What is sourcing?

The core aims of sourcing have never really changed: Find reliable suppliers who can deliver fast at a good price. But today’s world is growing more complex by the minute. Modern digital solutions allow for unprecedented speed, intel, and visibility. This helps you manage your business better, but it also means that competition is fiercer than ever and that your customers have more choices than at any time in history.

Your company must also navigate an increasingly rocky landscape when it comes to sustainability, ethical sourcing, and unpredictable global and environmental events. As one of the earliest links in your global supply chain, sourcing can set a great example of how consistent practices and integrated digital solutions can help you cut costs, speed up cycles, and boost your performance.

Sourcing definition and meaning

Sourcing is all about finding, evaluating, and onboarding suppliers that can provide the best goods and services—with the best terms—for your business. It impacts cost, quality, and the availability of products or services. By securing reliable and cost-effective suppliers, you can ensure a steady flow of materials to not only keep your operations running smoothly, but also to meet your customers’ fast-paced demands.

As a preliminary step in supply chain management, sourcing involves evaluating supplier capabilities, negotiating terms and prices, and managing relationships to ensure a continuous supply of quality goods and services. This directly impacts production costs and product affordability—and if done right, leads to savings, improved quality, and better supply chain resilience and agility. Additionally, sourcing decisions are crucial for meeting sustainable and ethical practices—which also helps you build and maintain a positive brand image.

Sourcing vs. procurement: What’s the difference?

Sourcing and procurement are often used interchangeably, but they actually refer to distinct parts of the supply chain management process. In reality, sourcing is an early-stage component of the procurement process. The due diligence and rigor associated with the sourcing role adds enormous value to procurement, offering an additional layer of confidence and strategy to support their later acquisition activities. Here’s how sourcing and procurement fit together:

• Sourcing focuses on identifying, evaluating, and engaging suppliers to provide goods and services. It involves market research, running sourcing events, and negotiating favorable contract terms—helping you to build a resilient supply chain and ensure great relationships with your suppliers.
• Procurement encompasses the entire process of acquiring goods and services, from early needs recognition to supplier payments. It includes steps such as recognizing needs, requesting goods and services, reviewing and approving requests, creating purchase orders, receiving goods, and processing payments.

Different types of sourcing in supply chain management

In reality, most of today’s businesses use a combination of different sourcing models to meet increasingly complex opportunities and challenges. Here are some of the most common ones:

Outsourcing

Contracts third-party suppliers (rather than in-house teams) to carry out specific tasks. This model can reduce costs, access specialized skills, and increases flexibility.

Insourcing

Uses internal resources to perform tasks instead of contracting them out, providing greater control over processes and quality.

Near-sourcing

Relocates sourcing activities closer to the market where products are sold, reducing transportation costs, improving communication, and shortening delivery times.

Global sourcing

Procures goods and services from different countries, often using electronic data interchange (EDI), allowing businesses to benefit from lower production costs and access to new markets.

Single sourcing

Selects one supplier for all required materials, goods, or services, strengthening supplier relationships and bargaining power.

Captive service operations

Establishes wholly-owned subsidiaries or facilities in other countries to handle business functions.

Joint ventures

Involves partnering with another organization to share resources, expertise, and risks in sourcing activities.

What is strategic sourcing?

Strategic sourcing is a methodical, data-driven approach that evaluates and continuously re-evaluates your activities to align with your long-term goals. Unlike traditional sourcing, which often focuses primarily on cost and speed, strategic sourcing considers a broader range of factors, including supplier quality, reliability, sustainability, and long-term partnerships. This approach helps you secure the best prices, build strong supplier relationships, and enhance supply chain efficiency.

Key components of strategic sourcing include the following:

• Spend analysis: Evaluating and analyzing an organization's expenditure to identify cost-saving opportunities and areas for improvement.
• Supplier evaluation: Assessing potential suppliers based on their capabilities, reliability, and alignment with the organization's values and objectives.
• Supplier relationship management (SRM): Building and maintaining strong relationships with suppliers to ensure long-term collaboration and mutual benefits.
• Market research: Conducting thorough research to understand market trends, supplier landscapes, and competitive dynamics.
• Risk management: Identifying and mitigating supply chain disruptions such as geopolitical instability, supplier insolvency, natural disasters, and risks associated with inventory control.
• Integrating across the supply chain: Integrating cross-business solutions to ensure that related operational areas are co-informed. For example, integrating with material requirements planning (MRP) systems to correlate supplier activity with inventory levels and scheduling.

