Part 1 : Sourcing in Procurement & Supply Chain

1. Introduction to Sourcing

Sourcing in procurement is defined as the process of locating, evaluating, and engaging suppliers based on predetermined criteria in order to achieve cost savings and the best value for goods and services at a price point and terms that provide the required margin to positively affect the company's bottom line. Tendering is used in the sourcing process, which is used at tactical and strategic levels to generate distinctive value by selecting the most relevant suppliers at the lowest cost in order to obtain a competitive edge.

In most firms, the initial stage in the supply chain process is procuring items or services. Sourcing entails striking a balance between the quality of items and raw materials necessary, as well as their pricing. Most procurement teams want to spend less money and make more money. But how can you be certain that you have the necessary tactics and processes in place to make sourcing profitable?

2. What is Sourcing?

Typically, sourcing entails locating the best supplier to supply the highest quality goods or services at a pricing range that allows the business owner to maintain the necessary profit margins. Sourcing and procurement management work in tandem like a glove.

However, before you can purchase items, you must first identify prospective suppliers and undertake a rigorous verification procedure. This guarantees that no mistakes are made throughout the sourcing process, as backtracking may be costly. While most company executives are focused on the cost-cutting benefits of strategic sourcing, in today's competitive market, leading organizations are looking at generating value while not disregarding cost and waste reduction.

Three factors are central to the?sourcing?process, and these are

• Cost structure
• Profit margins
• Competitiveness

All three factors affect businesses of all sizes

The?sourcing?process involves:

Collecting data on good quality sources of goods and services

Negotiating contracts

Market research

Product testing for quality

Considering outsourcing for goods

Constituting standards that the company will use.

You must keep in mind that the end goal of?sourcing?is procurement.?Steps in the procurement process include:

• Logistics
• Communications
• Negotiations

3. Different types of Sourcing

To successfully execute sourcing, you must first have a clear grasp of your overall company strategy, including what resources are necessary to achieve that plan as well as the market dynamics and unique risks involved with implementing certain techniques.

Obtaining low-cost goods and services should not be the exclusive purpose of sourcing. Instead, procurement teams should focus their sourcing efforts on building mutually beneficial relationships. Depending on your sourcing requirements and the commodities you want to buy, you can engage directly with wholesalers, producers, or distributors.

That said, what types of sourcing should you consider?

3.1 Outsourcing

The most practical and straightforward example would be hiring a party outside a company to perform services or create goods that were traditionally performed in-house. This can also be done by migrating operations abroad or partnering with a domestic supplier. Both back and front office functions can be outsourced.

3.2 Insourcing

This type of sourcing involves you delegating a job to someone or a team within the company. Most company leaders prefer this option when available because it is an excellent cost-saving strategy that allows for on-the-ground monitoring of the quality of goods and services required.?

3.3 Near-sourcing

This involves placing some of your operations close to where your end-products are sold.

3.4 Low-cost Country Sourcing (LCCS)

LCCS involves sourcing materials from countries with lower labor and production costs. This type of sourcing focuses on cutting down the overall operating expenses of an organization. China has become the go-to country for this sourcing method for most global corporations.

3.5 Global Sourcing

The world is now one giant marketplace. Buying goods and services from international markets across geopolitical boundaries has become an easy process. This method has many benefits and exposes your organization to different markets; moreover, you gain insight into how business is conducted worldwide.

You also can access a new range of skills and resources that may not be readily available in your country.

3.6 Subcontracting Arrangements

This arrangement involves a contract between a contractor and a subcontractor to perform a portion of work that is part of a larger project. All contracts are dealt under offshore law because the agreement is between two offshore entities. Procurement teams can reduce the burden of dealing with import or export restrictions

3.7 Captive Service Operations

Some organizations go as far as establishing and operating some form of a partly/ wholly-owned entity overseas. This method makes room for greater control and allows you to control confidentiality and security issues. However, your economies of scale will be negatively affected.?

3.8 Professional Service

You can recruit the professional services of occupations in the service sector requiring special training.

3.9 Manufacturing

The creation of new products either from raw materials or components.

