If I used the term "Strategic Sourcing", would you think I'm smart?

The advances in IT (information technology in Layman’s terms) and the internet have made methods in procurement a whole lot easier. By leveraging the procurement assets—personnel and existing infrastructure—and directing them in a systematic way, companies are in a better position to do more with less. That is one of Procurex’s “claims to fame”; we like the challenge of finding additional cost savings, using fewer resources, producing less headaches. IT technologies allow you to save time and effort on mundane tasks, while the Internet opens users to a nearly infinite supply of information. Thus, employees kill two birds with one stone: they become more efficient and have access to better information. These are the keys to successful purchasing. Procurex is in business largely because the internet today is so “scalable”.

Let's look at our friend above, and let's call him Chip. Boom, step 1. Chip's never heard of strategic sourcing before, like most other computer animated faces. Needless to say, he's a little spooked. But no need to cower in fear, Chip; it’s not that bad.

Strategic sourcing is basically the application of the principles of strategic planning, management, and cost reduction to purchased goods and services. We see these principles at work in many other functional areas of the company such as manufacturing and operations. The key is to look at the procurement function in strategic terms across the entire panoply (how about that for an intimidating term) of items purchased. Analyze what is being bought, from whom, and under what conditions (including price). Once this data is gathered, the company must categorize the total “spend” and decide which items are more significant in terms of amount purchased, cost reduction potential, supply market dynamics, and criticality to the company’s core value. This process is referred to as the Spend Analysis. It also includes a determination of the important parameters of each spend category such as price goal, quality standard, delivery conditions, etc.

The next step is to examine the methods involved in purchasing. The goal is to maximize value, not just price, and implement fair, effective, and objective means of purchasing the items to achieve the best value. In economic terms, this means approaching the conditions of a competitive market or perfect competition as nearly as possible. Under these conditions, the purchaser will realize the best price and delivery conditions. Therefore, objective means are those that tend to create conditions that approximate perfect competition. This includes disseminating as much information as possible for buyer and vendors to use; qualifying all potential vendors against clear and comprehensive standards, maximizing the number of qualified vendors offering each item, and limiting the points of negotiation or interaction between buyer and vendor to those pertinent to each item. These means should reduce or eliminate the influence of uneven personal interactions or the relative power of the negotiators that often are determining factors in the final purchasing agreement with more traditional methods.

Strategic sourcing usually includes the use of a Reverse Auction. A reverse auction is an auction where vendors bid to supply a product or service to a purchaser, pretty much the opposite of what you would envision a normal auction entailing. Most people are familiar with the sealed bid process used by many public entities to award contracts. Reverse auctions used in strategic sourcing work in essentially the same way. However, there are several important differences: reverse auctions are typically done electronically, over the Internet or a similar network. It’d be pretty tough to have 4 to 5 companies, who are bidding for your business, in person. It’d probably be a little bit crowded. Information on the individual bids is disseminated to the entire bidding group on a regular basis, in many cases in real time; vendors are typically qualified prior to the auction, rather than through their responses to the bid documents and subsequent to the award; auctions are dynamic events, allowing the participants to update their bid information in response to other bids. Reverse auctions resemble the auctions held on eBay that have become a mainstay of the popular culture and experience. In fact, the eBay system was originally developed with very similar goals to improve the trading of securities. In addition, these auctions require little infrastructure or management relative to other methods, because they are run electronically.

There's your general overview of strategic sourcing. Hopefully I've enlightened you a little bit, and hopefully Chip can sleep a little better at night now.