In this article, learn about:
An overview of what strategic sourcing is
Common sourcing challenges that suppliers face
Helpful sourcing strategies that suppliers can leverage
What Is Sourcing?
Sourcing is the process of a supplier finding, evaluating, and acquiring materials, products, and/or partners for its business. Depending on the supplier’s business model, sourcing could involve obtaining raw materials for in-house manufacturing or engaging in partnerships with manufacturers or distributors.
Sourcing, in whatever form it takes, is the beginning of the entire supply chain. The supply chain only functions when there are products to sell, and in order to sell products, they must be manufactured and distributed. Sourcing is the driver behind it all. For suppliers manufacturing their own products, it is imperative that the raw materials fit with the product design. For suppliers who outsource their manufacturing, it is important to heavily research options to determine which manufacturer will be the best partner.
It is important to distinguish sourcing from procurement, though these terms are often used interchangeably.
The different types of sourcing are:
Outsourcing
Insourcing
Near-sourcing
Single sourcing
Global sourcing
Joint ventures
Defining Strategic Sourcing
Strategic sourcing is when a supplier looks at the bigger picture during the process of sourcing materials or partners. Strategic sourcing seeks to focus on the long-term relationships suppliers must maintain with their various partners. For example, this could mean going with a slightly more expensive manufacturing partner, but one that would ultimately provide a greater ROI (return on investment) down the road.
At its most basic level, strategic sourcing is the process of sourcing with maximum ROI in mind.
Strategic Sourcing Considerations for Suppliers
Suppliers’ strategies when it comes to sourcing will vary, but some things to take into consideration when building your sourcing strategy are:
Social responsibility: Many consumers are becoming increasingly concerned with ethical and sustainable sourcing. As a result, a strong sourcing strategy should include social responsibility by ensuring that potential partners also use ethical and sustainable practices in their business.
Market dynamics: Markets change, but sometimes partners don’t keep up with these changing dynamics. Suppliers should make sure that potential manufacturing partners are consistently auditing the market and making strategic adjustments accordingly.
Strong partner relationships: By doing extensive research into a future partner’s business practices, costs, and ethics, and focusing on what a long-term relationship with a partner would look like, suppliers set themselves up to have a stronger long-term relationship with that partner and prevent unpleasant surprises.
Related Reading: Sourcing in the CPG Industry
Benefits of Strategic Sourcing
Strategic sourcing is an investment in the long-term, but not every benefit will take months to come to fruition. Some of the benefits (both short-term and long-term) that suppliers will realize through strategic sourcing are:
Strengthened partner relationships. By creating a system to strategically choose all partners, partnerships across the entire supply chain will be strengthened, whether they are partners specific to sourcing or not.
Improved quality. By seeking to source from a perspective of long-term ROI, and an emphasis on excellence rather than just cost saving, the overall quality of your business will improve. For example, partnering with a higher quality manufacturer will result in higher quality products, and ultimately, happier customers.
Reduced risk. Higher quality means lower risk. When a manufacturer is dependable, the supplier can be certain that the products created are more likely to be delivered on time, and depending on the product type, might be less prone to damage.
Common Sourcing Challenges
Sourcing is a highly variable process and, just like any supply chain process, it comes with challenges. Some common sourcing challenges faced by suppliers are:
Limited budget. Probably the most common challenge across the supply chain, many suppliers stop pursuing strategic sourcing due to a real or perceived lack of budget.
Lack of visibility. Strategic sourcing can feel like an invisible leap of faith for suppliers who have historically lacked visibility into sourcing. However, suppliers can eliminate this challenge by making visibility a high priority in their sourcing strategy moving forward.
Mismanaged data. At the heart of most supply chain challenges and disruptions is mismanaged data. When data is incorrect, the rest of the supply chain falls apart, sourcing included. A solid sourcing strategy should include efforts to align and organize data.
These challenges tie directly to the need for strategic solutions for suppliers seeking to find manufacturing partners.
5 Best Sourcing Strategies for Suppliers
Strategic sourcing carries many benefits for suppliers by eliminating common challenges in the sourcing process while enhancing overall quality, strengthening partner relationships, and reducing risk. Some best practices for suppliers seeking to implement a sourcing strategy are:
1. Identify Opportunities and Research Options
The first step in building a sourcing strategy is to assess your current sourcing process and determine the areas and opportunities for growth and change. A good strategy does not necessarily mean an overhaul of existing processes but rather should involve an honest look at current systems and processes as an opportunity for improvement and advancement.
Strategic sourcing starts with what is already there, fixes what is broken, adds value where it previously did not exist, and dispenses with processes that are not working and are redundant or extraneous.
In addition to capitalizing on existing systems as a framework for strategic sourcing, suppliers should do their research into what would bring the most ROI for their business. Strategic sourcing will look different for different business models and different suppliers.
2. Leverage Technology and Automation
When researching which manufacturer to partner with, and determining where current sourcing operations break down, suppliers should leverage technology and automation to add value and reduce costs.
Strategic sourcing does not just involve seeking partnerships with the highest ROI. Strategic sourcing also involves distribution — whether through third-parties or done at home — building contracts for partners, building or updating systems for data integration between partners, and streamlining communication across all channels. Some good questions suppliers can ask themselves while building their sourcing strategy are:
Which current or future systems can be automated in order to keep things moving efficiently?
What technology are we lacking, or not utilizing, that would streamline our sourcing strategy?
What are we doing manually that automation or AI could do instead, freeing up valuable time for strengthening partner relationships?
3. Invest in Advanced Data Analytics
Your data is what will drive your sourcing strategy, so it is imperative that your data is easily accessible and up to date. Additionally, how you analyze that data will give you the information necessary to make the most strategic decisions.
Investment in data analytics software can yield a high ROI, especially if your current system for data analysis involves inputting numbers manually in a spreadsheet. Human error can lead to mismanaged data, incorrect analysis, and ultimately cost the supplier money.
By investing in software and technology that can manage and analyze data, suppliers can focus on building a solid sourcing strategy that is grounded in accurate information.
4. Communicate
As with any partnership, communication is key. Establishing a partnership with a high ROI is only half the battle. Once the contract is signed, the process for maintaining a good working relationship begins. Open and consistent communication builds trust and encourages transparency on both sides of the partnership, which in turn means faster resolution of issues, concerns, compliance infractions, and system errors.
5. Audit Processes and Report on Results
Once a supplier has built their strategy, based on accurate data, and assessed their current processes and adjusted accordingly, leveraging automation where possible, and once the contract has been built and signed, strategic sourcing is in full swing. But that is not the end of the process.
Suppliers should audit their current sourcing strategy and partnerships on a regular cadence to ensure that they are keeping up with supply chain trends, continuing to seek efficiency, and not stagnating themselves in processes or partnerships that no longer work for their business.
Let SPS Commerce Help
Simplify your sourcing strategy with SPS Commerce. Through guidance and expertise, SPS Commerce provides exactly what suppliers and brands need to create successful long-term partnerships with manufacturers.
