Strategic sourcing involves developing ongoing collaborative relationships with key suppliers in order to reduce costs, improve quality, and gain access to new resources and markets. It differs from traditional sourcing by focusing on total cost rather than just purchase price, developing long-term strategic relationships rather than individual transactions, and involving ongoing communication and information sharing between organizations. Successful strategic supplier relationships are characterized by mutual benefit, trust, compatibility between organizational cultures, open communication, and flexible contracts to guide rather than dictate the relationship.

1. Strategic Sourcing
Strategic SourcingStrategic sourcing is a procurement process applied in institutions for
continual improvement and re-evaluation of the purchasing activities of the organization
(Nishiguchi, 1994). Often, it is considered a component of supply chain management when
it is applied in a production environment. In supply chain management it is used as a tool
for delivering a number of cost reductions as well as other benefits. To be specific, it is an
event that is practiced periodically and that manages to identify and select initial
commercial arrangements with a particular supplier leading to either a creation or resetting
of a relationship. This paper will compare strategic sourcing to traditional sourcing, the
impact of strategic souring decisions on performance in SCM, the features of strategic
supplier relationship and the scope that strategic sourcing can be applied in during
recession and difficult economic times.Strategic sourcingOne requirement of strategic
sourcing is for the organization to divide their spend into categories which will then be
classified based on how important the product or service is as well as on how complex the
market place is (Monczka et al, 2005). Both the purchasing organization and the supplier
organization must then take into account the various relationships required. Cost might be
used as the basis in the least strategic relationship on one hand. On the other hand, the
ability to create new opportunities in business or create advances in technology might be
used as the basis in most strategic suppliers. The specific formal targeting and searching for
suppliers with the aim of filling this role is what constitutes strategic sourcing. Combining
strategic sourcing with both strategic supplier management and effective daily purchasing
activities would result in a true supply advantage.The need to focus on strategic sourcingA
core mission of purchasing and supply functions in the past has been driving costs to the
lowest possible price points followed by these price points being tracked and reported
(Wisner and Keah, 2000). Despite the fact that many CEOs still value cost-reduction
initiatives such as this, most of them also believe that the role of purchase and management
is not limited to cost cutting alone. Supplier relationships now place priority on reduction of
costs, improvement of quality, increased access to new resources and enhanced sales
(Kearny, 1997). In addition, the leaders in Kearney’ s study who placed value on end-
product competitiveness as a basic objective also considered establishing relationships with
leading suppliers to be of value. One common practice in these organizations was the
providence of strategic positioning advantage and enhancement of revenues by purchasing
and supply management professionals.Organization leaders recognizing the important role
of strategic sourcing as well as strategic supply management have an opportunity of being

2. on the center stage as players in the success of their organization. Innovation will arise from
the alliances that they will form with their suppliers. New product opportunities will also be
identified resulting from the alliances. In addition, they will bring access to advanced
technology or new markets and also provide new intelligence that will be used in strategic
decision making.An example of an organization that has strategically selected supplier
relations in its sourcing strategy is Cisco systems (a provider of Internet networking
material that is based in San Jose, California (Hadeler, 1994). The organization chose to
inaugurate a build-to-order program. It also rolled out extranets which would enable
suppliers to monitor as well as fulfill the orders of the customers. Introducing this
cooperative relationship with suppliers together with the organization’ s high percentage
outsourcing have made it possible for the company to significantly slim down costs and
contributed greatly to its recent growth. This strategy has made it possible for the company
to quadruple its output without investing in new plants and reduced the time taken for its
products to reach the market by three times. In addition, the close cooperative efforts of
Cisco have quadrupled the shareholder value of the company in three years.Despite the
promising benefits strategic sourcing has to offer, not many organizations have managed to
apply both sourcing and strategic supplier management. Proactive professionals in
purchasing and supply who have chosen to capitalize on working with suppliers with the
aim of fostering innovation and to develop markets are still rare. There are organizations
that do not place focus on establishment of purchasing processes aimed at creation of
genuine supply advantage.The hesitation to apply process-oriented procurement instead of
a transaction-oriented one often stems from the purchasing organization and not the supply
base. Majority of suppliers would readily contribute to their customer’ s success in any way
they could so that their own revenue can increase through improved cooperative
