Key Points:
- Sourcing involves the whole process of evaluating and selecting the suitable suppliers who help the organization in maintaining its competitiveness in the market.
- Quality of goods and cost savings are necessary criteria to consider before choosing a sourcing partner.
- The significant difference between sourcing and procurement is that while sourcing focuses on direct goods and services, procurement focuses on indirect goods.
Sourcing is an essential aspect of the supply chain. It entails finding the right quality of products for your business at reasonable prices.
These days, business owners are on the lookout for the best suppliers to make the sourcing process hassle-free. In fact, 70% of sourcing and procurement professionals report using suppliers to tap into new-in-kind technology services or something outside their core business model. There are a couple of strategies that business owners can adapt depending on their company size and what they intend to achieve in the long run.
This blog post will give you a rundown of everything you should know about sourcing, its definition, types, and how it differs from procurement.
Table of Contents
What is Sourcing?
Sourcing refers to finding suppliers to provide the products and services needed for the day-to-day running of a business. This process also involves evaluating and selecting the suitable suppliers who help the organization maintain its competitiveness in the market.
Though sourcing may sound like an easy task for business owners, the process can be complex. Choosing the wrong supplier can cost businesses a lot, so companies evaluate several factors before choosing a supplier. The method of selecting a supplier includes the following:
- Accessing sources of quality goods and products
- Contract negotiations
- Establishing payment terms
- Market survey
- Quality test
- Outsourcing goods
- Establishing standards
Once you follow the above steps, you're on the right track to creating an optimized strategy.
What are the examples of sourcing?
There are different sourcing examples that you can adopt for your business, depending on your chain sourcing needs. You'll have to consider the outcome in the long run, such as cost-effectiveness and quality of goods.
Some characteristics of sourcing and examples include the following:
- Global sourcing: Refers to when a company buys its raw materials or necessary items from other countries in the world. The advantages of this type of sourcing are affordability and quality.
- Low-cost country costing: Refers to the cost-effectiveness of sourcing raw materials from low-cost countries like India and China.
- Prime/sub arrangements: This refers to when a company relies on the services of an outsourcing agent. This agent then sub-contracts the sourcing job to another company.
- Captive service operations: Refers to a group of companies or subsidiaries that handle the procurement of goods.
- Conventional agreements: Refers to the traditional way companies source and procure goods. It is between the two parties and hence, the simplest of all sourcing types.
Understanding this concept is essential for the smooth running of day-to-day warehouse operations. However, it also has other overall benefits, which we will consider in the following sections.
Why is Sourcing Important?
For businesses of all sizes, factors like cost structure, profit margins, and competitiveness keep the company going.
Sourcing is essential in helping a company achieve all of these factors. And with a well-established strategy, companies can efficiently establish consistent and optimized supply chains.
Cost management
When sourcing is strategically implemented, both buyer and supplier benefit from it. They can bargain lower prices for high volumes of purchases. The result of this is reduced cost prices and competitive sales prices.
Stability
Once a company finds a good supplier, both parties can develop a relationship that is beneficial to the smooth running of the business. Here, the buyer can rely on the supplier to provide quality products.
Managing risk
When a solid relationship between the buyer and supplier is established, the risks can be managed effectively. In addition, they can rely on each other for transparency and accountability.
What is the Process of Supply Chain Sourcing?
Though sourcing can take some processes, the effectiveness of these processes lies in helping businesses create an optimized supply chain. Let's take a broader look at the processes here
1. Selecting a supplier & strategic planning
The supplier of a company's products impacts the reputation of that company and the company itself. Companies should tactfully choose suppliers based on the following criteria:
- Experience
- Cost-effectiveness
- Customer service relation
- Delivery time
- Available of product
- Recent customer review
In the long run, suppliers become business partners and form supplier relationships. This fact is why companies look for reliable and trustworthy ones that will serve their interests for a long time.
2. Securing a supplier
This step entails actionable steps to ensure that the supplier you choose can help you improve your company. Securing a supplier requires you to do the following:
- Research: By carrying out thorough research, you can find information on the reputation of a supplier. You can read customers' reviews and check out for business verifications and licenses and necessary certifications.
- Negotiate: You need to negotiate favorable deals for business at this point. Through bargaining, you compare prices and opt for the one that will benefit your company in the long run.
- Discuss payment terms: For the cash flow for both parties, it is essential to agree on when payment will be made and how. Negotiate deals that will benefit both parties, and take your time before signing.
