April 2, 2018

Purchasing Vs Strategic Sourcing: Key Areas of Difference

Purchasing Vs Strategic Sourcing: Key Areas of Difference

Supply chains are everywhere. Even a corner store has one. And what differentiates a small corner store from a big enterprise is the nature of their purchasing. This traditional act has “evolved from purchasing to procurement to strategic sourcing and Supply Chain Management” said Ted Weyn. Change is the only Constant. Evolution is the law of nature and he who fails to evolve won’t survive the bloodbath of a financial predatory world.

In the past, strategic sourcing wasn’t considered to be a value generating act and all in all in a rudimentary way it is lot like traditional purchasing. However, the value it brings to the table can only be understood in respect to how it differs qualitatively from purchasing on areas like cost, value, relationships and quality versus quantity paradox and collaboration. Where traditional sourcing emphasis the need for finding the lowest cost suppliers, strategic sourcing qualitatively outweighs the gains through its aim of building longer term relationship with suppliers with a will to collaborate and having the maneuverability to meet market dynamics.

Key differences in a nutshell

Cost – This is a vital factor as often purchasing includes only at the price value (lowest possible cost per unit). However, strategic sourcing envisions the total cost of doing business with a supplier. Understanding the market dynamics strategic source managers look beyond price, to include delivery, purchasing administration and inventory.

Value – Companies use strategic sourcing to obtain additional value from suppliers.  Such suppliers that offer technologies or materials that enable them to improve their own products or develop new products are chosen which in hindsight adds value to the relationship and helps a company increase its competitive advantage.

Quality Quantity Paradox – Purchasing deals with generating high volumes for mass discounts however, by integrating their own quality standards with those of suppliers, strategic sourcing can reduce its own costs. Obtaining components and materials to an agreed quality standard means fewer inspections and less waste on the production line.

Relationship Building – In purchasing the headline price may be lower but one has to deal with multiple newer suppliers each procurement season. Strategic sourcing invests in selected suppliers with long term goals and this relationship with its simpler ordering and invoicing arrangements will reduce the cost in a longer run. On an additional note a healthy relationship with suppliers can be the deciding factor when your chips are down and you need someone to bank upon. Low priority price-oriented relationships won’t help you see the light of the day again.

Collaboration– In a traditional procurement environment, customers would have to cancel orders or find new suppliers with additional capacity to meet changes in market demand. Strategic sourcing helps to build collaborative relationships between suppliers and customers. As they provide suppliers with information on future production plans and supply requirements, which enables suppliers to plan and adjust their own levels of productivity. By sharing information, both parties can respond quickly to market dynamism.

So, still wondering how to choose the right procurement software for strategic sourcing?

Try Moglix!  We are Reimagining B2B commerce and supply chain technology.