Business efficiency has become uncompromisable in today’s markets, and optimum supply sourcing is one of the most vital aspects of ensuring it.
So, procurement departments increasingly play an essential role in giving organizations a competitive edge in the market.
They mainly obtain goods through two techniques: strategic and tactical sourcing. Though these terms are similar, they vary in their approach, execution, and goals. Read on to understand the dissimilarities between strategic and tactical sourcing.
Tactical and strategic sourcing vary in their time frames, goals, and scope. The contrast becomes apparent right from their definitions:
Tactical sourcing is mainly about arranging the required material at the right time at the lowest cost. In this approach, the purchasing decisions are based on a smaller set of criteria as compared to strategic sourcing.
It is a short-term transactional activity that aims for shorter lead times, high quality of goods or services required, and budget-friendly sourcing.
The tactical sourcing approach in procurement is used for fast requisitions, quotes, and order processes. As it focuses on immediacy, it is not as broad in scope as strategic sourcing.
Strategic sourcing is the approach of planning ahead to ascertain that an organization’s required goods and services are always obtained on time and on budget.
This is a long-term process that involves careful consideration of all related areas like vendor selection, payment terms, vetting, contract negotiation, and the purchase of goods and services.
Both these approaches to source materials have varying components as well.
Tactical sourcing is a straightforward, to-the-point reactive approach. It simply involves comparing prices and delivery times of vendors from a varied supply base to find the most competitive deals according to any arising need.
There is no extensive market research done in the process and no consolidated vendor list to choose from.
In contrast to tactical sourcing, strategic sourcing is a long-term plan. It involves three components:
Spend Analytics involves assessing the organization’s spending patterns and transactional activity to pinpoint any areas that allow for cost reduction and process improvement.
The market research in strategic sourcing goes beyond comparing product catalogs and accounts for everything from suppliers’ reputations to their financial health. It further involves analyzing and forecasting within markets that could disrupt the availability or costs of supplies.
Strategic sourcing aims to build long-term, value-driven relations with suppliers to streamline the procurement process and mitigate risks associated with dealing with new vendors repeatedly.
Tactical and strategic sourcing contrast greatly in the approach they take to selecting suppliers to build relations with them.
Tactical sourcing makes no investment in supplier relations. It deals with suppliers that offer the most cost-effective deals. In the process, it only negotiates to gain profit for the organization, pushing the maximum cost to the supplier.
Minimal market research is done prior to closing deals, and contracts made as a result can be inconvenient, pushing for one-sided benefits.
Suppliers are only contacted when problems or queries arise. So, vendor management systems and contribution to relationship building are minimal.
On the other hand, strategic sourcing takes proactive measures to manage a vendor base and invest in long-term, mutually beneficial relationships with suppliers.
Any vendors shortlisted for the company to deal with are assessed on numerous criteria that go beyond the quantitative cost-savings approach of tactical sourcing.
Risk factors and geopolitical concerns are taken into account as well. When drafting contracts, strategic sourcing focuses on robust negotiation that benefit both parties and recognize the value of prolonged relationship building.
There is a time and place for using both these approaches.
Tactical sourcing is the best bet when you just want a short lead time and aim to save on costs. This approach is particularly suitable for smaller businesses but can be used in multiple instances where swiftness and budget are the topmost priorities. It is versatile and helps seize short-term opportunities.
Strategic planning often needs entire dedicated procurement teams equipped with tech-enabled solutions to stay ahead of markets and risks.
So, this approach is particularly suitable for larger enterprises with complex supply chains and multiple products and services to source.
Both the processes come with their own sets of benefits and drawbacks. A hybrid approach to sourcing in procurement combines the power of both tactical and strategic sourcing to maximize both short-term and long-term gains rather than sacrifice one for the other.
For example, a tactical approach can be allowed to supersede the strategic approach at times when a product is needed on an urgent basis or when the budget becomes constraining.
Each business has its own specific needs, specialties, and pain points, so there is no one-size-fits-all approach to procurement.
Understanding both types of sourcing is necessary to be mindful of the workings of your organization. It can help identify the room for improvement and improvisation so that your business can maintain its position and flourish in the market.
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