- Agree on delivery time: Delivery lead time is critical. Buyer and supplier must agree to terms that favor both parties.
3. Choose a supplier delivery model
Depending on your agreement, there are a couple of delivery models you can choose from:
- Just-in-time model: Here, you receive your supplies based on when you need them.
- Continuous replenishment: The continuous replenishment model entails ordering supplies in small batches. A supply schedule is prepared based on the company's inventory demand.
- On-demand: Supplies are made when requested.
4. Create a contract
Ensure that a well-written contract is drafted between your company and the supplier. All agreements should be included in the contract, like the delivery model, payment terms, and contract length, among others.
For legal foregrounding, both parties should sign the documents. This shows that both parties are obliged to fulfill their part of the agreement.
Related post: 7 Things to Consider When Sourcing Overseas vs. Domestically
Pros and Cons of Global Sourcing
Many companies have adopted international sourcing because it reduces production costs. However, companies tend to have limited control over quality on the flip side. As a result, all models have their pros and cons.
Here, we will go through the advantages and disadvantages of global sourcing.
Advantages of sourcing
Global sourcing helps reduce production costs and increase manufacturing efficiency. We'll take a more in-depth look at the advantages of global sourcing here.
Reduces production costs long term
By sourcing supplies internationally, you save money. The cost of labor is eliminated, and goods automatically become cheap. In addition, global sourcing takes the stress off your business so that you can focus on other aspects of building your business.
Increase manufacturing productivity
Global sourcing provides you access to a limitless number of manufacturing experts. Another benefit is that some countries have access to specific resources more than others. You can reach the suppliers who have both access and experience in the raw materials you need from them through sourcing.
Helps create an optimized supply chain strategy
Once a company resorts to finding suppliers internationally, the supply chain is simplified. The company knows where to get supplies. What this does is optimize the supply chain for effectiveness.
Disadvantages of sourcing
Though there are few, sourcing has its own set of disadvantages. We'll discuss the disadvantages in further detail in this section.
Lack of quality control
Sourcing for supplies globally means one thing. You have to communicate with suppliers in different countries from where you are. The truth is, you can't be everywhere to oversee a supplier's day-to-day activities. You may have to battle with various suppliers for not meeting your company's standards.
Supply chain delays
Since you don't have control over suppliers, you may experience delays. Manufacturers may default in sending your supplies at the right time. Other factors like lack of materials, low workforce, and even delivery delays can slow down the supply chain.
Possible communication issues
Differences in time zones, language, and work ethic can challenge the communication between you and your supplier. For effective sourcing, frequent communication is vital. However, if there is a problem, it can negatively impact your business.
Sourcing vs. Procurement: Procurement Strategies
Procurement refers to the full process of sourcing and using suppliers to gather all necessary materials needed for products, services, and indirect costs. It entails ordering from suppliers, paying for the goods, and receiving them.
Indeed, both sourcing and procurement are essential aspects of the supply chain. However, the major difference between them is that while sourcing focuses on direct goods and services, procurement focuses on indirect goods.
Both sourcing and procurement involve the acquisition of materials needed for business. Combining the sourcing and procurement departments can be effective depending on the company. In other cases, companies can decide which one is best for them.
Supply Chain Sourcing with Easyship
While sourcing is vital to complete the supply chain process, it is crucial to find the right supplier. With the right supplier, business owners can work towards building their brands and give their customers optimum satisfaction.
With a third-party logistics provider, Easyship can offer you access to features to make your sourcing process hassle-free. For example, you'll gain instant access to features such as the following:
- Shipping Dashboard: Manage orders and create shipments instantly in the Shipping Dashboard. Plus, keep track of all your delivery lead times in one place for your business.
- Global Fulfillment: Easyship has warehouse partners on four continents so that you can reach your customers all across the world. Plus, Easyship helps scale up fulfillment capabilities without increasing overhead costs.
- High-Value Shipping Insurance: Easyship offers up to $10,000 shipping insurance for all shipments. This way, customers can have peace of mind regarding high-value items.
Ready to ship? Sign up for a FREE Easyship account and create your optimized supply chain strategy today
Supply Chain Sourcing Strategies FAQ
Does outsourcing save money?
Outsourcing can help companies to get materials at competitive prices. Companies also save money on recruitment and infrastructure by hiring experts while gaining a competitive advantage.
Why do companies source globally?
Through global sourcing, companies take advantage of limitless access to manufacturing experts. They also rely on other factors like skilled and low labor costs and reduced trade tariffs.
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