What is sourcing in supply chain management?
Today’s customers are more informed than ever before. They expect their needs to be met immediately, and if that isn’t the case, they will take their business elsewhere. As a result, organizations of all sizes implement fast and flexible supply chain strategies to meet these new standards. Strategic sourcing in the supply chain is the outset of a robust SCM framework. It is the process of acquiring high-quality goods, services, and raw materials, at low cost and finding a balance between them.
A company’s ability to source materials efficiently, streamline processes between departments, and negotiate reasonable vendor contracts all factor into the performance of an organization’s supply chain. An effective sourcing strategy is one of the key pillars of an optimized SCM framework. It is essential for any company that wants to remain competitive in today’s volatile business climate.
We’ll explore everything you need to know about sourcing in your supply chain. From types of sourcing to importance in achieving supply chain resilience, we’ve got you covered with all the details you need to start sourcing efficiently today!
Sourcing in supply chain management, simply put in words, is the process of finding the right supplier who can provide high-quality products and services at a reasonable price from which the business can create cost-efficient supply chains and generate a profit margin.
It is the alpha of supply chain management, and any aberration may disrupt the efficiency of the whole supply chain. Therefore, the process of sourcing is typically divided into two processes:
Finding the right prospective supplier, where you’ll approach multiple suppliers who can deliver products or raw materials with set specifications at reasonable prices.
Following the vetting process, checking the quality, accuracy, and efficiency of the product that the supplier will deliver.
The right sourcing by an eCommerce business will help them achieve economies of scale. Strategic collaboration with suppliers will result in easy manufacturing and distribution, reducing the overall cost of the product. This will help you win the price war often played by businesses.
Here is the 7-steps process of strategic sourcing:
- Finding the right supplier of goods and services
Approach multiple suppliers who are manufacturing the same products you require. It will help you pick the right one from the pool. Search and shortlist different global, domestic, and local suppliers.
- Negotiating a contract with the supplier
Clarify the product quantity, and terms of supplying the products with different suppliers.
- Establishing the payment terms
Establish and agree upon a common mode of payment, and set payment terms.
- Conducting market research
Before asking for the samples, research the quality standards of the product in the market, and identify the customer’s needs, expectations, preferences, and USPs of competitors.
- Testing the quality of the product and services
Vet the supplier’s product, and analyze whether it will work in the market.
- Considering outsourcing of goods
Decide whether to outsource the production to a third party supplier or produce in-house.
- Specifying the standards of the products
Set the benchmarks of product quality and quantity with suppliers.
Types of Sourcing in Supply Chain Management
It is the common and the most practical type of sourcing, where the third force executes the process. Most companies (usually startups and SMBs) delegate sourcing to another company that bids to execute the process efficiently and cost-effectively. Organizations outsource with the sole aim of tapping the expertise of third-party companies and gaining a competitive advantage.
Contrary to outsourcing, when companies do sourcing functions within the in-house plant is known as insourcing. This is because when the company has the expertise, resources, and labor to deliver the mandate, instead of outsourcing the responsibilities to another company, the company decides to insource the process to departments within the company.
Near sourcing is a strategy that companies use to lower the supply chain cost. So it is when companies choose to place operations (or outsource to a company) of sourcing, procurement, development, manufacturing, and supply near the end consumer market. Near sourcing reduces the costs associated with the supply chain, like transportation costs.
Low-cost country sourcing
Companies decide to do low-cost country sourcing when they try to cut their supply chain expenditure. Here companies source material, labor, and other expertise from countries where these are available at low cost. For example, China.
Companies in today’s digital world find countries where they can source high-quality material, labor, and expertise at low cost. The world is the marketplace. If a company does not find the right quality material domestically, they expand its options to other countries for goods and services. Plus, due to global sourcing, companies also get access to global talents and insights into how businesses run worldwide.
Difference between Sourcing and Procurement in the Supply Chain
Sourcing and procurement are two distinctive things in supply chain management. Sourcing is the process of selecting, vetting, and managing suppliers who can provide good quality resources at affordable rates. On the other hand, procurement is related to procuring or acquiring those resources primarily needed for operations in the organization.
Importance of Sourcing in Supply Chain Management
The purpose of strategic sourcing is to bring cost-effectiveness to the whole supply chain process. Finding the right supplier who delivers quality at an affordable price is the motive of sourcing and the root of decreasing the cost of products and the supply chain.
Minimizing the risk with supply chain
Vetting the supplier and the resources they are offering minimizes the risk of a faulty supply chain. In addition, the sourcing process rigorously screens the quality of the material more than cost basis. This helps the company funnel down suppliers and find the best supplier whose goals match the company.
Sourcing and procurement of resources is the base of a supply chain and brings operational excellence and supply chain resilience if carried out correctly.
Sourcing in the supply chain may ask for upfront investment, but you shouldn’t have second thoughts as it is the critical step in supply chain management. The slightest ups and downs in the supply chain will disrupt the operation, leading to unhappy customers and high product costs.
Another critical aspect of the supply chain is logistics, which streamlines the whole supply chain efficiently. Logistics sets the supply chain into one string, the end-to-end supply of resources is possible when you have a reliable and trusted carrier, and NimbusPost helps eCommerce businesses and SMBs choose the one. Our AI-driven software system and logistics cost calculator helps you to find your ideal logistics carrier for each shipment.