DEVELOPING AND IMPLEMENTING A
STRATEGIC SOURCING STRATEGY
INTRODUCTION x CIPS believes that strategic sourcing options should
be assessed in terms of the benefits which they
CIPS practice documents are not written to be an end actually deliver as opposed to those which they may
in themselves - they are a collection of views on good have been expected to deliver as set out in the
practice within a particular subject area, in this case original business case.
strategic sourcing. The reader is encouraged to extract
CIPS has formulated positions on strategic sourcing as
those parts of a CIPS practice document that they can
this is a key activity for purchasing and supply man-
use for their own particular purposes such as writing
agement professionals. Traditionally, sourcing was
P RA CTICE
policy statements, guidance or procedures.
considered to be the identification of new or potential
suppliers. This is of course still a fundamental aspect
This range of publications is intended to provide
of strategic sourcing but this practice document aims
direction on good practice along with some guidance
to illustrate how the function has developed and
for context and interest. Practice documents are writ-
expanded in recent years.
ten for use by anyone associated with, or interested in,
the purchasing and supply management profession.
This practice document describes best practice pur-
However, this particular set of CIPS beliefs on strate-
chasing and supply management; for many it will
gic sourcing is written specifically for the head of the
remain simply an aspiration; however CIPS encour-
purchasing and supply management function.
ages purchasing and supply management professionals
to endeavour to move purchasing and supply manage-
This document is one of a series summarising the
ment in their organisations towards strategic sourcing
CIPS view(s) on a wide range of purchasing and sup-
as described below. However, CIPS appreciates that
ply management subjects. The reader may wish to
some organisations are bound by legislative require-
refer to the accompanying document which supports
ments that demand a different, (or in some cases, a
this series entitled ‘Background on Purchasing and
complementary approach) to that proposed in this
Supply Management Practice Positions’.
practice document; the public sector for example must
comply with the EC Procurement Rules.
CIPS views are stated through-out this practice docu-
CIPS P OSITIONS
ment but the key statements are summarised below:
CATEGORIES OF SOURCING: REACTIVE, TACTICAL
x CIPS considers strategic sourcing to be a pivotal
activity for purchasing and supply management
professionals. REACTIVE SOURCING
x CIPS believes it is important to draw a distinction CIPS defines reactive sourcing as being the procure-
between strategic, tactical and reactive sourcing. ment approach where no proactive sourcing strategies
x CIPS considers that each organisation should as a have been put in place and so the purchasing and sup-
priority develop an overall sourcing strategy, of ply management function has an entirely reactive role
which strategic sourcing should be seen as a key e.g. responding to requisitions or other unexpected
element. requirements from the business. CIPS encourages pur-
x CIPS advocates the formation of a Sourcing chasing and supply management professionals to
Board or Panel for discussing strategies and move away, wherever possible, from this type of
assisting with decision-making.
sourcing. However, some organisations still operate
x CIPS considers an 'As Is' analysis to be a key stage
in the implementation of a strategic sourcing policy. entirely on the basis of unexpected demand respond-
x Once the relevant data has been gathered and ing to individual needs as and when they arise. This
consolidated, and appropriate options generated, response may be professional, but CIPS believes that
CIPS recommends that the outcomes be presented such buyer behaviour is transactional, low level and
to senior management for their consideration. will not necessarily enhance or promote the purchas-
x In developing, analysing and comparing a range of ing and supply management profession.
