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Strategic Sourcing
Strategic sourcing is the continuous procurement process of discovering, prioritizing, improving,
and re-evaluating sourcing activities. Read the following 9-step guide to learn about practices
that have helped best-in-class companies achieve substantial cost savings and other sourcing
objectives.
Traditional Sourcing
Traditionally, procurement has relied on reactive sourcing – responding to requisitions or other
business requirements as they come up.
As procurement becomes more proactively managed within a company, reactive sourcing turns
tactical. While tactical sourcing involves creating a strategy to anticipate needs and plan
accordingly, it still deals with them as they arise.
Strategic Sourcing
Strategic sourcing is a well-planned ongoing process of proactive actions, where procurement
takes a leading role in satisfying business needs and adding value to the company.
Actively managing your supply chain means collaborating with internal stakeholders and
suppliers, critically analyzing company spend, and managing supplier risks.
1 Internal Research
2 Supply Market Analysis
3 Current Sourcing Process Analysis
4 Strategic Sourcing Methods
5 Identifying Opportunities

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6 Strategy Selection
7 RFIs and Supplier Qualification
8 RFQs and Tender Process
9 Sustained Improvements
The CPO’s Guide to Strategic Sourcing
If you want to implement strategic sourcing in your organization and have little prior experience,
you currently have two options: take extensive coursework through CIPS or ISM or read through
hundreds of articles on Google.
Here at DeltaBid, we’re all about easy. To save you time, we’ve put together a comprehensive,
9-step guide that you can use to get a better understanding of the principles behind strategic
sourcing.
The benefits of strategic sourcing
1. Increase profit – Every dollar the company saves in procurement goes directly into the
P/L bottom-line and adds dollars to the profit. Strategic sourcing systematically looks for
savings from the whole supply chain, providing the company with a competitive
advantage.
2. Manage supply risks – Strategic sourcing requires every category of spend and all
suppliers to be analyzed. Each existing supplier is evaluated separately for quality risk,
financial risk, availability risk, and level of cooperation. Once the risks are identified, you
can then take action to avoid or mitigate the risk.
3. Improve sustainability – Strategic sourcing is not a one-time project or initiative; it is a
continuous cycle of activities. Dedicated category managers within the team will keep an
eye on category and supplier performance. With every subsequent cycle, they can go
deeper to find additional opportunities to bring value to the company.
4. Get more value out of procurement – Strategic sourcing does not mean you are looking
solely for quick cost cuts. Every action taken during your strategy implementation is
evaluated using the following criteria: Does it provide more value at the same cost, does
it decrease operational costs, or does it increase operational speed?
Who should implement strategic sourcing?
Procurement best practice requires the adoption of strategic sourcing as a guide for developing
standardized procurement processes. Strategic sourcing is not a single project but rather a
continuous process that rolls like wheel.
Every company who wants to have control over its supply chain should use strategic sourcing
principles. Ask yourself this question: Do you control your supply chain or does it control you?
Implementing the best practices of strategic sourcing can provide extra boost to the company’s
profit margins. Once your company has grown to the point where you have recruited a
procurement manager or supply chain manager, then your company is ready to start
implementing strategic sourcing.

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The goal is to look beyond daily price and delivery time challenges. Strategic sourcing is a
complex process that helps you understand the relationship between your suppliers and your
organization.
Chapter 1: Internal Research
In the preparation phase, you will focus on gathering data from within your company, analyzing
it, and building up a framework for the subsequent steps. The preparation phase requires
analytical skill in order to handpick useful information from the company’s systems.
To review the strategic sourcing definition from CIPS, the purpose of strategic sourcing is to
satisfy business needs for predefined materials and services. Of course, every business has
many different needs, and you cannot do everything at the same time. This is why in step one
you will have to make choices and define your list of priorities and scope of work.
The following is a 6-step guide on how to perform internal data research:
1. Categorization
2. Category risk analysis
3. Scope selection
4. Spend analysis
5. Cost structure analysis
6. Total cost of ownership
1. Categorization
Categorization in the supply chain is a key element when defining a category manager’s scope
of work. There are different ways to categorize spend in a company. Some simple examples of
high-level spend categorization are direct/indirect, materials/services, domestic/import,
critical/noncritical, ABC, etc. However, these categories are simply too broad to draw
meaningful conclusions, and we have to go deeper into the details.

