In this age of supply chain disruptions that hold the power to upend entire industries, strength and resilience across the entire value chain is no longer a nice-to-have—it’s a survival tactic. For sourcing teams, that means pivoting their mindset around selecting suppliers from a tactical, lowest-cost-above-all approach to a strategic one.
Where tactical sourcing is a short-term strategy, strategic sourcing is for long-term business goals. Sourcing and procurement professionals operating with a strategic sourcing mindset assess a supplier’s quality, reputation and service. They also factor in how a strong partnership could reduce supply chain risk and advance sustainability. Such analysis and decision-making are often optimized with the help of various technologies, including artificial intelligence tools and data analytics platforms. The benefits of strategic sourcing are vast, ranging from overall supply chain process optimization to more cost-effective, long-term relationships with partners.
The following are examples of strategic sourcing use cases:
Transparency and traceability
From fast fashion to fluorite, consumers and stakeholders are keyed into product provenance—expecting brands to uphold ethical, responsible sourcing practices. In fact, in a 2022 survey, 73% of consumers said that traceability is important to them. And from that group, 71% would pay a premium for it. Outside consumer demand for traceability, new regulations may make it imperative for some businesses: the FDA’s Food Safety Modernization Act (FSMA) Rule 204 requires food companies that manufacture, process, pack or hold foods on the Food Traceability List (FTL) to use traceability systems and follow new record keeping requirements.
Meeting responsible sourcing demands will require strategic sourcing tactics and technology that enable transparency and traceability. Blockchain-based solutions can be leveraged to build a trusted ecosystem of suppliers and partners. How? The immutable ledger of blockchain authenticates a product’s origin and journey through the value chain.
For example, Antonello Produce wanted to provide food that its customers could trust. The company paired produce grown by its farming partners with blockchain-based traceability records using the IBM Food Trust® solution. Now, the full product history is available through just a batch or invoice number. Looking ahead, the Italian company is discussing the potential of in-store kiosks where consumers can scan QR codes on packaging to see the entire journey of their food.
In addition to ethical and responsible sourcing assurances, blockchain-based sourcing capabilities can also help guarantee high-quality products. See how Pietro Coricelli used IBM FoodTrust to guarantee the quality of its “Made in Italy” olive oil.
Together with traceability and transparency comes sustainability—and 60% of CEOs say they’re already feeling pressure to be more transparent about their organization’s sustainability performance.¹ With supply chains often accounting for more than 90% of the greenhouse gas (GHG) emissions associated with providing an enterprise’s products and services, strategic sourcing through the lens of sustainability is another way to reduce overall emissions and advance environmental, social and governance (ESG) goals.2
For instance, through sustainable strategic sourcing, companies consider questions like: Do manufacturing plants minimize waste and effectively use resources? One method to ensure this is by sourcing primarily recycled materials, like Patagonia does in the production of its outdoor recreation clothing. Using recycled polyester reduces the brand’s reliance on petroleum, better utilizes waste and reduces GHG emissions. Other companies may choose to leverage a type of sourcing called near-sourcing. This involves moving sourcing activities closer to where goods or services are sold, cutting the emissions costs that come with transporting products to their final destination.
Organizations may also choose to vet each supplier to ensure their own sustainability practices align—from the suppliers of raw materials for production to those who provide shipping boxes. For example, Patagonia asks its supplier base to be certified in third-party standards, including the Recycled Claim Standard (RCS) and Global Recycled Standard (GRS) certifications.3
Building a viable and sustainable ecosystem of partners is complex. The IBM Supply Chain Intelligence Suite, powered by artificial intelligence (AI) and blockchain, helps compile supplier data to drive Scope 3 accuracy, improve circularity by reducing waste and inform end consumers of carbon and other ESG impacts.
Selecting suitable suppliers to meet long-term business needs often results in contracts with more advantageous pricing and payment terms (like bulk pricing and reduced fees). While this is a cost reduction tactic for the business, a lower product or service price can translate to better prices for customers, yielding a competitive advantage.
Specific types of sourcing minimize costs in different ways. For example, insourcing, which is the opposite of outsourcing and leverages internal resources that may prove less expensive than external ones. Near-sourcing, in addition to lowering emissions, also cuts transportation costs and delivery times. And global sourcing provides businesses with access to less expensive resources in low-cost regions.
Another way to use strategic sourcing methods to reduce costs is through digital transformation, such as automating manual processes. The cost of human error associated with manual processes can be steep, not to mention the toll it can take on trust within customer and vendor relationships. Technology that streamlines and automates transactions and contract management can significantly reduce these errors and expedite sourcing processes.
Sourcing and procurement teams may also strategically leverage data and intelligence to determine which supplier will provide the most value and minimize the total cost-to-serve. Solutions like the IBM Sterling Fulfillment Optimizer help teams execute new sourcing decisions in real time to meet fluctuating customer demand. It also can help optimize transportation costs and service-level agreements as well as improve inventory management and visibility.
Supply chains are under tremendous stress, facing challenges from supply, demand, logistics and shifting industry landscapes. Strategic sourcing can help mitigate some of that stress by reducing potential risks associated with supplier relationships.
To start, strategically creating a broad ecosystem of quality suppliers limits the potential risks that come from dependence on one source. A diversified supplier portfolio helps organizations avoid delays, cancellations and price fluctuations from disruption.
Leveraging supply chain risk management (SCRM) software can empower organizations to build a trusted network of suppliers with optimized information and complete transparency. This technology can also help reduce the risk of regulatory non-compliance. IBM® Trust Your Supplier, for example, uses AI to continuously monitor suppliers’ regulatory compliance.
Broader technologies like supply chain control towers may also help reduce supplier risk by providing visibility across the entire end-to-end network. They use AI and real-time data to identify the impact of external events, forecast potential disruptions and recommend actions to mitigate the effects.
For some organizations, reducing risk with strategic sourcing means moving towards deglobalization by using sourcing strategies like near-sourcing and vertical integration. Apple, Nike and Tesla, for instance, have deglobalized their supply chains to reduce their dependence on foreign suppliers and gain more control. While this can limit the risk of disruption from geopolitical instability and natural disasters to a degree, reducing risk likely requires striking a balance between local and global suppliers.
Strategic sourcing: Getting started
Strategic sourcing processes vary by business, industry, geography and more. Here are some common steps to building your own process:
- Goal setting: Identify specific goals and metrics like cutting costs, improving quality control or better managing supplier risk.
- Analyzing current sourcing activities: Examine historic sourcing and business process data to find areas to improve or cut inefficient spend.
- Assessing the market: Look at market research and competitor data before making strategic sourcing decisions to benchmark your place in the market.
- Vetting and supplier selection: Establish a process for evaluating and selecting potential suppliers using a combination of supplier interviews, request for proposals (RFPs), request for quotations (RFQs) and scorecards to help.
- Ongoing supplier performance evaluation: Perform regular audits, KPI monitoring, supplier relationship management and supplier feedback collection.
To learn more about using the power of AI and automation to advance your supply chain management ambitions, explore the capabilities of the IBM Sterling Supply Chain Intelligence Suite and IBM Sterling Order Management.
1 Sustainability as a transformation catalyst, IBM Institute for Business Value, 10 January 2022.
2 Supply Chain Guidance (Link resides outside ibm.com), EPA United States Environmental Protection Agency, 17 January 2023.
3 Recycled Polyester, (Link resides outside ibm.com), Patagonia
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