The Sourcing Management Guidebook You’ve Been Missing…at Last!
When sourcing is done right - you wind up with high-quality products or services at a reasonable cost while establishing positive, long-lasting relationships with your ideal suppliers. When done wrong - you could end up with low-grade products at a sky-high cost, driving your prices up as a result.
Sourcing is the starting point of your procurement processes and also a crucial component for the success of any business.
When sourcing is done right - you wind up with high-quality products or services at a reasonable cost while establishing positive, long-lasting relationships with your ideal suppliers.
When done wrong - you could end up with low-grade products at a sky-high cost, driving your prices up as a result.
That’s why a thorough understanding of the sourcing process is necessary for all industries, regardless of what you need to procure. Developing a strategic sourcing plan is also a must if you want to find the perfect suppliers for your business.
If you want to form a cost-effective supply chain that won’t eat up your profits, you need to place a lot of emphasis on the sourcing phase.
Yet, sourcing strategy is a process that often gets overlooked by companies due to an eagerness to hit the ground running.
That mistake can be a costly one, which is why we put together this extensive guide breaking down everything you need to know about sourcing management.
Read on to discover how your procurement team can develop a strategic sourcing plan to gain a competitive edge in your field.
What is Sourcing & Why Is It Important?
Traditionally defined, sourcing strategy refers to researching, discovering, and selecting suppliers of goods and services for your business.
Ideally, you want to find suppliers that will provide high-quality goods/services at a price point that guarantees the profit margins you need to run a successful business.
That’s a significant reason why sourcing management is so integral to the health of your operation, as mistakes in this area can cause your business to see less profit.
Besides finding the right price point, the quality of goods and services suppliers provide should come into question. For instance, if you choose a supplier that has ultra-low prices but also low-grade materials - the added profit margin won’t amount to much since consumers won’t want to buy your products.
Proper sourcing and procurement involves striking a delicate balance between price and quality.
Here’s a quick overview of what the sourcing process typically entails:
Compiling data (prices, materials, reviews, etc.) on suppliers’ goods and services
Negotiating supplier contracts
Conducting market research
Analyzing competitor suppliers
Quality testing goods and services
The end goal of sourcing is to develop a vetting process to come up with a list of suitable potential suppliers. Once that’s done, the procurement process begins - where your team will communicate with and conduct logistics for each supplier to make an ultimate decision.
That’s the sourcing process and why it’s so essential for your success in a nutshell. Now, let’s review the top 5 types…
The 5 Most Popular Types of Sourcing That Provide the Best Results
Sourcing is an umbrella term that encompasses a few different schools of thought.
For example, depending on the needs of your business, you could choose to work directly with wholesalers.
Or you could choose to source materials in-house. There are also sourcing methods that involve looking overseas for suppliers.
There’s also partnering with other companies to produce goods/services.
Here are 5 of the most popular types of sourcing that companies use.
The most prevalent form of sourcing is outsourcing, where you hire a third-party entity to be in charge of providing goods and performing services that you need to operate your business.
This typically involves processes that can be done in-house, but the company doesn’t want to keep things simple.
You can outsource just about anything, including front and back office operations, shipping, or manufacturing.
The decision to outsource is usually a combination of financial, staff, and time constraints - such as a business opting to outsource its IT work instead of hiring an internal department.
As long as the supplier provides quality work, outsourcing can be a highly effective cost-saving tactic that simplifies operations.
Insourcing is the exact opposite of outsourcing, where you turn in-house to source goods and services.
In this case, you would use an internal IT department instead of outsourcing. That would be an example of insourcing a service.
Companies prefer to insource whenever possible because of the added agility, flexibility, and quality assurance. Insourcing grants you more complete control over what you produce, which can be a real benefit.
Yet, for a smaller company with fewer resources, it could make more sense to outsource. It depends on the resources you have available for sourcing.
3. Global Sourcing
In today’s age, collaborating internationally to source products and services is easier than ever before, which has led to the prevalence of global sourcing.
After all, the world is a big place - and there are suppliers everywhere. It just makes logical sense to take a peek and see if you can find a good deal overseas.
Not only that, but sourcing internationally can also expose you to skills, products, and services that aren’t available in your country.
4. Near Sourcing
An alternative to global sourcing, near sourcing involves only working with suppliers that are located near where you sell your products.
There are a few reasons why a company would choose to do this, one of which is to support local businesses in their area or have more control in case countries implement tariffs or other cross-border restrictions.
It also may be that the products a company sells need goods that only come from specific locations, such as oranges from Florida.
5. Joint Ventures
Two companies may agree to a joint venture to handle their sourcing. That refers to a business entity created by two parties in order to create goods and services.
Why is this beneficial?
Joint ventures are popular because they can provide companies access to distribution networks and markets they wouldn’t have on their own. A joint venture also increases the overall number of resources and capacity for each company.
Both companies also share risks, costs, and liabilities, which can provide more flexibility for both parties.
If there’s one thing that slows down the procurement process, it’s dealing with manual RFx (request for anything) forms. That includes creating, sending, and keeping track of supplier responses.
It’s a lot to deal with that often leads to confusion, time delays, and lots of wasted money.
That’s why you need to implement intuitive RFP software like DeepStream. It’s a cloud-based platform that centralizes everything related to RFx. You can automate RFx processes, create templates, and track all your responses in one convenient location.