3.10 Vertical Integration

Involves the merging of companies at different production and/or distribution stages in the same industry. So, when a company acquires its input supplier, it is called backward integration; it is called forward integration when it acquires companies in its distribution chain.

3.11 Few or many Suppliers

A multi-supplier strategy is commonly used for commodity products, and purchasing is typically based on price. On the other hand, single-source purchasing refers to purchases from one selected supplier, even though other suppliers provide similar products. Sole-source procurement refers to purchases with only one supplier.

3.12 Joint Ventures

This is a business entity created by two or more parties. It is generally characterized by shared ownership, returns and risks, and governance.

3.13 Virtual Enterprise

This is when a network of independent companies (i.e., suppliers, customers, competitors) are linked by information technology to share skills, costs, and access to one another’s markets.

As you can see, there are many types of sourcing. The various options mean that the management of these relationships differs significantly.

4. Responsible Sourcing

In today's global supply chain industry, responsible sourcing has become a prominent subject. This sort of sourcing is a voluntary commitment by businesses to consider social and environmental factors while managing their supplier relationships. The ethical development and sustainability of a product are more important to modern consumers and investors. They are more inclined than ever to invest in socially sustainable goods and services. To remain competitive and defend their brand, sourcing teams and company executives must include social, environmental, and ethical policies into their business, taking responsibility for the complete life cycle of products and preserving workers' rights during the manufacturing process.

However, this is easier said than done. Because of the complexity of global supply chains, it can be difficult for businesses to be aware of or comprehend the possible risks affecting their organization and its suppliers. Fortunately, there is a remedy. Your organization must be able to trace a product or service through each stage of the supply chain and collaborate with their company and suppliers to guarantee fair working conditions and sustainable environmental practices.

5. What is Impact Sourcing?

Another current sourcing trend is impact sourcing. This sort of sourcing is a socially responsible branch of the Business Process Outsourcing (BPO) and Information Technology Outsourcing industries that strives to employ individuals who have few options for long-term work.

Workers from impoverished and vulnerable areas are used in the impact sourcing sector to do jobs with low to moderate skill requirements, such as scanning documents, data entry labor, data verification and cleaning, video tagging, and microwork.

6. Sourcing Models

A sourcing business model integrates a company's connection model while also defining how you will formally regulate your supply source and economic model. This, in turn, dictates how you will handle the relationship's economics.

The 7 Sourcing Business Models are:

6.1 Basic Provider Model:

Used when the primary purpose is to purchase goods and services at the lowest possible cost.?

6.2 Approved Provider Model:

Used when you want to take advantage of high-volume discounts with suppliers with a proven track record.

6.3 Preferred Provider Model:

Offers value-added capabilities or volume discounts with a set supplier, and this is usually due to a longer contract.

6.4 Performance-Based/ Managed Services Model:

This is dependent on the supplier who has to drive efficiency and deliver predefined service levels. This model allows for a longer contract as the supplier tends to benefit as long as they sustain the quality of their goods or services.

6.5 Vested Business Model:

Is a collaborative model that requires both sides to ensure that everyone is committed to the success of the other. These relationships tend to last well over 10 years and optimize innovation and risk management.

6.6 Shared Services Model:

Is an investment-based model that is developed by companies that are seeking to create their own internal supplier

6.7 Equity Partnerships:

Are legally binding through formal structures. In this model, the organization invests directly into another company to build capability.

7. Why is Sourcing Important?

The first step in optimizing the supply chain is to find the correct products and services. There is also a need to strike a balance between the quality of the goods and the raw materials required. Furthermore, the cost of the items is an important factor to consider when sourcing, since it has a direct influence on the bottom line. A well-executed sourcing strategy enables your organization to develop reliable and predictable supply chains, resulting in well-stocked stores and pleased consumers. When sourcing is done correctly, it may improve your business's image and assist establish brand loyalty.

Strategic sourcing also aids in cost control by benefiting both buyers and suppliers. Lowering unit price for large-volume purchases lowers the cost of items. It enables the company to maintain competitive pricing. Suppliers, on the other hand, profit from having a continuous outlet for their goods, making planning and cash flow more reliable.