relationships. Suppliers are a vast resource which is many times not tapped. Relationships
between supply and purchasing can sometimes become a guessing game where suppliers
look for ways of determining how they can increase value (Kulkarni, 1997). Many times the
customers do not provide the answers. For this to change in the future, purchasing and
supply organizations aiming to succeed will have to project some of their core objectives on
the sourcing process by basing the choice of supplier on strategic objectives and ensuring
that constant evaluation is carried out on current suppliers for the same
contribution.Comparison between strategic sourcing and traditional sourcingExcept for the
inherent risks associated with global sourcing, it is known to offer numerous benefits to
organizations for instance by lowering the costs of materials and labor. In addition, a much
closer integration is required among the supply chain partners. Strategic sourcing differs
from traditional sourcing in that it involves the search for and development of ongoing
relationships with trading partners that will account for the biggest potion of an
organization’ s spend (Purchasing funds). Through maintenance of close relationships,
provision of materials or services that are main constituents in the eventual product or
service is possible or materials/services that can assist the buyer make the desired profit as
well as achieve its goal of customer satisfaction (Sheth, Jagdish and Sharma, 1997). Strategic
sourcing is different from traditional sourcing in its focus and execution.Traditional
purchasing places focus on purchase price while true cost to the customer is the key focus in

3. strategic sourcing. Price and cost are very different components as making a choice of a
component based on the lowest normal price may not necessarily be translated directly to
mean low cost. This applies, for example, if the components that are low priced are
unreliable and do not last long. It can be illustrated further that the savings initially made in
the production of the finished goods will be impacted negatively following shipping back of
the fail goods and the repair or disposal of them. These costs of reverse logistics together
with the lost business from the unsatisfied customer who was a prospective life customer
will greatly impact on the initial savings made in the production of the goods. At the same
time, cost reduction can be realized from strategic sourcing through the consolidation of
purchases with a limited number of suppliers. In addition, the centralized departments
negotiating leverage through economies of scale (the purchase of increased volumes) would
be allowed (Wisner and Keah, 2000). Another component that can be reduced by strategic
sourcing is frequency of purchasing orders which then translates to a reduction in the
inventory handling costs.Traditional sourcing is transactional and is applied sporadically
with each purchase being treated as a discreet transaction. Common communication
methodologies include haggling over prices, complaints regarding late shipments or the
disruption in product quality. The exchange of information in traditional sourcing that may
take place through electronic communication between parties is only tactical such as the
billing of orders or the change of orders. A traditional approach to sourcing, which is also
termed as ‘ buy on the market’ , is opportunistic since the purchase made by organizations
are made in response to immediate needs and the organization is free to choose from any of
the suppliers that can supposedly meet these needs (Kulkarni, 1997). Technical purchasing
requirements like specification and certification processes get to be shared between parties
in traditional sourcing but not strategies or plans as is the case in strategic sourcing.In
contrast to traditional sourcing, strategic sourcing involves ongoing relationships rather
than transactional ones therefore an opportunity for mutually beneficial collaboration
between the suppliers and the buyer is available. As a result, each partner in the
relationship can benefit from improved profitability all through the supply chain. The value
of the final product or service would also have been added. Concepts in SRM and strategic
sourcing require a company to share information with its suppliers in real time so that the
cost of materials can be cut, inventory minimized, shortages reduced, and deliveries
expedited (Christian et al., 2009). Furthermore, the suppliers are given the opportunity to
participate in improving the system hence better products will be produced, customer
satisfaction will be higher and more customers will get to be retained.Other differences
between traditional and strategic sourcing include the approach, motive, and relationship,
number of suppliers, risks, and activities. The approach used in traditional sourcing is an Ad
hoc with individual suppliers whereas strategic sourcing utilizes a network approach. The
motive in traditional sourcing is solely cost compared to the motive in strategic sourcing
which is strategy. The numbers of suppliers in the traditional sourcing are numerous, while
in strategic sourcing only few suppliers are involved (Nishiguchi, 1994). Strategic sourcing
aims to develop a relationship of trust with the suppliers. On the contrary, traditional
sourcing only relates with the suppliers in terms of contract hence their relationship being
transactional only. The risk in strategic sourcing is shared between the purchasing

4. organization and the supplier while traditional sourcing places the entire risk on the
individual. It is also of note that strategic sourcing applies on a global playing field whereas
the playing field of traditional sourcing is national.Impacts of strategic sourcing decisions
