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• Sourcing is the process of finding the most suitable suppliers of goods and services to a company. When sourcing, a business has to consider the following constraints: cost, profit margins, and competitiveness.
• The right supplier must offer a good enough price so that the acquiring business can make a profit margin by trading or using the product in their production process. All this happens while still considering the actions of competitors.
Specific Sourcing Activities
The scope of sourcing is quite wide. Normally, an organization has to shortlist all possible sources for the items it needs for various departments. It’s also important to find out how the suppliers are doing in terms of market share, reputation, and price competitiveness. Contract negotiations and testing the quality of products from suppliers are also part of the sourcing process. In fact, a determination of the standards to be used in such testing precedes testing.
Sourcing vs Procurement
People often use the terms sourcing and procurement interchangeably when referring to a range of activities that touch on a company’s supply chain. However, though they are related, they are technically different.
First, sourcing is concerned with finding, vetting, and onboarding suppliers who will provide what the organization needs. Procurement consists of the activities that will see products delivered to the organization when needed. Whereas sourcing is about building the supply chain, procurement is more about the steady flow of goods through that chain.
Why Have a Sourcing Strategy?
In order for an organization to attain a stable supply chain, it’s important to develop a proper sourcing strategy. A sourcing strategy serves several purposes:
First, it allows the sourcing team to consolidate purchasing power and negotiate for lower unit prices through bulk purchases. The savings result in higher profit margins or lower selling prices that increase the competitiveness of a company’s products. A sourcing strategy may also involve outsourcing some functions instead of procuring raw materials to produce them in-house.
A sourcing strategy also reduces the risk that a company faces when dealing with suppliers. By conducting research on prospective suppliers, a company can avoid suppliers who are not a strategic fit, perhaps in terms of capacity, culture, and regulatory compliance. This way, the company protects itself from possible disruptions arising from the non-performance of a supplier.
Strategic sourcing is an ongoing process of scouring the market for new opportunities. There may emerge new suppliers with superior product quality, more competitive prices, or even new production technology. It’s the role of the sourcing team to establish contact, gather intelligence, and lay the groundwork for future contracts. This helps the business to stay competitive in the long term.
Detailed Sourcing Process
In 2001, A.T. Kearney published a 7-step framework that businesses can use to develop their sourcing process.
Analysis of Internal Needs
The first step in the sourcing process is finding out the goods and services the company needs to acquire. The information should include how much of each item the organization needs based on past requirements and activity growth projections.
Researching the Market
Next, the organization should research the market to find suppliers and their offerings. The costing should consider logistical costs as well as the risk that arises from working with each of them. The company may settle on one of several types of sourcing:
- Global sourcing
- Captive Service Operations
- Vertical Integration
- Joint Ventures
Developing the Sourcing Strategy
Here the company comes up with a method of determining which supplier to work with. The criteria should guarantee both reasonable costs and supply chain stability.
Requests for Proposals and Quotes
Once a company identifies suppliers it may want to work with, it will invite them to send in their bids to supply goods or deliver a service. Quotes and proposals are supposed to be detailed enough for the sourcing team to assess the capacity of the supplier to deliver. By sending a detailed request for proposal to suppliers, the company can ask the bidder to explain how they intend to meet product specifications and other project delivery terms.
Once a company receives proposals from various potential suppliers, it then shortlists those suppliers who it wants to work with, based on an objective criterion. In many cases, the company will call in suppliers for clarifications, negotiations for adjustment of certain terms, and other arising matters from the chosen proposals. The negotiation process may take months before both parties are fully happy with the contract terms.
Onboarding and Integration of the Suppliers
Once a contract with a supplier gets signed, they have to go through a formal onboarding process. The company sets up communication lines with them, takes their banking and tax details, etc. Having a supplier portal makes this process easier and standardized for all suppliers. They can easily update their information as it changes.
Assessment of Results
As highlighted, sourcing is an ongoing process involving finding the right suppliers to work with now and in the future. For current suppliers, the company has to monitor its performance against predetermined standards continually. This is an important part of supplier relationship management.
Technology in Sourcing
The use of technology can help streamline your sourcing activities including gathering information about suppliers, sending requests for proposals, and performance benchmarking and assessment. ProcurePort is the world’s leading supplier of e-sourcing technology. We help businesses find and integrate technology into their sourcing and procurement efforts. Reach out to us for a consultation on the right e-sourcing solution for your business.