SOURCING
Sourcing in procurement is defined as a process to find, evaluate, and engage suppliers based on set criteria to achieve cost savings and best value for goods and services at a price point & terms that give the required margin to positively affect the company’s bottom line. The sourcing process is carried out using a tendering process and is applied at tactical and strategic levels with the intent to create distinctive value by finding the most appropriate suppliers at the lowest cost to gain a competitive advantage.
In most organizations, the process of sourcing products or services is the first step in the supply chain process. Sourcing involves finding a balance between the quality of products and raw materials required and affordability. The goal for most procurement teams is to spend less and increase the bottom line.
But how can you ensure that you have the right strategies and techniques to make sourcing a profitable process?
In this sourcing 101 guide, we break down everything involved with sourcing, from finding products to finding the most suitable suppliers to buy those products from, right through to the delivery types involved from sourced supplier to customer. So, let’s dive in.
What is Sourcing?
We’ll start the guide with a comprehensive definition of what sourcing is.
Typically, sourcing is finding the most suitable supplier that provides the quality of goods or services at a price point that gives the business owner the profit margins they need. Sourcing and procurement management fit together like hand and glove. But before you can procure goods, it is essential to:
This ensures that no mistakes are made during the sourcing process because it can be costly to backtrack. While most business leaders focus primarily on the cost reduction benefits of strategic sourcing, in today’s competitive market, leading companies have begun to look at creating value while not ignoring cost and waste reduction.
Three factors are central to the sourcing process, and these are:
All three factors affect businesses of all sizes.
The sourcing process involves:
You must keep in mind that the end goal of sourcing is procurement. Steps in the procurement process include:
Different types of Sourcing
To implement successful sourcing, you must have a thorough understanding of your entire business strategy, i.e., you need to know what resources are required to deliver that strategy and the market forces and specific risks associated with implementing particular approaches.
Acquiring cheap goods and services should not be the only goal of sourcing. Instead, procurement teams should center sourcing activities around developing mutually beneficial relationships. Depending on your sourcing needs and the goods you are trying to acquire, you can choose to work directly with wholesalers, manufacturers, or sources from distributors.
That said, what types of sourcing should you consider?
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.
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. Near-sourcing
This involves placing some of your operations close to where your end-products are sold.
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.
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.
6. Prime/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
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. ?
8. Professional Service
You can recruit the professional services of occupations in the service sector requiring special training.
9. Manufacturing
The creation of new products either from raw materials or components.
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.
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.
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.
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.
Responsible Sourcing
Responsible sourcing has become a hot topic in today’s global supply chain market. This type of sourcing is a voluntary commitment by companies to consider social and environmental considerations when managing their relationships with suppliers.
The modern consumer and investors are increasingly mindful of the ethical creation and sustainability of a product. They are more likely to invest in more socially sustainable goods and services than ever. Sourcing teams and company leaders who want to remain competitive and protect their brand have to incorporate social, environmental, and ethical practices in their business, taking responsibility for the entire life cycle of products and protecting workers’ rights during the production process.
But this is easier said than done. The complexity of global supply chains can make it difficult for companies to be aware of or understand the potential risks affecting their business and their suppliers.
Thankfully there is a solution. Your business needs to be able to trace a product or service through each stage of the supply chain and work with their company and suppliers to ensure working conditions are fair and environmental practices are sustainable.
What is Impact Sourcing?
Another modern trend in sourcing is impact sourcing. This type of sourcing is a socially responsible arm of the Business Process Outsourcing (BPO) and Information Technology Outsourcing industry that aims to employ people with limited opportunities for sustainable employment.
The impact sourcing sector utilizes workers from poor and vulnerable communities to perform functions with lower and moderate skill requirements such as scanning documents, data entry work, data verification and cleaning, video tagging, and microwork.
Sourcing Models
A sourcing business model combines a company’s relationship model and defines how you will formally control your supply source and economic model. This, in turn, determines how you will handle the economics of the relationship. The 7 Sourcing Business Models are:
1. Basic Provider Model:
Used when the primary purpose is to purchase goods and services at the lowest possible cost. ?
2. Approved Provider Model:
Used when you want to take advantage of high-volume discounts with suppliers with a proven track record.?
3. Preferred Provider Model:
Offers value-added capabilities or volume discounts with a set supplier, and this is usually due to a longer contract.
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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.
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. Shared Services Model:
Is an investment-based model that is developed by companies that are seeking to create their own internal supplier
7. Equity Partnerships:
Are legally binding through formal structures. In this model, the organization invests directly into another company to build capability.
Why is Sourcing Important?
The first step in getting the supply chain right is sourcing the products and services. There is also a need to balance the quality of the products and the raw materials that one needs. Moreover, affordability of the products is also an aspect that needs to be considered where sourcing is concerned, as it directly impacts the bottom line.
A well-executed sourcing process allows your company to establish consistent and predictable supply chains; in turn, shelves stay well-stocked, keeping customers happy. When sourcing is done right, it can positively affect your brand image and help create brand loyalty.
Strategic sourcing also helps in cost management by providing benefits for both the buyers and the suppliers. Negotiating lower unit pricing for high volume purchasing reduces the cost of goods. It allows the business to keep its pricing competitive. On the other hand, the suppliers benefit by having a consistent outlet for their goods, making planning and cash flow more dependable.
