Sourcing isn’t just a concern for procurement teams. With rising consumer and stakeholder expectations around ethical and responsible supply chains, who supplies your organization’s goods and services is also a C-suite consideration.
The sourcing process sits within supply chain management and is used for identifying, vetting and selecting the best suppliers. It’s distinct from the procurement process. Think of it this way: sourcing is the “who” (the suppliers themselves) and procurement is the “what” (goods and services).
Here are some of the most common types of sourcing:
Outsourcing is using a domestic or foreign third-party to carry out an activity or provide goods or services that are typically provided in house. Companies generally outsource non-core tasks and functions that are similar across organizations, such as back-office operations (accounting, IT and human resources) and front-office operations (sales, marketing and customer support). The main motivators for outsourcing are cost savings; the flexibility to ramp up or scale back functions and goods or services as needed; and greater access to specific skills or raw materials.
Subcontracting falls under the umbrella of outsourcing. It involves outsourcing a specific task or obligation to a subcontractor or service provider. Subcontracting is common in more complex industries, such as construction, and is often a temporary arrangement.
The most suitable suppliers may be in house. Insourcing leverages internal resources, such as a specific person or department, to perform tasks that could have been outsourced or were so before. Keeping tasks and functions in house offers a competitive advantage as organizations may experience greater consistency across products and services.
While often a cost-reduction strategy, insourcing also gives organizations greater control over an activity and speeds its execution. This is because the necessary resources already exist within the organization; any employees performing the task are already familiar with the company’s culture, products, services and customer base—they may just require some training or upskilling. However, in some situations, an insourcing model may choose to embed new employees or processes into the organization to achieve specific goals.
Near-sourcing, also called nearshoring, involves moving sourcing activities closer to where goods or services are sold. It can be considered an alternative outsourcing strategy: while outsourcing to distant countries may offer cheaper labor costs, it’s more difficult and costly to manage logistics. Outsourcing to a closer locale makes it easier to manage partner relationships as well as cuts transportation costs and delivery lead times. In some instances, the contracted vendor may still operate in a neighboring country, like a US firm outsourcing to Mexico.
Near-sourcing can also reduce risk. For example, supply chain disruptions are difficult to predict. But with factories or warehouses closer to the recipients of the end product or service, customer delivery is less likely to be delayed or cancelled should there be a natural disaster or geopolitical unrest.
Single sourcing (or single supplier) is choosing only one supplier for all raw materials, goods and services. This can create product exclusivity with unique materials and reduce the time spent on contract negotiations and supplier selection. Single sourcing also simplifies supply chains, which makes it easier for organizations to ensure quality products and uphold ethical sourcing standards.
While single sourcing is often used interchangeably with sole sourcing, the two terms are distinct: single sourcing is a specific sourcing strategy where a business chooses only one supplier but has other options available. A sole-source strategy, on the other hand, is a situation where there is only one supplier for a particular product or service, negating the ability for businesses to choose alternatives.
Global sourcing is sourcing goods or services from suppliers in global markets. This provides businesses with access to low-cost resources, incentives such as tax breaks and skills potentially unavailable in their geography. While commonly exemplified by outsourced services based in India, China and Eastern Europe, global sourcing is not synonymous with low-cost country sourcing because the latter is contingent on lower labor and production costs. In contrast, companies may engage in global sourcing when skilled workers are hard to find locally, even if businesses don’t reap cost savings from the practice.
Businesses leverage global sourcing to access advanced skills and technology using business process outsourcing, as mentioned above. However, supply chain disruptions resulting from the COVID-19 pandemic and recent climate events have revealed the risk of dependency on suppliers, skills and partners in regions far from operations.
Joint ventures are partnerships between organizations to accomplish a goal. By working together and combining strengths and resources, organizations can achieve more, faster than if they were taking on a project independently. They can also expect to achieve costs savings by sharing labor and skills; technology and innovation; marketing and advertising budgets; and other well-established functions and processes, like manufacturing or logistics. For example, companies in a joint venture can use the economies of scale of the larger organization to produce goods or services at a cost advantage unattainable for the smaller company. On the supply chain front, joint ventures can increase bargaining power with suppliers as well as limit risk.
For organizations that partner with businesses in a foreign market, joint ventures also provide opportunities for exposure to a wider audience. Along the same vein, businesses that partner with brands that possess positive reputations can improve their own by association.
Vertical integration is when an organization expands its own supply chain operations rather than outsourcing. Vertical integration requires significant upfront investment but allows organizations to take complete control of their supply chain operations and production processes. This is common for manufacturers that wish to sell direct to their customers instead of relying on distributors.
Vertical integration has two directions—backward integration and forward integration:
Backward integration, or upstream integration, occurs when a company becomes the supplier of products or services that it uses to produce its own products or services—through buying another company or expanding its own operations. In simple terms, backward integration removes intermediaries, improves control and accelerates growth. For example, Apple now produces its own chips that are used in its suite of technology products.
Forward integration, or downstream integration, occurs when a company takes control of distribution, or post-production processes. This allows businesses to reduce distribution costs and have more control over how they sell goods or services. For example, a shoe brand might take ownership of product sales by bypassing department stores and instead selling products at its own retail stores.
Captive service operations
Captive service operations, or captive centers, are set up by organizations in countries where the business may not yet have a presence, likely in overseas markets. Workers in these centers are fully employed by the company. The products they make or services they provide directly benefit the organization.
The advantages of captive centers include access to a new or larger talent pool, reduced costs and greater control over operations than traditional outsourcing (and therefore, less risk). However, due to the significant upfront investment required for captive centers, businesses often only establish them in locations where they have long-term growth ambitions.
Strategic sourcing methods: ethical, responsible and sustainable sourcing
There are many types of sourcing strategies. Strategic sourcing, specifically, is a procurement strategy that factors in a company’s long-term goals and business objectives when evaluating potential suppliers. Practicing strategic sourcing involves the consideration of quality standards, supplier performance, cost-effectiveness and how a long-term partnership with a high-quality supplier strengthens and streamlines the overall supply chain.
Businesses that are interested in responsible sourcing will need to make sourcing decisions that consider the social, economic and environmental impacts of their sourcing activities and suppliers. In addition to increasing customer and stakeholder demand for transparency, responsible sourcing is essential to following new and existing legislation relating to the impact of an organization’s environmental, social and governance (ESG) efforts and initiatives—such as the European Union’s (EU) Corporate Sustainability Reporting Directive (CSRD).
Organizations may also focus on sustainable sourcing or sustainable procurement goals, which put a greater emphasis on the environmental impacts of suppliers and vendors. Others may concentrate on their own ethical sourcing standards, which ensure suppliers and vendors uphold fair labor practices, make a positive social impact and practice environmental sustainability. Many are leaning on emerging technology like blockchain to ensure it.