Responsible sourcing

Responsible sourcing involves incorporating ethical, social, and environmental considerations into procurement decisions. This means selecting suppliers that adhere to fair labor practices, environmental sustainability, and ethical business conduct. The goal is to ensure that sourcing activities contribute positively to the world around us, and also align with your broader corporate social responsibility (CSR) objectives. And as today’s customers and investors expect greater transparency and more responsible business practices, the companies that prioritize sustainable sourcing and ethics can boost your brand image, build customer loyalty, and mitigate risks.

Impact sourcing

Impact sourcing is a socially responsible sourcing strategy focused on providing employment opportunities to people from disadvantaged communities or backgrounds. It aims to create positive social and economic impacts by offering sustainable work to people who may not have had access to traditional employment channels. This typically involves making existing and new jobs more accessible to marginalized or differently-abled candidates and offering training programs to build long-term skills and opportunities. When done with strategy and care, it can help to build a more cohesive and loyal workforce—boosting retention, value, and lasting community impact.

Three main sourcing models

A sourcing model defines the level of involvement, control, and risk in the sourcing process. Depending upon the nature of your business and product range, one (or all) of these models may work for you.

Direct sourcing

Involves procuring goods and services directly from manufacturers without intermediaries. This model provides greater control over the quality and cost of products and often leads to stronger supplier relationships.

Indirect sourcing

Means purchasing goods and services through intermediaries such as distributors, wholesalers, or agents. This model can provide access to a broader range of products and services, but it may come with higher costs due to intermediary markups.

Hybrid sourcing

Combines elements of both direct and indirect sourcing. This model is often used for critical or high-volume items to control costs and quality, while employing indirect sourcing for less critical or lower-volume items to benefit from intermediaries' expertise and broader product ranges.

Key steps in the sourcing process

Every company is unique, so there is no “cookie cutter” sourcing process. However, best practices tend to include most of the steps below:

• Assess sourcing needs: Use experience and data-driven intel to help determine your company’s specific needs and demands, including required products or services, quantity, and delivery timeline. This step defines the scope and objectives of your sourcing activities.
• Identify potential suppliers: Conduct market research to find suppliers who meet your requirements. Consider factors such as supplier reputation, financial stability, and delivery capacity. Quantifying your selection criteria can help streamline the process.
• Issue requests for proposals (RFPs): Issue standardized RFPs to potential suppliers, detailing requirements, timelines, and evaluation criteria. This allows suppliers to submit the most relevant proposals as to how exactly they can meet your needs.
• Evaluate RFPs: Evaluate and shortlist received proposals against your criteria. Using e-procurement platforms can streamline this process by supporting digital submissions and analyses—for faster communication and more efficient decision-making.
• Negotiate contracts: Enter detailed (and meticulously documented) negotiations with shortlisted suppliers to finalize terms and conditions. This process will focus on the big factors such as pricing, delivery schedules, and payment terms. But it should also consider written commitments to transparency and accountability.
• Execute contracts: Formalize the agreement with the chosen supplier through a legally binding contractual document. This officially kicks off the supplier relationship—and it goes without saying that you should secure the appropriate legal counsel for this step.
• Monitor performance: Continuously monitor the supplier’s performance through regular audits, reviews, and feedback sessions to ensure they meet agreed standards. For best results, address issues promptly and maintain a strong, consistent—but respectful—stance.

Benefits of effective sourcing

With competition and customer choice being what it is these days, it’s essential to leverage every opportunity to create savings, efficiency, and greater visibility and integration.

