What is sourcing in business? Well, that is the question that we will answer in this post.
Here will give a detailed definition of this business term and discuss other integral parts of this topic that you should know as a business owner.
Therefore, if you want to learn about this topic, you need to read this article.
This article is your ultimate guide to business sourcing.
So, let us dive right into it.
Meaning of Sourcing in Business – What is Sourcing in Business
Sourcing refers to the process of looking for the best supplier that will deliver the best goods or services at a favourable price that will allow a business to make enough profit.
As you most likely know, businesses do not exist in a bubble.
Occasionally, a business will need to work with another party to enable its processes.
It may need the other party to get an external service or procure certain products or materials to carry out its processes.
But before a company buys this service or goods, it needs to find a suitable supplier/vendor.
This is what sourcing is all about.
It is the process through which a business looks for a suitable supplier.
A suitable supplier will not just be able to deliver top-notch services or goods but should also be able to offer them at a reasonable price.
Sourcing is very important because it allows businesses to vet and get suppliers that meet their requirements.
The final goal of this process is buying services or goods, i.e. procurement.
This is why procurement management and sourcing go hand in hand.
When a company handles its sourcing processes properly, it can procure good quality services and goods at a favourable price.
Types of Sourcing – What is Sourcing in Business
There are so many types of sourcing.
The type you use depends on the situation, the type of goods/services you want to procure, and your sourcing requirements and needs.
You may need to work with manufacturers, wholesalers, or distributors based on these factors.
This is why you need to know the various types of sourcing available to businesses.
This way, you could pick the one that best fits your needs.
Therefore, here are 9 important types of sourcing that you should know about and consider.
Insourcing is done internally within the organisation.
With insourcing, a task or project will be delegated to a group of people (team or department) or someone within the organisation.
This option has two main advantages.
It is more cost-effective and allows proper monitoring to help ensure the work’s quality.
This is why most business owners will opt for this option if available.
Outsourcing is a very straightforward type of sourcing.
It involves hiring an external party outside of a business to carry out certain tasks or deliver specific services initially done by the company.
A company can outsource by shifting some of its operations abroad.
They can also make it less complicated by partnering with a company within its location.
Low-Cost Country Sourcing
Low-cost country sourcing, or LCCS, is all about sourcing from countries with relatively lower production or labour costs when compared to the labour/production costs of the country a company operates from.
The main idea behind low-cost country sourcing is reducing a company’s overall operating costs.
Near Sourcing – What is Sourcing in Business
With near sourcing, a company will shift some of its operations to a location close to where it sells its final products.
For instance, a manufacturing company can locate its warehouse close to the store where it sells its products.
Subcontracting Arrangements – What is Sourcing in Business
Subcontracting arrangements are made between contractors and subcontractors.
With these arrangements, the subcontractor will carry out some tasks that are part of a bigger project the contractor is handling.
As you can guess from the name, global sourcing is worldwide sourcing.
Thanks to technology and globalisation, the globe is now a big marketplace.
The geographical location of some companies no longer restricts companies.
As such, they can buy goods and services from any part of the world.
A major advantage of global sourcing is that it exposes businesses to different markets in different countries.
This help businesses broaden their horizons and get insights that they can use to make their operations and processes better.
It also gives companies access to skills and other resources lacking within their country and neighbouring countries.
Captive Service Operations
Some companies, rather than partnering with another organisation overseas, would open and operate an entity overseas that will carry out the necessary functions.
The company may wholly or partly own the entity they establish.
This method is quite beneficial as it will ensure control.
Vertical integration can either be backward integration or forward integration.
The process by itself is when a company merges with another company in a different production or distribution stage within its industry.
Backward integration is when a company buys an input supplier.
Forward integration is when a company buys a company in the distribution chain.
Joint ventures are business entities that two or more different parties create.
The parties involved in the venture often share ownership, risks, return, and administration.
Importance of Sourcing – What is Souring in Business
Sourcing is a very important step in the supply chain that any business must get right in its processes.
It determines the product/service quality a company will get.
Aside from this, it ensures a smooth supply process.
Properly-executed sourcing will positively impact a company’s image.
It will aid customer satisfaction and build brand loyalty.
With all that being said, let’s look at some of the major advantages of a good sourcing process.
Advantages of Sourcing
Here are three main advantages of sourcing:
One of the basic sourcing functions is finding the right suppliers at an effective cost.
Therefore, by properly carrying out its sourcing processes, a company can get the best quality at a good price.
This can help a company reduce its overall costs to a considerable extent.
Helps you Build a Strong Relationship with your Suppliers
When you source for and get a good supplier, you will be more inclined to ensure that the relationship between both parties works.
This can lead to a long-lasting business relationship that benefits both parties.
Helps You Get the Best Suppliers
Sourcing helps companies get the best suppliers to offer the quality of services or goods that the company needs.
Sourcing Vs Procurement – What is Sourcing in Business
So far, this article has mentioned procurement a couple of times.
This is because these two terms are closely related.
For this reason, some people tend to confuse both of them.
Some people use both terms interchangeably, but this isn’t exactly correct.
Therefore, it is important that you understand the similarities and differences between both processes.
Where sourcing is all about vetting and getting suppliers, procurement is the primary process of buying the services and goods.
Sourcing focuses on the entity or organisation responsible for a company’s supplies.
Procurement focuses on what is being supplied.
The procurement process allows a company to monitor their expenses, avoid fraudulent purchases, and boost its efficiency when buying high-quality products.
Let us look at other key differences between these two processes to help you understand them better.
Differences Between Sourcing and Procurement
The following are some of the major differences between sourcing and procurement:
The process involved in sourcing is quite different from the process involved in procurement.