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Fig. 1 – A sample spend categorization
Every company should have their own spend categorization structure, and it should be
maintained in the ERP material master. If the company has not created categorization in the
ERP material master, it should still have spend separated into different cost accounts. Usually
Accounting is responsible for separating spend into different cost categories. If your company
has no master data available, check with Accounting first to see if you can use their spend data
as a starting point.
When building up a categorization structure from scratch, make sure you include your entire
team in the process. You may also find it helpful to team up with Engineering and Design in
order to find the answers to some of your more technical questions. Build up a category tree by
starting at the highest level and then moving down to the details. How many levels you want to
go down and how detailed you want to go is up to the company’s profile. In Fig.1 you will find an
example of high level categorization for a typical production company that produces machines.
Categorization should be done with the long view in mind; it should not be changed often.
Otherwise, if you change your categories frequently, you will not be able to compare category
spend between periods.
2. Category risk analysis
When you are done with categorization, you can start to analyze the data. Use the Kraljic
portfolio matrix (Fig. 2) to help you define a risk level for each category and its impact on
company performance. The Kraljic model is a four-quadrant (strategic, bottleneck, leverage, and
noncritical) matrix with one axis for supply risk and another for profit impact.

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Fig. 2 – Kraljic portfolio matrix
Imagine each of your categories as a basket filled with products. One by one, take each of
those “baskets” and place it on the Kraljic matrix. This will help you define which categories can
be labelled strategic, bottleneck, leverage, and noncritical. Later on in Step 2 we will drill into
each category and evaluate the risk level of suppliers in Category C.
If you’re not familiar with the Kraljic matrix, there are lot of materials available online. Check out
a few of them hereand here. (I recommended taking some time to learn about this matrix since
the Kralijc model will be used in several steps of strategic sourcing.)
3. Scope selection
It is important to select a feasible scope. Selecting a category level that’s too high may put you
in a situation where very few or no suppliers can cover your category need. In cases where you
have one highly critical component, you can define this one component as your scope of
sourcing work. However, if you select a single product as your category, you may spend a lot of
time and energy executing your sourcing strategy for every single product. The sweet spot lies
somewhere in between.
It takes experience to select a proper categorization level. Work with your team on scope
selection; you should not define category scope alone.
4. Spend analysis
A spend analysis requires working with historical consumption data. During the spend analysis
phase, the more detailed data, the better. This is where your company’s ERP comes in because
this is where your purchase records are stored. If your company is not using master data for
making purchase transactions or the master data it is not maintained, then the category
manager’s work will be more complicated.

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Fig. 3 – Total spend by suppliers and categories.
There are some workarounds for getting historical spend data, though. For example, you can
get the suppliers’ spend data from Accounting. If you are desperate enough, you can even ask
for your spend data from your suppliers. It may not look the best, but at least you will get what
you need.
Once you have the data, then you can analyze it. The category manager’s best friend is
Excel’s PivotTable. If you have a huge pile of data, no tool can beat it. PivotTable can be used
for spend analysis since it allows you to sort and filter data in many ways and drill into the
details. Ideally, PivotTable will be integrated with your company’s ERP so that you will always
have access to your organization’s most recent spend data.
The spend analysis should enable you to look at the data in different ways:
 Total spend by category and then by supplier
 Total spend by supplier and then by category
 Top suppliers with 80% of the total spend
 Category spend by supplier and then by product
 Category spend by product and then by supplier

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Fig. 4 – Total spend divided by category and supplier
5. Cost structure analysis
Almost every company performs a cost analysis when calculating its own product price, but not
many try to do it for purchased items. It is not an easy thing to do, and it does require some
engineering skills.
First of all, try to figure out what cost elements make up the component price your supplier
offers you. Typically, for a physical product, one cost element would be raw material.
The second cost element would be machining. However, even machining can be split into
different operations: punching, bending, etc. (It’s not necessary to go so deep.)
Then the next elements would be finishing, like painting and packing.

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Fig. 5 – Sample cost structure template
6. Total cost of ownership
The total cost of ownership calculation is an advanced cost structure analysis where, in addition
to product cost elements, other cost elements, such as acquisition (transportation, warehouse,
financing cost) and lifecycle (usage period, maintenance, repair), are taken into consideration.
Prepare a TCO template (Fig. 6) and start filling it in with the data you already know. If you’re
missing some data, it is not a problem since we can put those gaps on the action list.
Fig. 6 – Sample total cost of ownership template

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Both the CSA and TCO are powerful tools when negotiating with suppliers because you as a
buyer have an overview of different suppliers’ data when your negotiation partner has only his
own.
A cost structure elements template should be used when asking for quotations through an RFQ.
Conclusions
Step one on the road to strategic sourcing is all about internal research. A category manager
must be familiar with each and every category, which is why it may take one to two months
before you can move on to the next step. The importance of this key preparation phase should
not be underestimated, as it is the foundation for all of the other steps to strategic sourcing.