Types of Sourcing Strategies in Procurement

At ProcurePort, we believe that a successful sourcing strategy demands a solid understanding of an organization’s overall strategy and long-term mission, the resources needed to deliver that mission and the market risks and forces within the organization that inhibits meeting your end goals.

Common Sourcing Strategies Considered in Procurement

1. Outsourcing

Procurement outsourcing transfers supply chain and procurement functions to a third party. Organizations usually outsource supplies to tap into their market knowledge and skill set and cut costs. The most commonly outsourced materials and activities are indirect materials (and labor), referred to as indirect procurement.

Most companies outsource their IT and legal functions and see this as a measure to complete their already existing talent pool. Outsourcing is legal, and IT services contrast the practice of organizations or businesses outsourcing their HR or hiring functions typically to reduce costs associated with overheads. So, the sole objective of outsourcing is to reduce costs, although tapping into the expertise of external suppliers is considerably regarded as a comparative advantage.

2. Insourcing

Insourcing is where an enterprise engages and fully utilizes its internal workforce or employees to accomplish and meet its routine procurement and supply chain functions. The sourcing functions, responsibilities, and authorities are delegated to persons within the organization who deliver on these mandates without outsourcing. In this procurement strategy, an organization essentially uses its people and resources to meet its day-to-day supply chain needs.

3. Near-sourcing

Transportation costs account for almost 60% of manufacturing costs. In addition, the product has to be transported to the target market. The above figure doesn’t account for the transportation cost incurred to transport resource inputs (materials, labor, or machines) into the manufacturing shop floor. When you factor in the cumulative transportation costs involved in the design, development and distribution of a product, you realize just how expensive transportation fits in the supply chain.

Near-sourcing is a procurement strategy that places operations near the target market or where the end products are sold. Organizations using near-sourcing do not decouple their operations from the target market. Everything occurs in one place – sourcing, manufacturing, and supply. Organizations using near-sourcing operate in confined supply chain spaces because everything happens in one geographical location. Luckily, this strategy reaps massive benefits associated with transportation cost savings. Organizations that invest in empty lands can use near-sourcing to enjoy warehouse cost savings.

4. Vertical integration

Vertical integration is the process of merging two or more companies located at different production or distribution levels but within the same industry. For instance, a cement processing firm can acquire a limestone mining company to streamline sourcing and procurement management functions. So, when an organization buys out a supplier who supplies resource inputs, that’s called backward integration. And when it acquires enterprises in its distribution line or chain, that’s known as forwarding integration.

5. Many or few suppliers

A many-supplier procurement strategy is for single commodity products, and purchasing is based on pricing. Single-source purchasing is supply based on single, selected suppliers, although there exist other suppliers who offer the same product. Sole source procurement denotes purchases made from a single supplier. Although sole and single-source procurement can be high-risk, they can reap massive benefits.

6. Joint ventures

Joint ventures are organizations created by two or more parties. These entities are characterized by shared ownership, shared benefits and risks, and shared governance. The purpose of joint ventures is combined efforts and input that target the development of a single project for profit. In procurement management and supply chain processes – joint ventures provide scalability and reduce risks. Organizations can always access similar products from different suppliers, thus eliminating the risk of product understock.

7. Virtual enterprise

Virtual reality has dawned with improved and enhanced user interfaces and enhanced interoperability of information networks. The rise of the virtual enterprise has followed this emerging trajectory, and now supply chains are run by a network of independent companies (customers, suppliers, competitors) connected by information technology to share skills, knowledge, and access to other markets.

Procurement and Digital Transformation

According to the I-Scoop Report, digital transportation is the operational, organizational, and cultural change of an organization or industry across different levels and functions – and staged in a strategic manner.

Deloitte, on the other hand, defines digital transformation as:

“The transformation of an organization, culturally and operationally, facilitated by the infiltration of new, facilitative technologies. Digital transformation is simply the practice of unleashing the potential of new technology in the design of scalable and agile procurement systems.”

So, when selecting a procurement and sourcing strategy, understand how this selection will affect business process execution now and in the future. While deploying an effective digital procurement strategy can be expensive, approached diligently, it can improve every stage of the procurement lifecycle.

Procurement digital transformation is all about reimagining and reinventing how you do business. And with technology being a highlight today more than ever, businesses need innovative solutions procurement transformation that enable them to leverage procurement transformation.

Contact ProcurePort to take advantage of digital transformation in your procurement management and supply chain processes.