Sourcing in the CPG Industry

In this article, learn about:

• The definitions of sourcing and procurement

• The difference between sourcing and procurement

• Types of sourcing models and their benefits

• Sourcing challenges for CPG suppliers

• How to mitigate potential sourcing issues

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What is Sourcing?

Sourcing is the process of identifying, evaluating, and engaging partners to obtain the materials or products a company needs. For CPG suppliers, sourcing involves finding manufacturers or distributors to deliver quality goods at competitive prices while meeting the brand’s needs and regulatory requirements.

What is Procurement?

Procurement is a broader process that encompasses sourcing but also includes the actual purchasing activities, like placing orders, managing contracts, and ensuring the timely delivery of goods. Procurement covers all activities required to acquire the products and services a company needs, including operational and transactional functions.

Related Reading: Procurement Best Practices

What’s the Difference Between Sourcing and Procurement?

While the two terms are sometimes used interchangeably, they represent different parts of the supply chain process. As previously mentioned, sourcing involves obtaining materials or products a company needs. Procurement, on the other hand, includes sourcing as one of its components but also encompasses the end-to-end process of acquiring goods or services, such as developing contracts, placing orders, and managing deliveries and payments.

How Does Sourcing Differ Between Suppliers and Retailers?

Within the supply chain, both retailers and suppliers perform sourcing activities. For retailers, sourcing primarily involves identifying and selecting suppliers—a process buyers typically manage. It involves market research, supplier evaluation, and terms negotiation. 

For suppliers, sourcing is centered on securing the essential raw materials, components, and production services required for manufacturing and/or distribution. It’s important to note that not all suppliers are manufacturers—while manufacturers create products and can also supply them, many suppliers operate as distributors, wholesalers, or other entities that provide finished goods. 

Regardless of the role, effective sourcing involves identifying potential vendors and rigorously assessing their reliability, quality standards, and cost-effectiveness to maintain a steady, uninterrupted supply chain. Alongside choosing vendors, suppliers must handle the challenges of planning production and managing risks. Building long-term partnerships that can adjust to changes in demand and avoid disruptions is key to creating a strong and effective production system.

Related Reading: How Do I Create A Plan For Supply Chain Risk Management?

Types of Sourcing

It’s unlikely you will find a supplier that utilizes a single type of sourcing. In reality, successful CPG suppliers combine multiple sourcing strategies to address various needs within their supply chain. Here’s a closer look at various sourcing models and how each can be applied to your business:

Domestic Sourcing

Domestic sourcing involves partnering with vendors located within a company’s respective country. Domestic sourcing offers advantages, like: 

• Shorter Lead Times: The proximity of operating in the same country often results in faster turnaround and delivery.

• Simplified Logistics: Transportation is simpler when you don’t have to deal with customs, ocean freight, or international shipping regulations.

• Ease of Communication: Shared language and industry regulations can facilitate smoother operations.

For example, sourcing ingredients for a food product domestically might offer tighter control over quality and inventory levels. On the other hand, this method might come with higher costs or limited access to specialized materials compared to international options.

International Sourcing

The alternative to domestic sourcing, international sourcing involves obtaining materials or products from outside your country of residence. Some of the benefits of this method include:

• Cost Advantages: Access to lower-cost materials or labor.

• Specialized Materials or Products: Ability to source unique or hard-to-find components that may not be available locally.

• More Options: A broader range of suppliers and innovations.

For example, a supplier may find they can access customized shipping boxes at a lower price if they expand their search internationally. This method also has disadvantages, such as longer shipping times, more regulations, and fluctuating currency. Careful risk management and robust supplier evaluation processes are essential when engaging in international sourcing.

Single Sourcing

Single sourcing is the practice of relying on one vendor for a particular material or component. This is not to be confused with sole sourcing, which occurs when a supplier has only one available option for sourcing that material—either due to exclusivity, patents, or lack of alternative providers. Single sourcing can offer:

• Strong Partnerships: A dedicated relationship can result in better pricing, improved service, and efficient collaboration.

• Simplifies Processes: Fewer vendors to manage can simplify communication and logistics.