on supply chain management performanceDepending on the decision made in strategic
sourcing the performance of supply chain management gets to impacted in a number of
ways. The decisions reached at depend on the findings from the strategic process initially
carried out. The choice to form long lasting and productive relationships with the most
reliable suppliers in the market would guarantee reduced costs for the purchasing
organization. In the strategic process the company that the organization buys in large
volumes would have to be analyzed. The market place for these products would then have
to be reviewed. In addition, the economics and usage of the organizations supplying these
products would be taken into consideration. A procurement strategy would then be
developed and finally an integrated working relationship with the supplier would be
established.Different suppliers have varying profit margins that they seek to obtain from
their sales. Also, products from different suppliers come in varying qualities. It is therefore
important to not only look at the cost of the product from the supplier but also its quality
and the costs associated with quality problems (Monczka et al, 2005). Following this
process comprehensively would give findings that would essentially lead to appropriate
decisions in the strategic sourcing.Choosing to purchase from the supplier supplying
products at the lowest price would lead to reduction in the cost incurred by the purchasing
company. However, the evaluation carried out in the strategic process would reveal the
suppliers who are supplying products at a lower price but whose products are of low
quality. Low quality products would be supplied at a lower cost but the costs incurred from
shipping back the products as well as the costs of repair or disposing them would translate
to losses rather than profits for the purchasing organization. Strategic sourcing decisions
therefore are based on reliable findings from the strategic process leading to appropriate
decisions that will reduce costs.Flexibility is impacted negatively when the purchasing
organization utilizes strategic sourcing. The need to conduct thorough evaluation of the
available suppliers as well as the product market puts a restriction to the impulse decisions
regarding which supplier to purchase products from. The decision regarding which supplier
to form a relationship with and at what price to purchase products has to wait for the
evaluation to be carried out and the trend to be observed for a short time. As a result of this
strict process, the purchasing organization is not flexible in its operations as it would have
been had there been no strategic process to determine major decisions.The time products
take to reach the market gets to be extended by the strategic sourcing decisions. In the
traditional sourcing, the process taken before the decision to transact with a particular
supplier was reached was not long. The supplier offering products at low price was
recommended since the costs of the purchasing organization would be reduced in this
instance. However, strategic sourcing requires a particular process to be followed before
any decision regarding suppliers is to be reached. As a result, the products take longer to
reach the market (Roth et al, 2008). However, in the long-term the lead-time becomes
shorter as the relationship created between the purchasing organization and the supplier
ensures information regarding demand of products is passed on in time hence products get

5. to be made available in time and reach the market much faster.Strategic sourcing decisions
affect the quality of performance in chain supply management in a positive sense. Strategic
sourcing requires the purchasing organization to evaluate the various suppliers and form a
mutually beneficial collaboration with one or a few of the top suppliers. This relationship
between the purchasing organization and the chosen supplier is supposed to be based on
trust and reliability. If there any supposed changes that are predicted to apply in the near
future, the supplier is expected to inform the purchasing organization. The purchasing
organization is required to inform the supplier of the products that they will order in the
future so that the supplier will ensure they are available at the time they are needed. This
will avoid the supply of low quality goods when products are demanded but they are not
immediately available. In addition, the close relationship between the two parties will lead
to satisfied customers and more customers will be retained. In the long run, the quality of
performance will be improved since all the parties have nothing to complain about and the
products supplied are of high quality (Monczka et al, 2005).Value is added when strategic
sourcing decisions are applied. As a result of the satisfactory relations between the
suppliers and the purchasing organization, shareholder confidence will be increased hence
the value of shareholder stock will increase. An increase in the value of shareholder stock
attracts investment from interested parties in the organization (Hadeler, 1994). High
quality products being produced due to the effective communication between the supplier
and the purchasing organization on manufacture and supply adds value to the performance
of the SCM.Features of Strategic Supplier relationshipAs the market place becomes
increasingly competitive, firms are seeking new and creative approaches that will enhance a
competitive advantage. A strategic function that is playing a key factor in competitive
positioning in present day is purchasing. Strategic sourcing in supply chain management
places a lot of value in the relationship between the purchasing company and the supplier.
