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 organisations 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. Moreover, skilled sourcing professionals can contribute significantly to more effective contract negotiations.
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 a strategic approach that defines the products and services a company needs to procure to deliver its offerings effectively. It organizes purchases into distinct categories (areas), enabling a clear understanding of how, what, and where the organization spend its money. By effective Category Management, organizations can avoid sub-optimization, drive efficiencies and leverage purchasing power and volumes across the supply chain. This approach provides greater control and visibility over costs as well as understanding of the supplier base, instead of managing every purchase separately with limited oversight.
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 a company have partners that is capable of delivering required goods, at the right time and in the right quantities and price.
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 that support project deliverables.
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 normally work closely with other project stakeholders, including sourcing functions such as Category Managers.
To ensure that all these sourcing activities actually gets delivered a vital component in organizational design is Operational Sourcing, also known as Tactical Sourcing which focuses on managing daily procurement operations.
The Operational Sourcing plays a crucial role in enabling daily efficiently handling of call-off, contracts, order placement, goods receipt – and in collaboration with Finance Department ensure proper invoice payments (Account Payable) for goods and services as a part of the Source to Pay processes. 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, into procurement organizaonal 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, together with IT, is typically responsible for integrating sourcing operations—such as Source-to-Contract and Source-to-Pay (with Accounts Payable)—with other systems like Enterprise Resource Planning (ERP) and Material Planning Systems (MPS). This can be a challenge for organizations due to legacy systems. However, when successfully implemented, such integration enhances transparency, automation and overall contribute to operational cost effectiveness.
A final component in the design of sourcing organizations is the Supplier Relationships Management (SRM). This design element 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. However, not all suppliers are equal—some are strategic to operations and market success, while others are easier to replace. Supplier Relationship Teams must balance long-term partnerships with transactional relationships to unlock cost and quality improvements.
Key functions of a Supplier Relationships Unit include: (i) Securing procurement of 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, value engineering in order to enable customer deliveries.
Sourcing Execution
When designing a sourcing organization, it is essential to establish a governance structure with tools that support effective follow-up on executed sourcing strategies, along with mechanisms to address and correct underperformance. This governance framework should also encompass councils or boards within the organization to ensure clear reporting, informed decision-making, and to facilitate joint business planning with stakeholders, partners, and key suppliers.
In these forums, critical topics such as collaboration, strategic objectives, balanced scorecards, and KPI performance tracking are addressed to align procurement outcomes with business goals and drive continuous improvement. Equally important is the competence development and certification of personnel as well as recruitment of highly competent and experienced professionals that enabling the organization to sets high standards that enable the achievement of its strategic objectives.
A pratical 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
AI in procurement
Procurement digitalization has evolved significantly over the past two decades, streamlining processes such as Source-to-Contract, Source-to-Pay and Contract Management. These developments have enabled data-driven decision-making, as well enabled more transparency in the field of Supplier Risk Management. As a result, measuring procurement performance has taken a major step forward and contributed to strengthening corporate compliance as well as increased awareness and resilience in areas such as Health, Safety, Environment (HSE) and corporate policy-related requirements in areas like UN sustainability goals.
Procurement has with help from AI envoled from an administrative function (order, fulfillment, contract admin etc) into a Strategic Business Partner function, exerting direct influence on the Profit and Loss statement—particularly in organizations where sourcing costs account for a significant share of total turnover. However, single organizations differ in their requirements and ability to integrate and leverage AI in their operations, resulting in varying levels of maturity among different procurement functions.
Looking forward, AI will further enhance procurement excellence by automating insights and optimizing processes, yet the expertise, judgment, and strategic thinking of skilled procurement professionals will remain indispensable for designing organizations, managing and facilitating complex sourcing activities and strategies.