strategic sourcing options CIPS recommends the
use of weighted evaluation criteria rather than TACTICAL SOURCING
simply using cost/price as the sole basis for Tactical sourcing is to some extent reactive as it covers
arriving at a decision. those business requirements that cannot be planned in
x Once the preferred strategic sourcing option has
advance, but are provided within a framework of
been finalised, CIPS believes that the purchasing
and supply management function should have a strategic sourcing. It is however, proactively managed
key role to play in its implementation. and so resources and processes are set aside to manage
it within the purchasing and supply management strat-
egy. An example of tactical sourcing is working with
colleagues in Marketing and Sales, pro- In order to sustain the high level position, resources
viding a bid support activity within and influence, CIPS recommends that purchasing and
fast-moving technology areas. supply management professionals responsible for
strategic sourcing create a suitable governance struc-
Notwithstanding the above, CIPS sug- ture so as to:
gests that there should be no unplanned
or unexpected capital expenditure as all · illustrate where the purchasing and supply
organisations have capital investment plans which pur- management functions sits within the organisa-
chasing and supply management professionals should tion e.g. alongside Finance, Legal, Human
obtain and incorporate in the strategic sourcing strate- Resources
gy. If an unexpected requirement is ad hoc, low risk and · illustrate the role of the function itself and those
low value, purchasing and supply management profes- people that carry it out - the purchasing and
sionals should not be involved with obtaining the supply management function's terms of
requirement anyway. All low-value requirements should reference, scope of responsibility and objectives.
have been aggregated into call off contracts for use by
P RA CTICE
end users; those that are low value, yet high risk, are pre- CIPS also recommends that the purchasing and supply
cisely those that require strategic sourcing plans. management function creates a Sourcing Board
(sometimes referred to as a ‘Procurement
STRATEGIC SOURCING Board/Panel’) comprising, for instance, decision mak-
Strategic sourcing is a core activity in purchasing and ers, opinion leaders and influencers. The Sourcing
supply management. It is a complex commercial Board should be used to discuss strategies, policies,
process requiring extensive knowledge and compe- approaches, assist with decision making and to help
tence. It can be defined as ‘ satisfying business needs influence others in the organisation on behalf of the
from markets via the proactive and planned analysis of purchasing and supply management professionals.
supply markets and the selection of suppliers with the
objective of delivering solutions to meet pre-deter- b) ‘As is’ Analysis
mined and agreed business needs’.
The second, and very resource-consuming stage in
Developing the strategic sourcing strategy is a funda- strategic sourcing involves the ‘As is’ analysis stage
mental part of the purchasing and supply management which includes:
process. Strategic sourcing is a logical process involving
the application of tools by skilled, competent and Customer and business requirements
knowledgeable people; however - developing and x what do our customers need and what does the
implementing strategic sourcing is a functional process. business need?
CIPS P OSITIONS
Since it is such a broad area, it is advisable to sub-divide Spend analysis
x historical usage analysis of goods or services
the subject into a number of sections as follows.
x supplier positioning
x supplier historical analysis
a) Positioning Purchasing and Supply Management x transaction cost analysis
for Strategic Sourcing x critical nature of products.
CIPS strongly recommends that every purchasing and Future spend analysis
supply management function develops a written, and x forward/expected usage of goods and services
regularly updated, overall strategy which states their x trends in the market.
objectives and activities over a given timeframe. The
strategic sourcing activity should form one part of the
x assessment of the market capability
overall purchasing and supply management strategy. x analysis of power dependency in supply chains
The first stage in implementing strategic sourcing is x analysis of individual marketplaces
the positioning of the purchasing and supply manage- x supplier preferencing
ment function within the organisation. In order to x relative positioning of your organisation
undertake strategic sourcing, purchasing and supply x supply chain cost analysis
management must be positioned at the appropriate x the nature of the market - appropriate type of
level (senior) within an organisation and should report sourcing strategy - global, regional or local
to the Board (or via an appropriate Board representa- x potential size (and actual size) of the supply base.
tive) and it must possess suitable human resources. Several analytical tools are appropriate for this stage
Strategic sourcing requires the application and inter- including Porter's Five Forces, PEST (Political,
pretation of sophisticated strategic sourcing tools and Economic, Social, Technological) and SWOT
techniques such as relationship management, by suit- (Strengths, Weaknesses, Opportunities and Threats).
ably authorised and competent professionals. Further information on such tools is available from
c) Mapping Supply Chains all stages in strategic sourcing but where this is not
possible, it is better to attempt some aspects of it than
The process of mapping supply chains not undertake it at all.
