Sourcing is an upstream part of the supply chain: It’s the process of strategically choosing the right services and goods that a company needs to run its business. Sourcing is also the act of buying goods, including seller selection, contract negotiation, and measuring the long-term performance of your supplier’s management services.
Introduction to Sourcing
Sourcing in procurement is defined as a process to find, evaluate, and engage suppliers based on set criteria to achieve cost savings and the 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. Sourcing Training services.
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:
Find prospective suppliers
Implement a rigid vetting process
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:
- Cost structure
- Profit margins
- 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:
Different types of Sourcing
To implement successful sourcing, you must have a thorough understanding of how 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.
Types of Sourcing:
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.
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.
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 with 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.
The creation of new products either from raw materials or components.
As you can see, there are many types of sourcing. The various options mean that the management of these relationships differs significantly.