Published: 13 December 2023
Contributors: Alexandra Jonker
Sourcing is the process of identifying, evaluating and selecting suppliers to provide goods and services. When applied tactically and strategically, sourcing activities can significantly impact the cost, quality and availability of an organization’s goods and services.
Sourcing is one of the first steps of supply chain management—the handling of the entire production flow of a good or service. Organizations employ sourcing processes to create their network of suppliers (“links” in the chain) that move products along.
Frequently used interchangeably with “procurement,” sourcing is a distinct supply chain process within the procurement department. Procurement professionals handle the entire end-to-end process of acquiring goods and services from external sources. This includes activities such as need identification, contract negotiation, purchase order issuing, purchase requisition and performance management.
To better understand the key differences, consider sourcing as the “who” (the suppliers themselves) that builds the supply chain and procurement as the “what” (goods and services) within a supply chain. Due to their interconnection, sourcing and procurement strategies typically share similar goals and metrics.
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There are over a dozen types of sourcing according to some supply chain authorities, but the most common are:
Outsourcing is using a domestic or foreign third-party supplier to perform an activity or provide goods or services that are usually provided in-house.
Insourcing is using internal resources to perform supply chain activities. This is often a cost-reduction strategy and is the opposite of outsourcing.
Near-sourcing, also called nearshoring, involves moving sourcing activities closer to where goods or services are sold. This helps cut transportation costs and delivery lead times.
Single sourcing is choosing only one supplier for all materials, goods and services. This can create product exclusivity with unique materials and reduce the time that is spent on contract negotiations and supplier selection.
Global sourcing is sourcing goods or services from suppliers in international markets. This provides businesses access to low-cost resources and skills that are potentially unavailable in their geography.
Joint ventures are partnerships between one or more organizations to share resources and strengths. This can increase suppliers' bargaining power and limit supply chain risk.
In its simplest form, sourcing is a transactional process that seeks out the best value, often provided by the supplier offering goods and services at the lowest price. Alternatively, when evaluating potential suppliers, strategic sourcing considers a company’s needs and long-term goals. In strategic sourcing, organizations frequently use data from procurement activities to develop sourcing strategies that reflect the big picture.
With a strategic sourcing mindset, the supplier with the lowest price may not always be the best option. Instead, the sourcing team might also consider factors such as quality, reputation and service. They may also factor in how a long-term partnership with a preferred supplier could strengthen and streamline the overall supply chain, advance sustainability ambitions and maximize cost savings.
Tactical sourcing is like strategic sourcing; however, it focuses on short-term goals and less complex, immediate needs rather than long-term goals. Strategic sourcing is an ongoing process that involves continuously evaluating and adjusting sourcing activities. For example, selecting a supplier for cleaning supplies during flu season is tactical sourcing, whereas selecting a supplier for the critical components of a core product line is strategic sourcing.
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Strategic sourcing helps organizations gain a competitive advantage: providing customers with high-quality products and services at the best price.
By selecting suppliers thoughtfully and strategically, organizations can often negotiate long-term contracts with more advantageous pricing and payment terms—such as bulk pricing and reduced fees. A lower product or service price translates to reduced prices for customers, which keep businesses competitive.
Sourcing from top-tier, thoroughly researched suppliers can yield higher-quality goods and services. Better raw materials lead to superior, high-value products that work well and last longer. This can help organizations meet customer expectations, inspire loyalty and improve brand reputation.
A balanced dependence on a broad ecosystem of quality suppliers reduces risk. With a diversified supplier portfolio, organizations can avoid delays, cancellations and price fluctuations from supply chain disruptions caused by anything from political unrest to severe weather events.
Organizations can fully vet each supplier to ensure that their sustainability practices align with their own. This helps advance the business’s own sustainability goals and reduce the overall environmental impact of the supply chain.
Responsible sourcing considers the social, economic and environmental impacts of all sourcing activities and suppliers. It is core to the concept of the “triple bottom line,” which suggests that the financial bottom line alone cannot measure business outcomes. Instead, they must also consider the well-being of people and the planet. Organizations that practice responsible sourcing take responsibility for what happens in the entire product lifecycle—from carbon emissions to workers’ rights. Responsible sourcing aims to reduce potential harm and increase positive impacts.
Sustainable business practices are vital for today’s customers and investors. Half of consumers are willing to pay more for sustainable products or brands. And purpose-driven consumers, who choose products and brands based on how well they align with their values, now represent the largest market segment (44%). Third-party sustainability certifications such as the B Corp status or being Rainforest Alliance Certified are often used as customer-facing indicators of responsible sourcing.
Supply chain strategies increasingly reflect this desire for sustainability: according to a 2022 study, 52% of chief supply chain officers (CSCOs) are more aggressively heading toward carbon neutrality.1 Responsible sourcing can be considered a foundational step in reaching this goal.
Responsible sourcing is also essential to following new and existing legislation demanding transparency around the impact of an organization’s environmental, social, and governance (ESG) efforts and initiatives. For example, the European Union’s (EU) Corporate Sustainability Reporting Directive (CSRD) will require that companies disclose their due diligence process for identifying and mitigating the social and environmental impacts in their value chains and supply chains.
How organizations build a sourcing strategy varies by company size, business goals and industry. However, these five steps are often found in effective sourcing strategies:
1. Goal setting. A common first step involves identifying specific goals and KPIs. These goals can include cutting costs, improving product quality or managing supplier risk.
2. Analyzing current sourcing activities. Next, procurement teams may look at historic sourcing and business process data to identify areas for improvement, take a closer look at supplier performance or see where they can cut inefficient spending.
3. Assessing the market. Market research and competitor data are critical for making strategic sourcing decisions. Information relating to consumer habits, industry trends, best practices and economic and geopolitical factors can help businesses understand their place in the market.
4. Vetting and supplier selection. Establishing a process for evaluating and selecting suppliers is a critical step. Consider supplier quality, financial reliability, value, and culture alignment and potential for a long-term partnership. Teams can use a combination of supplier interviews, request for proposals (RFPs), request for quotations (RFQs), scorecards and more to aid selection.
5. Ongoing supplier performance evaluation. An excellent and strategic sourcing plan doesn’t end at contract signing. Ensure long-term success with continuous performance analysis through regular audits, KPI monitoring, supplier relationship management and feedback collection. Then, adjust as needed to align with the goals set in step one.
As supply chains become more complex, organizations may choose to integrate innovative technologies like artificial intelligence (AI), automation, data analytics and blockchain into procurement processes, procurement software and workflows. This can enable several benefits, including reduced operating costs, automation-enabled efficiencies across sourcing activities (such as better contract management, accelerated supplier onboarding and pricing and spend analysis), more responsible sourcing and increased sustainability across the supply chain.
For example, blockchain platforms can help assure buyers that any raw materials used for new products are responsibly produced. Additionally, intelligent workflows can result in early supplier payments, improving working capital and cash flow.
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Supply chain management is the handling of the entire production flow of a good or service—from raw components to final product delivery.
The triple bottom line (TBL) is a sustainability framework that revolves around the three P’s: people, planet and profit.
Sustainability in business refers to a company's strategy and actions to eliminate the adverse environmental and social impacts caused by business operations.
Footnotes
1 IBV 2022 CSCO Study, unpublished data