Strategic sourcing refers to the process of finding the best suppliers of input materials that an organization needs to produce its goods or services. The goal is to save money and add value in the procurement process and requires collaboration with stakeholders and suppliers, analysis of the overall costs of purchase and managing supplier risk management.

The advantage of strategic sourcing is that it increases profit since every dollar saved during procurement directly impacts the bottom line. It is a process in which an organization systematically looks for ways to save costs through the entire supply chain in order to gain a competitive advantage.

Another advantage of this approach is that it simplifies managing supply risks because suppliers are constantly evaluated on their risk profile that includes quality risks, financial risks and their level of cooperation. Once risks or other issues have been identified, an organization can develop a plan to mitigate them or avoid them altogether by finding new suppliers when necessary.

Strategic sourcing is an ongoing process of managing and evaluating sourcing activities. This makes it easier to maintain procurement processes at peak level. Using this approach, every category of procurement has a dedicated manager that analyzes sourcing to find ways to add more value with each sourcing cycle.

Procurement managers must consistently find the best quality materials at the lowest cost from reliable suppliers with the least risk. This can include managing logistical problems that may come up at certain times of the year (because of weather, for example) or that may be affected by other external factors. Another consideration might be using a supplier that has a positive brand image with consumers (such as materials sourced through a fair trade program, for example) which allows an organization to differentiate itself from the competition.

Once the best suppliers have been identified, the next aspect of strategic sourcing is cultivating a collaborative and long-term relationship with them. Through a positive relationship with suppliers and by working collaboratively, procurement managers can negotiate lower prices, faster delivery and better overall quality while working with suppliers to tailor and deliver source materials to the specific requirements of the organization. When this works effectively, the supplier is also rewarded with additional business and other benefits that they can negotiate with the organization.

For supply chain managers, strategic sourcing is key to maximizing value from supply chains to reduce costs and achieve competitive advantage.