Sourcing in Supply Chain Management

In this blog, we have comprehensively addressed the essentials of supply chain sourcing, including its definition and practical tips for successful implementation.

Below are the following topics we are going to discuss:

• What is Sourcing in the Supply Chain Management?
• Three Main Sourcing Models
• Types of Sourcing in Supply Chain
• The Seven-Step Sourcing Process
• Sourcing Vs Procurement in Supply Chain Management
• Benefits of Sourcing in the Supply Chain
• Sourcing Challenges
• Conclusion 

What is Sourcing in the Supply Chain Management?

Sourcing is a fundamental component of supply chain management. It revolves around identifying, selecting, and obtaining the essential goods, services, and raw materials for a company’s day-to-day operations.

This process includes two key stages:

Stage 1: Identifying potential suppliers that can fulfil particular product or base material requirements at reasonable prices.

Stage 2: Carefully verifying the quality, accuracy, and efficiency of the delivered goods

This procedure includes searching for authentic suppliers who can efficiently provide these resources while maintaining the required level of quality. This plays a very significant role, as effective sourcing directly impacts a company’s ability to meet customer demands, affects operational costs, and maintains a competitive edge in the market.

Sourcing Definition And Meaning

Sourcing is the critical step involved in the supply chain management process. As the name goes, it is defined as the process of identifying raw material suppliers, assessing the quality of their materials and onboarding the suppliers by negotiating the terms of the contract. The objective of sourcing is to on-board potential suppliers who offer materials at the best possible value.

By choosing the right and cost-effective supplier, you can ensure a seamless flow of goods, which not only keeps your business running smoothly but helps you address customer demands fast without any manufacturing level delay. Getting the products quickly into the hands of the customers helps businesses attain a unique position in the highly competitive markets of current times.

Importance of Sourcing in Supply Chain Management

In today’s business world, customer expectations have increased, and companies have noticed a sudden surge in requirements. Organizations, regardless of size, prefer agile supply chain strategies to keep pace with the rapidly changing market. Strategic sourcing is essential in this approach, as it is necessary to ensure top-notch goods, services, and raw materials for cost-effective management while maintaining a balance of quality and affordability. 

Through strategic partnerships with suppliers, organizations can streamline manufacturing and distribution processes, resulting in a reduction of overall product costs. This helps the company beat the competitive pricing that businesses often face.

A firm sourcing process is essential for connecting with the best suppliers for your products or services, and it is crucial to maintain a backup supplier in case the primary one encounters difficulties. Efficient sourcing directly impacts your business’s success and financial stability.

Three Main Sourcing Models

A sourcing model acts like a planning strategy for companies to help them decide where they will get the products, materials, or services they require. There are three main Sourcing Models available as follows:

Direct Sourcing: The model of sourcing where companies directly buy raw materials from suppliers is termed direct sourcing.

Indirect Sourcing: This sourcing model refers to the method of purchasing goods and services through intermediaries such as distributors, wholesalers, or retailers.

Hybrid Sourcing: This sourcing model is a combination of the two models discussed above. In this model, the Direct Sourcing approach is used in scenarios where raw materials are needed in high volume and in less time. The goal here is to acquire materials fast and in high volumes. On the other hand, indirect sourcing is employed for less critical or lower-volume items. The goal is to leverage intermediaries’ expertise and access to a wider range of products at the lowest cost possible.

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Types of Sourcing in the Supply Chain

Each type of sourcing has its advantages and challenges, and organizations often use a combination of these strategies to achieve supply chain optimization based on their specific needs and objectives. Here are the primary types of sourcing:

• Single Sourcing: This method of sourcing focuses on obtaining goods or services from a single supplier. This type of sourcing simplifies the acquisition process, but it contains risks such as dependency on one supplier, which can create problems if they face any kind of issues with production or delivery.
• Dual Sourcing: Dual sourcing minimizes the risks involved with single sourcing by gathering goods or services from two different suppliers. It provides a layer of security in case one supplier encounters any problems, and supply will not be hindered because of another supplier. This ensures a regular supply.
• Multi-Sourcing: Multi-sourcing is an advanced version of dual sourcing that engages multiple suppliers for the same product or service simultaneously. This method focuses on regulating optimum costs, enhancing competition among suppliers, and reducing dependency on one particular source.
• Offshoring: Offshoring is the sourcing of goods or services from suppliers located in different countries. It is often opted for cost minimization, accessing particular services, or, as we can say if we want to expand our reach to the global market.
• Onshoring: Onshoring is just the opposite of offshoring. This type of sourcing is conducted locally or within one’s own country. It is often chosen to support domestic manufacturing, and this somehow reduces supply chain uncertainty.
• Outsourcing: Outsourcing in the supply chain is the practice of delegating specific tasks or processes to external companies or individuals. This allows a company to focus on its core competencies, such as product design and marketing, while benefiting from the expertise and cost efficiencies of specialized vendors for tasks such as manufacturing and logistics.
• Insourcing: Insourcing, contrary to outsourcing, involves bringing functionalities or processes back to their original origin that were previously outsourced. This is certainly done to improve control and quality or reduce costs.
• Strategic Sourcing: Strategic sourcing is an approach that takes into account not only cost but also factors like relationships with suppliers, quality of material, and long-term benefits. Its goal is to achieve sourcing decisions based on the core business strategy.
• Just-In-Time (JIT) Sourcing: This type of sourcing mainly involves the gathering of goods or materials when they are needed, reducing inventory holding costs, which ultimately optimizes supply chain efficiency.
• Vendor-Managed Inventory (VMI): Vendor-managed inventory (VMI) is a type of sourcing where the supplier keeps track of and manages the customer’s inventory levels to make sure that goals are met on time.