Sourcing is about getting the right supplier to offer the best quality of services/goods at the best price.
This is why sourcing is considered one of the processes involved in procurement.
Once sourcing is complete, then a company can confidently go ahead to carry out procurement.
Therefore, the sourcing process is not as complex as the procurement process.
It typically includes defining the company’s needs, conducting market research, and vetting suppliers.
The procurement process, on the other hand, has more moving parts.
It covers sourcing and other important processes like purchasing the order, receiving the goods/services, payment, invoicing, and other data analysis.
It even includes managing proper relationships between the company and its suppliers.
Purpose – What is Sourcing in Business
The whole purpose of sourcing is to get a good supplier.
It offers support to the general procurement process.
Once a company can get the right supplier, procurement will be made a whole lot easier.
Sourcing allows a company to negotiate with suppliers.
Conversely, procurement uses the information from the sourcing process to purchase goods/services smoothly.
Objectives – What is Sourcing in Business
Sourcing and procurement also have different objectives.
Sourcing is finding suitable suppliers while ensuring the company can rely on its supply chain.
Contrarily, procurement is all about buying good quality products.
While sourcing focuses on the suppliers, procurement is all about the actual process of buying goods/services.
Sourcing typically occurs before procurement.
Procurement can only take place after sourcing is complete.
Also, if there is an issue during the procurement process, a company may need to go through the sourcing process again before continuing it.
How to Carry Out Sourcing – What is Sourcing in Business
As a business owner, you should know how to carry out this business process effectively.
Sourcing is an effortless task in theory.
However, when you get into it, you may find it takes work.
This is why you need all the help you can get to conduct sourcing successfully in your business.
Taking shortcuts would most likely end up badly.
To get this process’s benefits, you must take your time and do everything accordingly.
Therefore, let’s discuss the major steps you need to take to conduct a successful sourcing strategy.
Choosing a Supplier – What is Sourcing in Business
This step is about finding and getting to know the suppliers that can offer the products or services you need.
This step covers most of the work you will do for this process.
So, you have to get it right.
You need to invest your time to learn all you can about potential suppliers properly.
You should be ready to ask them essential and sometimes challenging questions that will give you a clearer insight into how they operate.
It is equally important you consider several factors as you look for a supplier.
For starters, to verify their reliability, you need to find out their experience level and ask them how long they have been in business.
Find out what their previous customers have to say about them by reviewing their customers’ reviews.
Do not rely on the reviews they have on their websites, as they may only post good reviews.
Check 3rd party review sites to see what people are saying about them.
Find out all you can about how they operate, from their delivery times to their flexibility and the range of products/services they offer.
Also, be sure that they provide good customer service.
A supplier can count as a partner in more ways than one, so you can’t be too careful when selecting a supplier.
You need to be sure that you can trust them at all times.
Hiring a Supplier
Once you have gone through several potential suppliers, you should have a supplier that will meet your expectations.
However, you can’t just hire them without carrying out more research.
At this point, consider meeting them in person.
Set up a meeting with them where you can learn more about their business and how they intend to help your business.
Checking their reputation online will give you insights, but nothing is better than having a one-on-one with a supplier you want to work with.
Verify that the supplier has every necessary certification, license, and even insurance to work.
A shady supplier most likely won’t have all the documentation required to transact their business safely.
However, a reliable one would most likely have them.
If unsatisfied with the supplier, meet with the other potential suppliers to find a better fit.
Once you are satisfied with the supplier and have verified their reliability and credibility, you can do the following to seal the deal.
Remember that sourcing is about getting a good supplier to offer high-quality goods/services at the best price.
Therefore, you won’t have carried out a good sourcing process if you do not get a good deal.
This is why you have to negotiate the price at this point.
However, just because you want a good deal does not mean you would do that at the vendor’s expense.
You should be able to make a deal that would benefit both parties.
Negotiating the deal shouldn’t be all about the price.
You need to consider other important factors, especially those related to order fulfilment like delivery dates.
Discuss Payment Terms
Another important factor that you need to discuss is the payment terms.
This typically comes up when you are negotiating the terms of the deal.
However, some people may discuss every other aspect of the deal but don’t remember to bring this up.
This can be very detrimental in the long run, so you have to make sure you discuss this very important factor.
You should be honest with your expectations.
If you want an extended payment term, you should not hesitate to ask.
Some vendors offer 30 days payment term, but if you want a longer term, be vocal about it.
They may or may not agree, but at least you would know you gave it a shot.
Be sure that the payment terms are what you can meet up with.
It won’t be too late to consider another supplier if it isn’t.
Order fulfilment is another important factor that solidifies the relationship between businesses and suppliers.
This is why you need to discuss your delivery expectations before hiring a supplier.
Ensure you let them know your needs and let them verify that they can meet them.
When discussing this factor, you may find more ways to get a better price or payment term.
For instance, let’s say you want the product or service delivered on a certain date, and the vendor can’t meet that date.
If you can, shift the delivery date forward and use this for a better deal.
Draw Up and Sign the Contract
Now that both parties have agreed on the terms of the deal, it’ll be time to draw up and sign the contract.
Consider making oral agreements, but this may not be the best way to go, especially if you are working with the supplier for the first time.
This is because taking legal action can be difficult and expensive if you only have to back up your claim with an oral agreement.
So, both parties need to sign a contract that covers all the terms of the deal and the consequences that will follow if any party doesn’t deliver their end of the bargain.
Conclusion on What is Sourcing in Business
Sourcing is about getting a reliable supplier to provide the best product/services for a business at the best price.
If you prioritise sourcing and conduct it rightly, your company will benefit from it.
Thankfully, this article has discussed the basic steps you need to take to conduct sourcing properly in your business.
So, implement them and start sourcing the right way!