can be complex and the extent to which
it is undertaken is dependent on the Options should be perceived as ‘baskets of opportuni-
value and risk of the procurement in ties’. In summary, this stage involves brainstorming
question and limited by the resources options to fulfil the requirements, such as identifying the
allocated to strategic sourcing by the organisation. The offering of suppliers and identifying whether there are
‘As-is’ analysis and ‘Mapping’ stages can take typically other ways to fulfil the requirement e.g. instead of pur-
between three and six months. CIPS recognises this chasing PCs i.e. goods, rather purchase a desktop service
timeframe is too long for some organisations and more- i.e. outsource the PC desktop provision. Another exam-
over impracticable for some procurement situations. ple would be instead of buying meters, buy a billing ser-
However, the longer term benefits of such proactive vice including meter reading and customer billing. A
strategic sourcing are invaluable. public sector example would be the PPP/PFI which is a
sourcing option that can offer value for money in appro-
P RA CTICE
CIPS considers that best practice supply chain map- priate circumstances. The process of generating options
ping includes: is an iterative process in that colleagues examine, discuss
x identifying profit and gross margins in supply and criticise options and their feedback stimulates the
chains production of further options.
x understanding interdependencies in supply chains
e.g. power dependency Having brainstormed a list of potential options the
x mapping the required products and services onto
strategic sourcing team should subject each to a
these supply chains
x analysing spend by each supplier in respect of SWOT analysis and where appropriate, a detailed risk
category and business unit analysis. The options which seem to be the most
x buying patterns by product, service, supplier, and favourable are then prioritised on the basis of the ben-
business unit efits and savings that they can deliver. Clearly, any pro-
x sourcing patterns posed strategic sourcing plan must fully support the
x pricing patterns - both past and forecasted, and organisation's objectives. Examples of options include
also purchase price analysis make/buy options; dual/single source decisions; feasi-
historical performance of suppliers
x bility of starting up partnerships with suppliers; bene-
x historical market trends and associated cost fit sharing etc.
drivers (there are specialists in various fields)
x value chain analysis
SELECTION OF OPTIONS
x identifying and addressing dominant players in
the supply chain
CIPS P OSITIONS
x critical asset analysis (i.e. identify your critical CIPS suggests that once a range of suitable strategic
assets which should be borne in mind when out sourcing options has been identified, these should be pre-
sourcing) sented by senior purchasing and supply management
x technical analysis - alternative solutions to specifi- professional(s) to the organisation's directors or Sourcing
cation of requirement Board to be considered in the light of where the business
x risk assessment currently stands and what the customers require.
x cost modelling Occasionally, the strategic sourcing teams will be
x portfolio analysis required to investigate further, or support their sug-
x PEST analysis gestions with business cases, ROI (return on invest-
x complexity reduction i.e. standardisation ment models) and so on. Equally, the organisation may
x ascertaining the demand e.g. formulating the
require further options, or clarification or changes to
x demand challenge - does the organisation need those options preferred.
the ‘requirement’ (Defer, Diminish, Delete)
x market potential/market modelling If a purchasing and supply management function is
x determining the policy areas which need to be insufficiently resourced, the presentation of such strate-
accounted for in sourcing - environmental and gic sourcing options can be a means of securing more
ethical policies for example appropriate levels of resource from senior directors.
x determining funding e.g. PPP/PFI. Equally, where the purchasing and supply manage-
ment professional's impact on spend is limited, or
where bought out expenditure is only 20% of
CONSOLIDATE DATA AND GENERATE OPTIONS turnover, the presentation of strategic sourcing
options to senior directors, may be seen as a method of:
Once the analysis has been undertaken and supply · increasing the strategic sourcing remit
chains have been mapped, the next stage is to consol- · increasing other value-add of the purchasing and
idate the data and to generate options. Although not supply management function i.e. not simply price
ideal, where resources are tight, in terms of time and reduction
skills availability for instance, it is possible to omit · penetrating aspects of the business which can be
some of the analysis stages and go direct to the brain- transformed into bought out expenditure, via out
storming of options. It is good practice to undertake sourcing for instance.
