Strategic sourcing is an institutional procurement process that continuously improves and re-evaluates the purchasing activities of a company. In a production environment, it is often considered one component of supply chain management. Strategic sourcing techniques are also applied to non traditional area such as services or capital.
The steps in a strategic sourcing process are:[1]
The term "Strategic sourcing" was popularized through work with a variety of Blue Chip companies by a number of consulting firms such as A.T. Kearney, Booz Allen Hamilton, KPMG, PricewaterhouseCoopers, and PRTM in the late 80s and early 90s. This methodology has become the norm for procurement departments in larger, sophisticated companies.
Outsourcing is a method that can be employed as part of the overall sourcing strategy for services. This involves the transfer of staff and assets to an external or third-party company which then provides them back as a service.
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Operations Research is the discipline of applying advanced techniques to help make better decisions. Optimization, in turn, utilizes mathematical algorithms to rapidly solve a business problem by evaluating all possible outcomes (or many outcomes) and selecting those ones that yield the best solution.
When applied to sourcing and supply chain operations, optimization helps the sourcing professional simultaneously evaluate thousands of different procurement inputs. This evaluation can take into consideration the global market, specific current supply chain conditions, and individual supplier conditions, and offers alternatives to address the buyer’s sourcing goals.
Cooperative Sourcing is a collaboration or negotiation of different companies, which have similar business processes. To save costs, the competitor with the best production function can insource the business process of the other competitors. This is especially common in IT-oriented industries due to low to no variable costs, e.g. banking. Since all of the negotiating parties can be outsourcer or insourcer the main challenge in this collaboration is to find a stable coalition and the company with the best production function. This is difficult since the real production costs are hard to estimate and negotiators might be tempted to portray their real cost much higher than they actually are. This way, they are able to demand higher fees for Insourcing. High switching costs, costs for searching potential cooperative sourcers and negotiating often result in inefficient solutions.