The primary downside is the sole dependency on that partnership. If there are production issues or disruptions, your supply chain may be significantly impacted. Single sourcing is best suited for scenarios where the benefits of a deep, specialized partnership outweigh dependency risks.

Multiple Sourcing

Multiple sourcing is the alternative to single sourcing and involves engaging multiple vendors for the same materials and/or components. This method can:

• Increase Supply Chain Resiliency: Having multiple sources for your materials can minimize disruptions when one partner has issues. 

• Offer Competitive Pricing: The competition of multiple sources can help drive down pricing.

The potential complication is that managing relationships with multiple vendors can be more complex, and ensuring consistency in quality and standards across the board requires more oversight than single sourcing.

Strategic Sourcing

Strategic sourcing is a more modern, data-driven approach to sourcing in supply chain management. It views sourcing holistically, considering both the long-term and short-term implications of sourcing partnerships. Instead of choosing vendors solely based on price, strategic sourcing considers the total cost of ownership, risk mitigation, and alignment with business goals. Some of the benefits of strategic sourcing are: 

• Continuous Improvement: Regularly assessing supplier performance, market trends, and alignment with business objectives to optimize sourcing strategies.

• Data-Driven Decision Making: Utilizing analytics and market research to inform sourcing decisions, anticipate future needs, and minimize risks.

• Long-Term Savings: Lowering costs over time by reducing supply chain disruptions and improving efficiency.

For CPG suppliers, strategic sourcing might involve aligning sourcing relationships with broader company goals, such as enhancing sustainability or driving innovation.

Tactical Sourcing

Tactical sourcing involves making decisions that meet short-term needs with the greatest efficiency. Some benefits include: 

• Quickly Meeting Needs: Enables suppliers to secure materials or products on short notice, ensuring production and distribution stay on track.

• Mitigating Disruptions: Provides a fast response to supply chain interruptions, such as sudden shortages, delays, or unexpected demand spikes.

• Flexibility: Allows businesses to pivot quickly based on market conditions, changing customer demands, or unexpected supply chain challenges.

While tactical sourcing may address immediate issues, it might not provide the long-term benefits of strategic partnerships. By balancing strategic and tactical approaches, suppliers can maintain operational agility while building a resilient supply chain. 

Related Reading: What is Supply Chain Resilience?

Sourcing Challenges for CPG Suppliers

Even the most precise and thoughtful sourcing strategy can have challenges, especially when external circumstances cause unexpected issues. The best practice is to expect the unexpected and be prepared to mitigate challenges like: 

• Supply Chain Disruptions: Natural disasters, geopolitical events, policy changes like tariffs, or unexpected demand spikes can interrupt the flow of materials.

• Quality Control: Maintaining consistent quality across your supply chain can be challenging.

• Cost Changes: Volatile material prices or currency fluctuations can affect profitability.

• Regulatory Compliance: Ever-changing industry regulations bring complexity that requires constant evaluation. 

How to Mitigate Potential Sourcing Issues

To reduce the risks associated with sourcing, CPG suppliers should take a proactive and flexible approach. Here are key strategies to mitigate potential sourcing challenges:

• Be Agile: Agility is a learned skill. Work with your team to develop proactive problem-solving abilities, quickly adapt to disruptions, and respond to market shifts with confidence.

• Be Inquisitive: If you see problem spots in your supply chain, ask why. Problem areas, like recurring defect deductions, can pinpoint weaknesses in supplier quality, logistics, or compliance. Investigate root causes, gather data, and implement corrective actions that prevent future issues.

• Diversity Sourcing Strategies: If you keep facing unexpected issues that throttle your efficiency, it might be time to reevaluate your sourcing strategy.

• Build Strong Partnerships: Nurture your sourcing partnerships, so when issues do arise, you have a foundation of trust and collaboration to resolve them quickly.

• Utilize Technology: Manual processes are quickly becoming obsolete in the supply chain. By adopting advanced tools like sourcing and procurement software, automation, and AI-driven analytics, you can streamline operations.

Recover Your Revenue with SupplyPike

The supply chain is complicated, and things don’t always go as planned. When retailer fines and deductions start eating into your profits, SupplyPike is here to help. Our platform streamlines the recovery process, helping you identify and reclaim lost revenue so you can refocus on growing your business.

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