That will make procurement and contract management far simpler, saving you precious time (and time is money) that you can spend on more strategic work for your business.
DeepStream will enable you to make the days of keeping track of umpteen email threads a thing of the past, so don’t wait to request a demo today.
7 Sourcing Models to Simplify Supplier Management
In addition to the various sourcing types, there are also numerous sourcing models that companies choose to use.
Once again, the model you choose comes down to the resources you have available plus how much money and time you will save from it.
Here are 7 of the most popular sourcing models in use today.
1. Shared Services Model
This model is typically for companies seeking to create a supplier internally. It’s an investment-based model that involves ‘sharing’ services across several different entities.
The result is a shared services organization (SSO) that functions as a regular business.
Some services that can be ‘shared’ include:
The shared services model is popular because it frees companies up to focus on more value-adding activities.
2. Equity Partnerships
An equity partnership is an agreement between two individuals or companies to pool all their resources, capital, and capabilities together.
An equity partnership is legally binding through formally structured contracts. The idea behind the model is akin to ‘two heads are better than one.’
In other words, the individuals or companies partner up to achieve more success together than they would on their own. From a sourcing management perspective, it makes sense because you’re saving money by working together instead of outsourcing.
3. Approved Provider
In this model, you seek to source from trusted suppliers that offer fair pricing for both parties. This tactic is a core aspect of supplier relationship management, and it’s a great way to save money while finding a long-term supplier.
4. Basic Provider
The simplest of the sourcing models, the basic provider model is where you seek to source high-quality goods and services at the lowest price point. Deep discounts are expected but no long-term contracts are involved.
5. Preferred Provider
This model involves seeking suppliers that you can form a special relationship with - often by including price markdowns or other valuable features in exchange for a long-term contract.
These vendor relationships are often centered around value instead of price, as preferred providers make repeat orders effortless.
6. Vested Business
A vested business model is where a company and a supplier go all in on a long-term commitment.
Both parties must agree to commit to the success of the other and often agree to a long-term contract of 10 years or more.
You should only consider entering into a vested business model with a vetted, trusted supplier that offers strategic value to your business.
A performance-based sourcing model centers around maintaining high-quality standards to continue the relationship.
For instance, a shoe company may enter into a performance-based relationship with a shoelace supplier. The agreement states that if the quality of the product or timeliness of delivery wanes, the business can break the contract and turn elsewhere.
This can be an advantageous model for suppliers as long as they maintain their quality levels.
5 Irreplaceable Benefits of Proper Sourcing Management
Now that you know why sourcing is integral, as well as some popular sourcing models, what’s in it for you?
It turns out there are numerous benefits to taking the sourcing process seriously. As stated previously, the quality of your sourcing and procurement can make or break your business as a whole.
Beyond that, here are 5 of the most significant benefits you’ll see from implementing a strategic sourcing plan.
1. More Robust Supplier Relationship Management
The best way to ensure an optimal supplier performance is to strengthen your relationship with them. If you don’t place a lot of effort into sourcing or procurement, you likely won’t interact much with your suppliers, which isn’t good.
The more you can communicate with your suppliers and coordinate with them on sourcing decisions, the harder they’ll likely work for you as a result. One of the best things you can do is become a high-value client for a supplier, as they won’t hesitate to give it their all to keep your business.
A positive, long-lasting relationship with a supplier can lead to increased cost savings and improved timeliness of deliveries - so it’s in your best interest to invest in your vendor relationships.
2. Minimize & Mitigate Risks
Supply chain risks are a very real consideration for any business - and the threat they pose is considerable.
A significant blow to your supply chain can mean the end of your business or at the very least a considerable loss that will take years to recover.
What’s the best way to minimize these risks?
By practicing in-depth sourcing and procurement, you will lower the risk of something going wrong with your supply chains. Proper sourcing will maintain the status quo so you can continue selling products and services.
3. Reduce Spending & Maximize Profits
This benefit is the ultimate goal of the sourcing process, to minimize spending while maximizing profits.
The good news is that’s what sourcing does when it’s done correctly.
By following sourcing best practices, you can uncover suppliers that have reasonable prices AND high-quality products.
4. Hone in On Your Ideal Suppliers
Not all suppliers are created equal, and the perfect supplier for one business will not be the best fit for another.
That’s a significant reason why sourcing is such a crucial process for any business, as it helps you hunt down the perfect suppliers for your business needs.
Without it, you’ll wind up going with the first supplier that you find, which can lead to low-grade, cheap products and skyrocketing customer support costs.
5. Stay Competitive in the Future
No business can survive if they aren’t staying competitive, which is another benefit of proper sourcing. By implementing a rigid vetting process for suppliers, you’ll ensure that you’re only using the best - which will help you stay competitive.
If you ignore sourcing, you risk getting swallowed up by the competition due to their higher quality products and lower prices.
What is Strategic Sourcing & How Does It Turbocharge Sourcing Management?
Strategic sourcing refers to analyzing far more than the lowest purchase price of a supplier.
It also looks at:
Market analysis & research
This allows companies to uncover suppliers that have the lowest total cost overall, not just a desirable purchase price.
The #1 way to incorporate strategic sourcing at your company is to use DeepStream.
Its state-of-the-art supplier evaluation tool will help you make the most informed decision, ensuring you always wind up with the best option. DeepStream also has tons of other valuable RFx tools that integrate with your existing tech stack - so don’t wait to try it out today.