Good relationships with both customers and suppliers would impact positively on the
purchasing organization with increased satisfaction being observed in the three parties. It is
with this logic in mind that strategic sourcing applies the enhancement of supplier
relationships.Majority of alliances do not last long especially if the selection process was not
done comprehensively enough (Wilson, 1995). Common features of supplier relation can be
summed up into two big elements namely; selection and maintenance of supplier
relationships. In the selection, a competent and high quality criterion should be used. The
success of the relationship is dependent on several factors such as mutual benefit,
management support from the senior leadership and trust and commitment to the
realization of long-term goals. The suppliers and buyers are required to demonstrate trust
and commitment toward the achievement of a long-term goal, objective of vision. With trust
and commitment in the relationship, common barriers to success get to be eliminated.
Another feature is mutual benefit whereby both the buyer and the seller get to benefit from
the relationship. If one party was to desire to benefit without taking into consideration what
the other party wants from the relationship, soon enough the relationship would have to
die.The strategic team in the firm needs to have support from the top management if the
supplier relationship is to get any success. Examples of companies whose top management
has offered support to supplier relationships hence leading to the success of the

6. relationships include Wal-Mart, Roadway Express, DuPont, and Corning. The CEOs of both
Wal-Mart and Corning have supported supplier relationships and as a result the
relationship of the two organizations is successful. Similarly, Roadway Express and DuPont
have established an Executive Board which coordinates the meetings of both organizations
therefore improving their relationship (USGAO, 1994).Compatibility of the organizational
culture is the other feature. The two firms planning to form a relationship should have
culture that is compatible. Sharing common values and common reward systems, for
instance, would make it possible for both firms to have a foundation of relating. Two
telecommunication firms can, for example, fail to realize a successful supplier relationship if
their work philosophies are different. With one firm having an intense work philosophy and
the other a laid back philosophy, it would not take more than six months before the
relationship fails (Fong, 2008).Information is also very important in supplier relationship as
well as the need to share it. Transaction oriented exchanges posses a lot of uncertainty.
Relationships set in to reduce this uncertainty. Bothe parties become more certain when
they share information and interact less needlessly. Bailey Controls is an example of control
systems manufacturer that shares idea with two of its main electronic distributors and as a
result its inventories and costs have been reduced (Magnet, 1994). Sometimes
misunderstandings occur between the two companies that have collaborated. However,
these misunderstandings can be reduced if the two organizations were to practice open and
strong communications. In addition, the quality of the relationships would be enhanced
once the open and strong communications are applied.The contract made between the two
firms needs to be simple and flexible in order to enhance the relationship since contracts
guide the two parties rather than specifying every contingency. Kodak’ s contract with IBM
when Kodak outsourced its computer support services to IBM ran eleven-pages compared
to the contract applied in typically small businesses which run an estimate of 30 pages. For
a supplier relationship to be well maintained the management of both firms needs to be
intensively involved. Cross functional teams from the two firms get to meet periodically
with the aim of enhancing their relationship. Ford can be used as an example whereby its
salespeople are used to provide consumer feedback to its suppliers (USGAO,
1994).Performance monitoring is very important for relationships. To be specific, formal
performance valuation appeal to suppliers even more. Motorola, for instance, conducts
evaluations and then a score card is generated for all of the company’ s suppliers (Magnet,
1994). These suppliers base their next order on the previous performance of the supplier.
This knowledge is appreciated and considered to make them compete better. Internal
controls are another feature in supplier relationships. Both companies have an obligation to
protect confidential information from being accessed and distributed through rigorous
internal controls. In every relationship, be it a doctor-patient relationship, parent-child
relationship, and even lovers relationships, conflicts arise at one time. In anticipation of
such scenarios, problem solving procedures should be established in order to reduce more
conflicts or prevent them (Sheth, Jagdish, and Sharma, 1997). One way this can be achieved
is through the application of frequent communication at the various levels of the customers
and Supplier Company.Strategic sourcing in difficult timesThe recent recession has affected
the whole world with each region experiencing varying effects. The Centre on Budget and

7. Policy Priorities reported that 44 of the 50 states experienced a negative growth for the
2012 Fiscal Year with the shortfall of some states being more than 20 percent of their 2011
General Funds expenditures. The current budgetary crisis was so severe because the
revenues were far less compared to previous recessions (Christian et al., 2009). This
applied despite the fact that many people were eligible for services funded by the
government as a result of job losses.The same problem is experienced in Canada where the
provinces have been put in a fiscal hole at a time when an aging population us projected to
increase budgetary demands. The budgetary predicament being experienced at the moment
is not a new one, but possibilities of it fading into the background any time soon are almost
impossible. The situation created by the recent recession requires immediate action to be
taken in fixing the budgetary challenges presently in play. Strategic sourcing would be a
recommendable approach in such a time of difficulty. Strategic sourcing would utilize the
private sector since it allows private organizations to be competitive in accordance with the
prevailing market conditions and be transparent at the same time (Christian et al., 2009).
