Strategic sourcing is a procurement process that connects data collection, spend analysis, market research, negotiation and contracting.

Some facts about Source2Contract:

Strategic sourcing differs greatly depending on the industry in which the purchasing company is active, how important purchasing is for the company and which products (which product group, e.g. category) are purchased.

Companies can purchase direct and indirect material, whereby direct purchasing refers to all those goods that are part of the BOM (bill of material) and are required directly in the production process. These can be raw materials but also various purchased parts, whereby we are mostly talking about plastic parts, metal parts or electronic components.

Indirect sourcing, in turn, is divided into all those goods and services that are indirectly required in production, such as machines (including MRO - maintenance, repair and operations) but also goods and services for other departments such as IT, marketing and sales, services and support. The categorization of the goods and services that are purchased takes place in the so-called "Category Management".

Since the purchase of production material is business-critical for most companies, as excessive costs or a failure in deliveries can jeopardize the company's existence, the purchase of indirect material is usually not so critical; for example, the delivery of office supplies or IT equipment can also be delayed by a few days.

This results in differently complex and critical strategic purchasing processes in various industries, which often also include sub-processes such as risk management, supplier management, supplier development, contract management or cost engineering or initiative management.

Components of a Source2Contract Suite

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Key targets in Source2Contract

Identify value: Analysis of historical purchasing data in combination with predictions and indexes to identify the right measures to reduce costs.

Define strategies: Creation of a category strategy that includes risk management and market trends as well as an action plan to reduce costs.

Manage and develop suppliers: Create a supplier strategy that is not only based on reducing material costs but also on improving supplier performance, taking CSR (Corporate Social Responsibility) requirements into account.

Analyze price structure: Create competition, obtain offers, identify price drivers and other factors as a basis for the negotiation strategy and carry out the negotiation with the best possible result.

Execute the negotiation result: Efficiently create standardized contracts based on text modules that reflect the result of the negotiation, automatically eliminate risks as far as possible and prepare the buyer as best as possible for the next contract extension.

Let's go through a few examples why S2C is different per industry:

In the automotive environment, it is almost always about relatively large quantities (over 10,000 units per year), which are called off over a period of usually 6 to 8 years. A supplier is usually awarded 2 to 4 years before the start of production, since the development also takes place together with the supplier. As a result, you have to define during the first tendering phase exactly under which circumstances the future price may change based on which factors. Details on this are explained in the eSourcing section.

In plant construction, the average batch size is 3, which requires completely different purchasing processes. In the case of small quantities, it is relatively easy to correct errors when purchasing, since these have no long-term effects (apart from the fact that individual procurement processes do not run optimally).

In a bank or insurance company there are no really critical purchasing processes in this sense and there is not a large number of products, which is why strategic purchasing is often not very important in this sector.

Let us summarize:

Companies in different industries buy different goods and services. Since the complexity and criticality is different for each industry, there are different characteristics of S2C processes. This also means that not all providers can offer all processes and there are therefore sectors for which some providers are better suited than others.

Why some regions have more difficult processes:

In general, one can say that in countries where there are more manufacturing companies, there is also a greater need for source2contract processes. The "gold standard" in S2C processes was created by the automotive industry, as this is where the greatest complexity is found. This is one of the reasons why there are so many eSourcing startups in the USA and Germany. In the last 20 years, many companies from other sectors have adopted the processes from the automotive industry in order to be able to benefit from the process maturity and the experience.