• Cost savings: Companies that adhere to strategic sourcing strategies have been shown to save over 8% on their annual sourcing costs—by leveraging data-driven solutions and committing to holistic analysis of their sourcing operations.
• Product quality: Never in history have customers had more sellers to choose from. Competition is fierce and good sourcing can help you lock in quality goods and services from your suppliers. Quality feedback from customers can also support better category management, focusing on supplier performance around very specific categories of goods.
• Supply chain predictability and resilience: If the pandemic taught us anything, it’s the vulnerability of supply chains. When the supplier links in your supply chain are strong and reliable, your business is more robust.
• Reduced risks: Everything from natural disasters to politics can have an impact on supply and demand. Good sourcing helps you anticipate and respond quickly to a wide variety of risks. Furthermore, recent stats show that companies that use contract- and catalog-based invoices have a 60% higher rate of managing supplier compliance.
• Brand image and loyalty: In today’s business world, success can be won or lost on the strength of your reputation and image. Transparent supplier relationships and unwavering sourcing standards can help to both protect and promote your brand.

Sourcing challenges

Like it or not, your business is enormously dependent upon reliable suppliers. And with that dependency come some challenges and hurdles:

• Long sourcing/supplier onboarding processes: Traditionally, background research, evaluations, and approvals have delayed procurement. Streamlining onboarding with standardized procedures and modern cloud technology can help reduce these slowdowns.
• Reduction in quality of goods: Particularly with global suppliers, even reliable partners can suddenly be bought out or restructured before you know it. Cloud-based solutions that offer real-time supplier visibility can help reduce surprises.
• Contractual risks: To minimize risks that come from neglecting due diligence, today’s sourcing teams look for customizable templates, automated workflows, detailed audit trails, and the ability to easily collaborate with internal contract management stakeholders.
• Supplier over-dependence: It’s golden when you have a supplier that you can trust and depend upon. But unexpected disruptions happen. So, yes, be loyal to your proven partners, but always have a few vetted alternates waiting in the wings.
• Weak supplier relationships: As in all human relationships, complacency is a bad thing. Consistent communication and streamlined supplier relationship strategies and solutions are essential to managing expectations and strengthening partnerships—rewarding good performance, and spotting and addressing potential problems before they happen.

How to set a successful sourcing strategy

Setting a successful sourcing strategy is crucial for optimizing the procurement process and achieving long-term business goals. Here are the key steps involved in developing an effective sourcing strategy:

• Establish goals: Define specific goals and key performance indicators (KPIs) for your sourcing strategy. Include the obvious ones like cost reduction and supplier performance. But be sure to also encourage and reward targets like team leadership and innovation.
• Analyze current and past sourcing activities: Today’s AI-powered analytics and data management tools let you amalgamate both real-time and historical data sets into customized reports. And don’t forget to ask your teams on the ground. Your best insights may come from the shop floor rather than the top floor.
• Bring in market research and competitor data: Information is power. Make “research” a core focus. Explore your competitors’ websites and media. Listen to your customers. And follow the news in your sector and in the world. You can even use the same AI-powered analytics tools that you use on your own data to provide insights into your external market research findings.
• Conduct regular audits and performance monitoring: If you haven’t been rigorous about expecting your longstanding suppliers to undergo ongoing performance monitoring and regular audits, it can feel awkward to do so all of a sudden. But it’s an essential step in the process. Here’s where implementing a consistent SRM strategy from the start can help you in the long run.

What to look for in sourcing software

When selecting sourcing software, ensure that it aligns with your organization’s needs and can effectively support the sourcing process. Here are a few key features and capabilities to look for:

• Cloud deployment: Opt for a cloud-based solution that offers scalability, flexibility, and remote access.
• Process management workflows: Ensure the software provides robust workflows to automate and streamline various sourcing activities, including supplier onboarding and qualification.
• Comprehensive supply chain insights: The software should offer a 360-degree view of supply chain activities, powering better decision-making and risk management, and integrating smoothly with existing ERP and business management systems.
• Cost management tools: Look for features that support detailed cost breakdown analysis and total landed cost calculations for global sourcing, including logistics, import duties, and taxes.
• Collaboration and communication tools: Sourcing solutions should provide tools that support your collaboration with suppliers on all documentation, reporting, compliance, and more.
• Advanced analytics and reporting: It’s essential that you can track performance in real time, identify trends, and manage sustainability and efficiency from a single platform.

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