Benefits of Sourcing
The four benefits of sourcing are:
1. Cost-Saving
The first and most popular benefit of strategic sourcing is the amount of money that organizations can save by selecting and choosing suppliers that will offer the highest value at the best price possible. This will have a domino effect and positively affect your bottom line.
2. The honing of ideal suppliers
Effective implementation of a sourcing process has its foundation on the quality of the suppliers involved. Procurement teams should have on-hand supplier profiles and understand the core capabilities of the suppliers they choose. This allows you to match your organization’s objectives with your ideal supplier resulting in the highest value creation at the lowest possible cost.
3. The establishment of a long-term relationship with suppliers
When suppliers are valued and considered in various sourcing decisions, they will feel motivated and optimize their performance to meet your organization’s objectives.
Diversity and Inclusion in Procurement and Sourcing
Establishing diverse supply chains can have significant benefits for your company. Aside from increasing revenue, diverse and inclusive supply chains are more competitive, encourage innovation, provide new markets opportunities and deliver socioeconomic impact in local operating markets.
So how can you accelerate supply chain diversity in your company?
1. Determine where your procurement dollars are going
Developing a basic understanding of external procurement expenses is essential to building a more diverse and inclusive supply chain.
2. Identify diverse suppliers aligned with crucial spend categories.
Once you understand the significant categories of spend, you can begin broadening your pool of potential suppliers within each category. Look for platforms that can connect you with diverse suppliers. Advocacy and diversity certification organizations are an excellent place to start.
3. Establish inclusive procurement policies.
Ensure that you choose at least one diverse supplier in competitive supplier selection/RFP processes.
Procurement vs. Sourcing: What's the Difference?
There tends to be a little confusion where terms like procurement, purchasing, and sourcing are concerned. The terminology is related and sometimes used interchangeably, but each has a distinct meaning.
As a procurement or business leader, you need a complete understanding of the differences to help you gain a better understanding of the sourcing process. So, without further a due, let’s establish the differences.
Typically, procurement is concerned with acquiring the goods and services that are vital to an organization. Procurement is tasked with acquiring high-quality goods at the right time to meet company needs. The procurement process helps you gain insight and control over your company’s spending habits, minimize errors and fraudulent spending and boost efficiency by streamlining procure-to-pay-cycle.
Procurement involves multiple processes and numerous steps such as:
On the other hand, sourcing focuses on finding the best possible supplier of goods and services and negotiating the most favorable contract terms.
Sourcing involves:
Sourcing vs. Procurement Differences
Process Components
Sourcing is a subprocess of procurement and comes before any purchases are made. Sourcing ensures that the lowest purchase price is found while developing supply channels that provide the most significant value. To summarize, sourcing adds value to the procurement cycle by establishing solid supplier relations that help ensure consistent quality and availability of products or services.
Sourcing is less complex and has fewer moving components. It involves defining internal requirements, searching for vendors, arranging sourcing events, and assessing suppliers.
While procurement encompasses the sourcing process itself, purchasing, data analysis, contract and supplier relationship management.
Timing
The timing of both processes is different as sourcing takes place before the purchase is made or if there is a problem during the purchasing process.
On the other hand, Procurement is an end-to-end process covering all the activities before, during, and after purchasing.
Goals and Focus
The goals and focus of procurement and sourcing are also different. Sourcing is concerned with establishing relationships with the most suitable suppliers and building and maintaining a dependable supply chain. On the other hand, the procurement process combines strategic and tactical components.
Procurement mainly concerns purchasing high-quality goods and services at the lowest possible price while satisfying internal requirements. In summary, sourcing is concerned with suppliers, while procurement focuses on buying goods and services.
Function
Sourcing is meant to support procurement by building supply chains and systems for procurement professionals to use.
Sourcing teams focus on developing relationships with vendors, while procurement teams use vendor relations to purchase goods.
Therefore, sourcing makes the flow of supplies possible, whereas procurement aims at streamlining and optimizing this flow.
The sourcing team negotiates the pricing and quantity of products and goods with suppliers, and then the procurement team uses this information to predict the spend and determine how much money can be allocated.
What is Strategic Sourcing?
Globalization has magnified the level of competition in the business arenas. Therefore, it has become paramount for organizations to leverage the power of globalization and improve performance. Therefore, the role of effectively sourcing goods and services from suppliers has become unavoidable.
The need for an effective and strategic sourcing process that enhances an organization’s performance and efficiency has increased due to the volatility of the global market.
So, in essence, strategic sourcing refers to the process of identifying your spend profile and supplier base to ensure that your business requirements are aligned with the suppliers. This is a proactive, holistic, and continuous evaluation and re-evaluation of the sourcing activities in your organization.
Strategic sourcing aims to decrease supply chain risk, forcing procurement teams to develop strong and positive relationships with their sourcing partners. The supplier is viewed as a crucial value partner that collaborates with the organization.
Lastly, with strategic sourcing, there is more intensive monitoring of the customer-supplier loop at every stage of its lifecycle. This means there needs to be:
This means that strategic sourcing is a long-term process and needs skilled personnel and relevant technology platforms and tools to become successful.
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Benefits of Strategic Sourcing