Getting sourcing right
It’s clear that optimizing sourcing can significantly impact an organization’s profit and loss, while also enabling the delivery of the right products and services to the market at the right time. This, in turn, brings both tangible and intangible value to the company’s overall business and strategy. Therefore, it’s increasingly important to carefully design the sourcing function, not only to foster innovation and technology development but also to support ongoing business operations.
Studies show that effective sourcing can reduce costs by 10-15%, while simultaneously simplifying processes, improving employee productivity, and enhancing visibility and control over spending. Ultimately, this creates greater clarity and transparency—qualities that attract top talent to the organization.
How to get it right
Modern sourcing organizations are typically designed around six key elements, although the specific industry, operational nature, and strategic objectives of the organization will naturally influence the design structure. Additionally, the size of the organization plays a role in shaping the sourcing setup, as it impacts purchasing power. That said, most of the essential elements will be present in some form, regardless of the organization’s size.
Category Management is the central design element, as it defines the types of products and services a company needs to procure in order to deliver its offerings effectively
Strategic Sourcing is another critical design element, especially for companies with a product-centric offering. The primary goal of the strategic sourcing function is to ensure that the right direct materials are supplied to the company’s production units, while also providing the necessary indirect materials to support other functions. Strategic sourcing often involves establishing framework agreements with qualified suppliers, ensuring the company has partners capable of delivering the required goods, at the right time, and in the right quantities.
Project Sourcing is a critical design element for companies that rely on large-scale investment projects to deliver their offerings. It is commonly used in complex production environments and infrastructure investments.
The Project Sourcing function evaluates both the strategic and operational requirements of a project, identifying suitable suppliers and structuring procurement contracts.
These activities are often carried out in collaboration with the engineering and R&D teams as well as Project Management Office (PMO). And, to ensure efficiency and alignment with broader business objectives, project sourcing teams must work closely with other project stakeholders, including sourcing units such as Category Managers.
To ensure that all these sourcing actually gets done a vital component in organizational design is Operational Sourcing, also known as Tactical Sourcing which focuses on managing call-offs and smaller sourcing initiatives, ensuring seamless procurement operations.
The Operational Sourcing plays a crucial role in enabling daily efficiently handling of order placement, goods receipt, and payments for goods and services—often in collaboration with finance departments. Additionally, these functions are responsible for contract renewals, working closely with other business units to maintain continuity and compliance.
In order to tight all these activities together and particular in organization when sourcing represents a significant cost, the sourcing function may incorporate a Process Unit, also known as an Operational Excellence Unit, into its design.
The Process Units focus on process optimization and digitalization, ensuring effective implementation and integration of sourcing systems. Additionally, they may play a critical role in financial monitoring and performance tracking, overseeing key activities such as purchase order management, invoice processing, cost savings, contract compliance and overall sourcing efficiency.
The Process Unit jointly with IT are normally responsible for integrating sourcing operations with other enterprise systems, including Accounts Payable, ERP (Enterprise Resource Planning), and MPS (Material Planning Systems). A seamless integration enables an efficient S2P (Source-to-Pay) solution that can be leveraged across the company, enhancing transparency, automation, and operational effectiveness.
A final component in the design of sourcing organizations is Supplier Relationships. This unit plays a crucial role in developing supplier capabilities to drive strategic procurement and long-term value creation. By fostering strong supplier relationships, organizations can enhance their sourcing strategies, improve supply chain resilience, and unlock new opportunities for growth and innovation.
Key functions of a Supplier Relationships unit include: (i) Procuring emerging technologies to maintain competitiveness and innovation, (ii) Ensuring year-over-year improvements in cost efficiency and quality, (iii) Facilitating collaboration in complex project deliveries or R&D initiatives, where an ecosystem approach is essential for product innovation and value engineering.
Sourcing Execution
When designing a sourcing organization, it is essential to establish a Governance Structure to implement necessary tools to execute sourcing strategies effectively. This also includes various councils or boards within the sourcing organization, for reporting and decision and for facilitating joint business planning with stakeholders, partners, and major suppliers.
In these forums, key topics such as collaboration, strategic objectives, balanced scorecards, and KPI performance tracking are discussed to align procurement performance with business goals and ensure continuous improvement. Additionally, organizations must focus on recruiting the right business talent and developing personnel competencies to set standards that drive the achievement of strategic objectives.
A toolbox
For executions of Sourcing Strategies related activities there are several ”tool boxes” that can be applied and combined for deploying sourcing plan for a specific project or category opportunity. A very comprehensive and useful tools to tackle various sourcing challenges are the Purchasing Chessboard from 2008.
The Purchasing Chessboard offers 64 different methods and some key levers to reduce cost and to increase value with suppliers. Furthermore, the model also offers a business alignment tool for discussing how sourcing and business operation jointly can develop high-level principles for executing sourcing strategies, in order to shape efficiency and so contribute to an organisations objectives and P/L.
The Purchasing Chessboard is built on insights and best practices from a wide range of industries, including public procurement of military equipment, automobile manufacturing, construction equipment, energy & utilities, pharmaceuticals, and the food industry.
This broad foundation ensures that buyers have access to a diverse set of tools that extend beyond traditional levers such as quality, volume, and pricing. By applying the appropriate strategies from the model, procurement professionals can unlock new opportunities for cost reduction, value creation, and supplier collaboration, tailored to their specific industry and sourcing challenges