SOURCING PLANS MEASUREMENT
Once the preferred strategic sourcing CIPS believes that all strategic procurement, including
options are agreed, these are developed the design and implementation of sourcing plans,
into ‘sourcing plans’ which should be should be measured in terms of the benefits that they
innovative and creative solutions to the are delivered compared with what they were expected
organisation's requirements in support to deliver as set out in the original business case. This
of the organisation's mission and objectives. Strategic might take the form of a post-contract audit perhaps
sourcing plans should generate work-streams i.e. clear one year after the contract had been let. The findings
milestones to be achieved with resources e.g. project should be reported to and discussed by the purchasing
teams allocated appropriately. This is where the and supply management professional(s) and their
process of acquisition begins involving design teams, Sourcing Board in order to learn from experiences and
outcome-based specifications, market development, build on current commercial arrangements.
advertisements, policy compliance for instance.
P RA CTICE
Strategic sourcing plans include determining processes
for tenderer and supplier selection and performance CIPS holds that sound and effective sourcing expertise is
criteria ensuring the supplier continues to meet cus- a key element in the purchasing and supply management
tomers' expectations. CIPS advocates the use of professional's tool kit. Increasingly, the term ‘Sourcing’ is
weighted evaluation criteria when determining the pre- incorrectly replacing the terms ‘Procurement’ or
ferred options as this is one method of persuading ‘Purchasing’ or ‘Supply Chain Management’. Strategic
internal colleagues that purchasing and supply man- sourcing encompasses aspects of all of those activities
agement is not focused on price and cost alone but and is not a replacement activity.
considers issues such as speed to market and other
appropriate and relevant criteria. Therefore strategic CIPS believes that strategic sourcing is a skill set which
sourcing plans include producing and managing the must be learned, developed and refreshed. Strategic
ITT process, conducting negotiations and everything sourcing, as described in this policy, is a relatively new
up to the recommendation of contract award. skill set for purchasing and supply management pro-
fessionals. It requires great resource and excellent
IDENTIFYING NEW SUPPLIERS management information and so only some organisa-
tions are currently in a position to implement it.
Traditionally, sourcing has been perceived as the iden- Further, strategic sourcing should only be Carried out
tification of new or alternative suppliers e.g. sources of by competent and knowledgeable professionals.
supply. Methods of identifying suppliers have included:
CIPS P OSITIONS
· Internet e.g. suppliers' own pages and B2B trade bul- This practice document makes a clear distinction
letin boards between reactive, tactical and strategic sourcing and
· trade associations and trade directories encourages purchasing and supply management pro-
· business directories like Kelly's, Sell's etc. fessionals to move away from the former and to take a
· supplier exhibitions more proactive and strategic approach.
· networking with other buyers
· talking to specialist end users. CIPS believes that strategic sourcing, and as appropri-
ate tactical sourcing, have a vital role to play in the
This process is now part of the strategic sourcing overall corporate plan with the potential to make a sig-
work streams i.e. only part of the sourcing process. nificant and positive contribution to the bottom line.
Inevitably this begs the question as to how to measure
Following the development of strategic sourcing plans the effectiveness of any strategic sourcing policy. This
and the identification of work streams, the purchasing is an area which is briefly touched on in this practice
and supply management function should facilitate the document; a more comprehensive analysis of the the-
implementation of the strategic sourcing strategy. This ory and practice of purchasing performance measure-
may involve helping with, or leading, the contracting ment as a whole may be found in the various publica-
process, educating the internal customer or order plac- tions available from CIPS Bookshop.
er; enabling the supplier e.g. getting the supplier ready
to deliver by developing and managing them etc.
In many larger organisations, the strategic sourcing
part of purchasing and supply management is what
purchasing and supply management professionals are
primarily involved with. They are rapidly becoming
less involved with the other aspects of contracting; i.e.
purchasing and supply management professionals
have trained colleagues to manage the less strategic
and more straight-forward aspects of purchasing and