Legacy sourcing methods work against you. From lost opportunities to higher costs, outdated sourcing methods and traditional sourcing strategies can impede your success and the growth of your business.
Think about it this way: Would you rather spend time focusing on the core aspects of your business or spend valuable time and money trying to manage multiple vendors via spreadsheets and legacy systems manually? With the new sourcing methods and strategies available in 2023, you can eliminate those hassles and focus on what matters most—growing your business.
If you’re still performing sourcing manually or are curious about how to streamline your sourcing methods, read on to learn about these five ways traditional sourcing methods hold you back, and why tech-enabled sourcing strategies in procurement are a far better choice.
Sourcing Strategies in Procurement: What Is Traditional Sourcing?
If you’ve worked in procurement for some time, you’re likely familiar with the “old” sourcing strategies in procurement. Simply put, traditional sourcing methods require more time and effort, slowing down the entire supply chain and procurement process. When discussing strategic sourcing versus traditional sourcing, the biggest differences are the length of time and amount of elbow grease put into securing the correct suppliers for your goods and services.
Traditional sourcing strategy examples can include getting a customer inquiry via phone, email, or in person, followed by buyer visits to factories or wholesale markets to ensure the trustworthiness of the supplier. After this initial inspection, there can be a seemingly endless slew of back-and-forth conversations, often performed in a disorganized fashion, such as phone calls (which have nothing concrete on paper), emails, and even faxes.
Using traditional sourcing strategies in procurement will certainly hold you back, as today’s business expectations include speed, transparency, and efficiency in procurement. Below are the five main pitfalls of traditional sourcing methods.
1. Bad Data or Lack of Data
One of the biggest problems facing organizations today is a lack of quality data. When you have limited or no insight into your current spend, it is hard to manage your costs and improve profitability. This is especially important in procurement, where decisions are made around historical spend data and the ability to leverage that knowledge to drive better purchasing decisions.
After all, if you don’t know what you’re spending, how will you know where you can save? For many companies, the data they do have is unreliable and inaccessible. Some data is backed up on legacy systems and is not available in real-time, while others may be scattered across various business functions, such as finance and HR. As a result, important insights may never be discovered, and opportunities for savings may be missed. To succeed, it’s important to have access to the right data at the right time.
2. Lowest Bid Strategy in Sourcing
Traditional sourcing processes usually employ the lowest bid strategy, which may seem like a great short-term solution for cost savings. Still, it can put you at a disadvantage in the long term. As companies grow and expand into new areas, their needs and priorities change. Always choosing the lowest bid can quickly backfire, leaving you with suboptimal materials or services that you pay more for in the long run. It may even lead to supplier relationship issues if cost is the only consideration.
A better way is to align with a strategic sourcing partner that can help you identify critical needs and the best solutions. By evaluating alternatives and identifying value, you have a better chance of identifying and selecting the best suppliers to deliver the greatest value for your company over the long term.
3. Using Volume as a Primary Price Lever
Traditionally, pricing has been driven by the volume and frequency of orders a company places with a supplier. A low order volume may result in a lower price for a product, but placing more orders over time can actually result in a higher price for the same product. This is because your volume is being used as a lever to negotiate a better price from a supplier, meaning you are not receiving the additional value that a true strategic sourcing partner can provide.
Rather than using volume as a primary price lever, it should be used to indicate when there may be an opportunity to negotiate a more advantageous price for a product or service. The best way to leverage volume as an asset is to work with an experienced strategic sourcing partner who can identify key drivers that indicate lower prices may be available from suppliers.
4. Favoring Incumbents
Using the incumbent isn’t always the best long-term solution. While they may have an established relationship with your company, they may no longer have the capabilities or experience necessary to meet your needs. They may also have increased prices due to increased demand, leaving you at a disadvantage compared to your competitors.
Traditional sourcing methods tend to favor incumbents because it’s simply easier to continue working with the same supplier than to seek out a new alternative, which involves searching, evaluating, and qualifying suppliers. Working with a strategic sourcing partner will help you tap into a larger pool of potential vendors from which you can choose, ensuring that you get the best possible service at the most competitive price.
5. Lack of Digital Know-How
Sourcing is often considered a “black box” process in many companies because it is difficult for procurement leaders to predict which approach will produce the best results. There is no substitute for real-time visibility into spend, supplier relationships, and other critical purchasing data that can be attained only through advanced cloud-based solutions.
Sourcing Strategies in Procurement: What Is Strategic (Smart) Sourcing?
Generally speaking, smart (or strategic) sourcing involves the use of IT, software, and technology to manage the entire supply chain digitally (which includes sourcing).
Strategic sourcing strategies in procurement involve procurement analytics, planning, and insight—all performed digitally using the software. A strategic sourcing strategy in procurement involves:
- Performing spend analytics
- Identifying requirements
- Market analysis
- Strategy development
- Negotiating with suppliers (digitally)
- Award and contract
While this may sound similar to traditional sourcing strategies, this is all performed by intuitive software. When you’re shopping software, some of the main benefits to be on the lookout for include:
- Flexible RFx functionality
- Discovery tools to collect requirements and identify problems
- Vendor collaboration tools and vendor support
- Automation in scoring and evaluation
While there are many other features you may require for your particular procurement process, just remember that transparency, automation, and ease of collaboration is key. Composable and customizable software is often a better choice for many companies.
Sourcing Strategies in Procurement: The Benefits of Investing in Closed-Loops Digital Procurement Platform
The benefits of using strategic sourcing strategies in procurement are many, the most obvious of which is the time-saving and effort-saving factors. By investing in the right technology, organizations can unlock the power of their data and improve operations across the entire procure-to-pay cycle.
With a modern sourcing and analytics platform, you will have the ability to run effective RFPs and track performance across all of your suppliers with unprecedented efficiency and ease. With an all-in-one cloud-based sourcing platform that brings together all the necessary functions into one easy-to-use interface, it’s easier to manage your day-to-day activities and ensure that your organization is getting the best value from your supply chain. Here are just a few of the benefits that you will experience:
- Reduced Waste
- Controlled Spending
- Improved Transparency
- Faster Business Cycles
- Increased Employee Engagement + Morale
- Better Planning + Forecasting
With the right software, you can turn prior manual processes into time-saving digital ones. Ensure you find software or a suite that matches your company’s needs and is simple for you, your company, and your suppliers to use.
To learn more about how Simfoni’s powerful and intuitive sourcing platforms can help you build and optimize supply chain resilience, schedule a demo today!