzing suppliers in the market
  4. Development of a list of suppliers to invite to bid
  5. Publishing of the solicitation
  6. Supplier response acceptance
  7. Evaluation of responses and selection of the supplier
Challenges of Strategic Sourcing/eSourcing
Over the past several years, strategic sourcing and eSourcing has seen dramatic increases in its use with the value of goods and services that are procured accelerating. Strategic sourcing and eSourcing initiatives are effectively aimed at increasing the amount of spend under management and reducing or eliminating:
  • On-spot buying or maverick spending
  • Offline, manual and unorganized sourcing methods that lead to missed opportunities for savings through improved negotiations with suppliers
  • Localized decision making and difficulty in collecting requirements from end users
  • Time and cost involved in evaluating supplier responses and the inability to ensure compliance
  • Risk involved in spend that is not strategically sourced
PROACTIS, a leading provider of spend control and eProcurement solutions, provides the capabilities to address these issues.

The Opportunity
According to analysts, organizations can achieve potential savings of 15% to 25% through deploying a focused sourcing initiative. In addition, labor-intensive processes typically account for 12% to 15% of the sourcing cycle and consume 30% to 50% of a Commodity Manager's time (Aberdeen). Here is an example of the savings opportunities:

Scenario: Company X who spend £100m p.a. on goods and services and have 5 FTEs in Procurement:
  • Under-leveraged spend: Only 30% of spend is strategically sourced. They typically achieve 18% savings through better negotiations when conducting sourcing events. If they could place a further 10% under management (using the same resource) that would deliver £1.8m savings.
  • Supplier consolidation: In just one, high value spend category spend was distributed across 50 suppliers. If they could reduce the supply base by 75% to a few suppliers they could realize 5% savings through volume discounting.
  • Risk reduction: By increasing the amount of spend under management and strategically sourced they could decrease the number of purchases made on suppliers terms and conditions and their exposure to risk.
  • Labor-intensive processes: By increasing the level of automation they could achieve "more for less" and free-up managers' time to concentrate on value-add activities.
Questions to ask your organisation
  • How many suppliers do you have? What is the % increase?
  • What do you buy, from where and how?
  • How many tenders/ RFQs are raised per anum per FTE?
  • What % of total spend does this represent?
  • How many new sourcing events do you expect to conduct?
  • Do you have a consistent approach - describe it?
  • Are sourcing activities implemented at the local level only?
  • Do supplier evaluations typically involve a price only metric?
  • How do you target the right suppliers in tendering or RFQs?
  • How do you accurately identify and address policy non-compliance?
  • How do you manage capacity across your Procurement team?
  • Do you have standardized metrics enterprise-wide?
  • How many corporate contracts are in place?
  • Are all purchases made in line with these agreements?
  • How much spend is exposed to supplier risk?
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