Sourcing Optimization: What, Why and How

The fourth industrial revolution has compelled organizations to reexamine their traditional business processes, business models and operational strategies. Organizations that aim to be agile and cost-efficient must embrace connected technologies such as the Internet of Things (IoT), artificial intelligence (AI), data analytics, and the cloud. 

The rise of new technologies and their impact on enterprises make their adoption an inevitability for many business processes, including sourcing. 

The next generation of sourcing optimization software is enabling enterprises to address longstanding challenges in traditional sourcing while yielding significant advantages.

What is Sourcing?

Sourcing is the process of finding, evaluating and engaging suppliers based on predefined criteria to obtain cost savings and the highest possible value for the desired goods or services. The goods and services must be sourced at a price and terms that provide the margins to positively impact the organization’s bottom line. The goal is to find suppliers that can best provide the organization with the goods and services needed to run the business, at the required cost-benefit and competitive advantage. The sourcing function involves the following stages:

• Market research
• Identification of quality sources of goods and services
• Contract negotiation
• Agreement on the terms for payment
• Definition of standards
• Quality testing
• Evaluation of outsourcing for goods

How Does Sourcing Optimization Work?

Sourcing optimization is the process used by sourcing professionals to evaluate and develop supplier allocation and selection strategies. The selection strategies for sourcing optimization are developed based on a set of complex factors and business rules.

Organizations use mathematical models or algorithms to arrive at the ‘optimal’ sourcing allocation in undertaking this analysis for sourcing optimization. The sourcing allocation must meet all the stated constraints and business rules for the given set of data. 

Strategic sourcing connects data collection, expenditure analysis, market research, negotiation and contracting. Sourcing optimization does not involve the actual purchase of and payment for the goods or services being procured. 

Sourcing optimization can be personalized to meet the specific requirements of a customer. However, its focus is on leveraging a single, unified system to achieve greater profitability. 

Sourcing optimization allows you to:

• Increase savings potential by eliminating waste through more efficient sourcing. 
• Improve collaboration and transparency
• Reduce cycle times
• Achieve greater strategic insight and control
• Increase adoption rates

The Challenges of Sourcing Optimization

Cumbersome process

Traditional sourcing analysis processes are manual and cumbersome. Analysis is carried out offline using spreadsheets and without sourcing optimization software.

Time-consuming analysis

Sourcing analysis is time-consuming. The analyses and reports for some complex sourcing processes can take several weeks to complete. The team’s time can be better spent on core activities that could deliver greater business value.

Incomplete or insufficient data

Sourcing analyses are often incomplete. Even with all the data, sourcing personnel may not be able to analyze that data using traditional means. Traditional analysis for the strategic souring process is done using spreadsheets; therefore, the available data is often disconnected and disjointed for sourcing analysis tools. Consequently, there is little opportunity for collaboration and knowledge retention. 

Benefits of Sourcing Optimization

Investment in sourcing optimization technology provides businesses with benefits that include:

Cost savings

Sourcing optimization enables the identification of new suppliers, and the competition between the identified suppliers allows a business to derive the best value for its money and save on costs.

Risk reduction

By enabling tracking and monitoring of deliveries as well as supplier evaluations, sourcing optimization helps prevent supply chain disruptions and budget overruns, thereby reducing risk. 

Improved supplier relationships

Sourcing optimization tools provide real-time visibility on invoices and timely payments, enabling suppliers to track, manage and message buyers for query resolution. Greater transparency and frictionless interactions help build robust and enduring supplier relations. 

Market research

Examining all available sources of goods and services to meet critical business needs ensures the selection of the source that adds the most value to the business. This enables increased productivity and long-term profitability. 

Key Ways To Improve Sourcing Effectiveness

The best businesses adopt some simple strategies to increase sourcing effectiveness. These include:

• Approaching sourcing as an ongoing process.
• Negotiating contracts that ensure mutual advantage.
• Accounting for all direct and indirect procurement costs and evaluating their impact on risk and price. 
• Minimizing transaction costs with aligned interests.
• Understanding the impact of all mutual dependencies between the organization and the sourcing agent. 
• Viewing contracts as a framework for a mutually beneficial relationship rather than as legal weapons.
• Building trust instead of strong-arming suppliers.
• Keeping the sourcing process simple. 

Sourcing Optimization Accelerates Processes and Improves Outcomes 

When sourcing is optimized using sourcing optimization software, the business can have faster processes, have a built-in feedback loop for ongoing optimization, and institute continuous evaluation of suppliers to ensure that it is getting the best sourcing agreements. 

Frequently Asked Questions