Currently, though, not many states and provinces are applying strategic sourcing and those
that do, do not seem to take complete advantage of the opportunities it offers.Strategic
sourcing focusing on making purchases in a way that money is saved based on initial
gathering of detailed requirements, conduction of a market analysis in order to understand
the business needs better and the application of the strategic process on supplier
management. If these practices were to be aligned with current marketplace practices, the
government would be able to leverage its buying power considerably so that it can get
better prices as well as better services (Nishiguchi, 1994). The scope of strategic sourcing is
not limited to cost reduction alone, but also long-term initiatives such as organizational
restructuring and capability building. The practice of strategic sourcing rationalizing the
sourcing process from a holistic total cost perspective ensures that the need for low costs
does not blind the organizational in question from other costs that result from the
purchase.Similar to the desire of governments to embrace strategic sourcing in recession
and during economic recovery, purchasing organizations can also benefit from strategic
sourcing in hard times. Strategic sourcing starts with data collection on the available
suppliers and an analysis to develop a deeper understanding of where and how the
organization spends money on purchases (Nishiguchi, 1994). During the assessment the
suppliers are comprehensively evaluated as well as the product market. At the end of the
assessment, the findings presented provide a baseline for decisions to be made regarding
which supplier to form a long-lasting relationship with and which practices the organization
needs to improve on. Following the assessment, the trends found get to be monitored for
some time. Recession causes the prices of commodities to rise and introduces tension and
panic in the market place. As a result, the market trends cannot be understood well enough
without thorough and comprehensive analysis of the market place and the related players
in the market. Strategic sourcing ensures a detailed analysis is carried out and a short
period is allocated to monitoring of the market trend.Strategic sourcing is therefore the best
approach in a time like this as it works based on reliable statistics obtained from the
strategic process. The decisions made from the strategic process are appropriate leading to
reduced costs which are really needed in a marketplace that is characterized by high

8. product prices. Most organizations continue to experience losses despite choosing suppliers
offering products at lower costs (Christian, 2005). However, there are other causes that
result from a purchase which should be taken into consideration before a purchase such as
the costs of shipping back products which are of low quality and additional costs of
repairing them or disposing them. Strategic sourcing takes into account the total costs in its
evaluation therefore avoiding such inconveniences.During economic recovery,
organizations strive to get a hold on their position in the market as the conditions get to get
better. Strategic sourcing ensures improved quality, reduced costs and creation of mutually
beneficial relationships with one or a number the suppliers (Hadeler, 1994). The improved
quality attracts more customers, the customer satisfaction from the trust based supplier
relationship ensure customers are retained and the long-lasting relationship created with
the supplier breeds loyalty hence any hiccups in the market place or the economy would not
affect the purchasing organization since it is confident that the supplier is loyal to them at
all times.ConclusionStrategic sourcing has over time gained popularity regarding its
efficiency and reliability. A number of differences exist between strategic sourcing and
traditional sourcing including its focus, number of suppliers, and type of activities, risks, and
scope. Strategic sourcing decisions get to impact on the performance of supply chain
management in a number of ways. It leads to reduction in costs, improvement in quality,
reduced flexibility, longer lead-time, and added value. Several features are found in strategic
supplier relationship such as the need for trust and commitment to long-term visions,
mutual benefit, communications that are strong and open, support from top management,
information sharing, and application of problem solving procedures. Times of recession and
economic recovery are characterized by unpredictable market changes and high product
prices. Strategic sourcing is a recommendable approach in such times as it works under
reliable statistics and avoids impulse purchases ignited by false trends and baseless
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