When Supplier Sourcing Strategy Goes Beyond Cheaper Prices

By now it’s not news that procurement has gone through an evolution, one that is digital, automated and a potential area of strategy for the overall enterprise. But what may come as a surprise is that strategic sourcing has emerged as one of the most important parts of the procure-to-pay process, says Stan Garber, president of eSourcing company Scout RFP.

Scout RFP and Harvard Business Review have just published a new report on the role strategic sourcing plays in the procurement department, and in the broader enterprise. “High-Performance Sourcing and Procurement – Driving Value Through Collaboration” takes a look at the current state of strategic sourcing, and how technologies are helping companies understand why choosing the right vendors is so important.

But, according to the research, eProcurement doesn’t receive the attention it perhaps deserves. The report found that improving non-customer-facing operations, like procurement, ranks tenth among 13 of businesses’ top focus in their overall technological transformations.

Garber told PYMNTS that this isn’t so much a concern as it is an opportunity for technology to make a bigger mark in the area of procurement.

“There isn’t a lot of digital transformation happening in this space,” he said. “Some of the biggest reasons for that is the inability to experiment quickly, and legacy systems. A lot of firms today aren’t using what’s out there today — they think there’s no need for digital transformation.”

That’s a narrow view, however, he added.

After all, 15 years from now, email isn’t going to be the most common way companies collaborate with their vendors anymore. Technology is a critical component to the strategic sourcing process, and, Garber said, is today about much more than finding cheaper prices from vendors.

Companies need to establish their goals before they set out choosing their vendors. Whether that’s compliance, revenue growth or something else, strategic sourcing can help with that broader vision, the executive noted, and technology makes it possible to more quickly identify and assess potential vendors that should be brought on as partners to achieve corporate goals.

While, historically, procurement has been viewed as an important part of helping a company make progress, Garber argued that in only the last few years strategic sourcing has surfaced as a particular focus for some of the most progressive companies.

“Depending on your goals in the business, you can really start pinpointing how sourcing and procurement can drive value,” he stated. “A lot of it is more sourcing than procurement. There has been a revolution in the last decade, where procurement is viewed as more transactions — the purchase orders, the invoicing, the payments and approval — versus strategic sourcing, which is working with suppliers, identifying opportunities and being strategic about it.”

There’s a catch, though: research shows supplier risk is one of the largest threats to the enterprise. It can be difficult for a company to view a vendor as a strategic partner if there is also the risk of, say, non-delivery of goods, especially when firms are exploring working with new suppliers.

“It’s a trade-off,” Garber said, adding that this is true especially when firms begin working with smaller, newer companies.

“Small companies are coming into the mix aggressively,” he said. “Through sourcing, you’re mitigating that risk. Compliance, verification, data protection — all of these things can be easily identified; you can check these boxes.”

Again, he added, technology is critical to this component.

“Through technology, and through conversation, you can easily find what exposure to risks you have,” Garber stated. “Previously, it was very difficult to get third-party assessments; now everything is much easier, less expensive.”

Ultimately, strategic sourcing is about the bottom line. Working with younger, more innovative suppliers may also yield cheaper prices on goods and services. But Garber pointed to other ways companies can benefit from a robust supplier sourcing strategy. For instance, one supplier may offer more favorable payment terms than another, ultimately making for a better deal to the corporate buyer. Receiving discounts for early payments or faster ACH payments can also be achieved when working with the right vendors.

All of this adds up to dollars and cents added to the bottom line.

“The impact strategic sourcing can have in procurement is you can see 10x returns,” Garber said. “There are very few units within a company that cost so little that have such a large impact on the bottom line for the organization.”

Sure, technology may help to accelerate and automate strategic sourcing, but ultimately a company cannot realize these benefits without stepping up to ask.

“The biggest thing is having a conversation,” he said. “It’s asking; it’s not being afraid to ask the supplier. A great supplier will always think through that.

“The other side of it is innovation,” Garber continued. “What are the things suppliers can offer? What can they bring to the business? If you have a good relationship with those partners, they can add value to different departments and goals across the organization.”