This reduces the customer’s inventory costs and keeps the supply chain running smoothly. In other words, the supplier is responsible for making sure that the customer has the right amount of inventory on hand at all times. This is done by monitoring the customer’s inventory levels and placing orders automatically when needed.

These sourcing methodologies have their own pros and cons, and the choice of which to make depends on an organization’s specific aims, market conditions, and risk tolerance. Effective sourcing decisions are significant for maintaining a shock-proof supply chain.

The Seven-Step Sourcing Process

The process of sourcing encompasses a series of steps and activities aimed at acquiring goods and services to meet an organization’s needs. Here is an overview of the key steps involved in the sourcing process:

Step 1: Need Identification

Initiating the sourcing process necessitates a comprehensive understanding of the organization’s requirements. Identifying closely what products or services are needed and specifying the associated requirements forms the foundation of this step.

Step 2: Market Assessment

For effective sourcing, it is necessary to analyze market dynamics and list the desired products or services. Then, filtering factors such as product availability, ease of gathering, and looking for potential challenges to gain insights into market supply

Step 3: Sourcing Strategy Formulation

Establishing a structured sourcing strategy is the basis for efficient sourcing. Random sourcing can hinder the reach of optimal suppliers. At this stage, it’s essential to define your sourcing strategy, covering methods like online research or attending industry events to identify potential suppliers.

Step 4: Strategy Implementation

In this step, we will be practically implementing a sourcing strategy. Reaching out to potential suppliers with inquiries about the products or services you require

Step 5: Engaging Suppliers

Engaging with potential suppliers is an important step in which, by discussing specific questions and gathering detailed information, you can collect valuable insights into a company’s capabilities and suitability as a partner.

Step 6: Supplier Evaluation

In this step, you will be gathering the necessary data from each supplier and evaluating their offerings. Considering aspects such as terms, minimum order quantities, return policies, guarantees, and product quality in your assessment

Step 7: Agreement Finalization 

With a clear understanding of the suppliers’ capabilities and terms, proceed to finalize agreements and make your purchases. Negotiate prices and terms while adhering to minimum order quantities. In some cases, a minimum order is required to test the supplier’s performance.

A well-defined sourcing policy ensures that your organization secures the best possible suppliers for its needs. Effective sourcing is essential to business success, as it directly impacts costs, product quality, and the overall bottom line.

Sourcing Vs Procurement in Supply Chain Management

Sourcing and procurement in supply chain management are two distinct concepts but closely related functions within the supply chain. Let’s look into the differences between them:

Benefits of Sourcing in the Supply Chain

Sourcing in supply chain management offers several significant benefits that contribute to the success and efficiency of both suppliers and clients. Here are some key advantages:

• Stability: Sourcing establishes a strong connection between suppliers and clients. Through collaboration, they work together to identify and address hurdles like pricing,quality maintenance, on-time delivery, etc., that can negatively impact both parties. This leads to the development of reliable and long-lasting relationships, resulting in improved product quality and operational efficiency.
• Cost Efficiency: Sourcing creates a mutually beneficial scenario for both buyers and suppliers. Buyers can secure goods or raw materials at lower prices through bulk purchases, while suppliers benefit from having a steady market for their products. This predictability enhances future planning and cash flow for suppliers, leading to cost savings for both parties.
• Risk Reduction: Building trust-based partnerships during the sourcing process significantly reduces risk. When both suppliers and clients have confidence in each other’s reliability, honest discussions about potential challenges can take place. As a result, the overall risk factor diminishes for both parties, fostering a more secure and resilient supply chain.
• Quality Improvement: Continuous collaboration between suppliers and clients, driven by sourcing relationships, can lead to ongoing quality enhancements. By jointly identifying and resolving issues, the quality of products and services can be consistently improved, benefiting end-users and enhancing brand reputation.
• Streamlined Communication: Effective sourcing necessitates clear and open communication channels between suppliers and clients. This streamlined communication helps in a better understanding of needs, preferences, and changes in demand, leading to more agile and responsive supply chain operations.
• Market Insights: Sourcing can provide valuable market insights to both parties. Suppliers can gain a deeper understanding of customer demands and trends, allowing them to adapt their offerings accordingly. Clients, on the other hand, can stay informed about market developments and leverage this knowledge for strategic decision-making.

Sourcing Challenges

1. Supplier onboarding delays:

Onboarding suppliers is a time-consuming undertaking. A lot of things happen behind the scenes, such as negotiating material costs, defining supply routes, evaluating raw material quality, creating legal contracts, etc. This process can consume a considerable amount of time, which in turn delays the sourcing process.

2. Unexpected change in suppliers:

Political changes and natural calamities cannot be predicted. If events like that strike, there is a chance that the supplier might not be able to fulfil your requirements. Also, there is always a possibility of your suppliers being acquired by other businesses. The occurrence of scenarios like the above can harm your supply chain across all levels. To resolve this issue, you must diversify your dependency on suppliers.

3. Missing important factors in supplier contracts:

Legal contracts are crucial for defining the code of conduct in a supplier-manufacturer relationship. Before you create an agreement, you need to carry out a thorough assessment of the rules and processes that must be in place to ensure smooth communication. Taking an appropriate amount of time and drafting just the proper agreement can help you limit any possibility of future disruption

Conclusion 

In conclusion, sourcing in the supply chain is strategic and provides stability, cost reduction, and risk minimization. It brings quality improvements, efficient communication, and market insights. Strong supplier relationships and strategic sourcing optimize supply chains and enhance competitiveness.

Effective sourcing is crucial for resilience and success. For example, when sourcing electronic components, choosing cost-effective, quality suppliers enhances efficiency and financial performance. Enroll today in our supply chain management online course to master supply chain management skills.