Often used interchangeably, these terms refer to the process of determining which components, if any, of a product or service should be produced in-house and which components should be outsourced to another company.
Strategic sourcing is normally a mutually beneficial arrangement for all parties. The model was started in the 1980s and today is a common business tool.
Common examples of outsourcing include contracting with a call center for customer support, arranging payroll services through an accounting firm, or procuring product components from a vendor which specializes in providing or manufacturing that particular component.
Strategic Sourcing involves a multi-step process whereby management
- identifies an opportunity to improve a service or component,
- conducts a full cost analysis,
- evaluates potential sources for the component,
- negotiates with those sources or suppliers, and
- regularly evaluates and manages the relationship to ensure competitive advantage.
Sometimes a proprietary agreement or non-compete contract is necessary to protect the business interests of all parties. In all cases, the process and evaluation should be overseen by all key departments, including finance, engineering, quality, purchasing, marketing, and manufacturing.
While saving money is usually the most common reason for strategic sourcing, there are other equally-important reasons. Just like diversifying your financial portfolio, it’s often wise to diversify suppliers in case of calamity — natural or manmade.
Offering friendly competition among your suppliers can improve not only the service they provide, but your bottom line as well. Also, suppliers are an excellent source of innovation and feedback.