Sourcing: What Does It Mean?

By Erhan Musaoglu logiwa-blog-author | Tags: Inventory Management 3PL wms

In the business world, many parts are working together. Manufacturers, suppliers, wholesalers, retailers, third parties, etc... Manufacturers take the raw materials and make the product. Wholesalers buy those products and sell them to retailers. Retailers sell those products to customers. This network includes different activities, people, information, and resources. Managing this supply chain is crucial since an optimized supply chain provides reduced costs and a faster production cycle. Sourcing is one of the elements floating somewhere in between in the huge jungle of the supply chain. But what is sourcing? Sourcing is the notion of selecting and locating companies or individuals according to your business field. This concept is used in many different businesses and many different ways. supply chain management is one of the most common uses of sourcing because that can find appropriate suppliers at the lowest cost. Apart from being related to procurement processes, sourcing is also about recruitment. Sourcing as a subset of recruitment means proactively searching for the most talented candidate for a specific job. There are also other terms we hear much in our daily business life: outsourcing and crowdsourcing. These two are also about sourcing having different definitions. Outsourcing is a technique of contracting a business function that is not crucial for that business. Companies generally prepare a list of potential suitable third parties for this process and pick the most appropriate one among them. This benefits a company in many ways, which you will read further in this post. Apart from that, crowdsourcing is relatively new. As the name might imply, this term aims to use the power of groups to perform a set task more efficiently, such as brainstorming or recruitment.

Major Advantages of Sourcing for Businesses

As sourcing is directly combined to selecting the most suitable supplier or individual, cost saving, and efficiency are certainly the most obvious benefits of the process. As the awareness of improved communication and collaboration with suppliers has increased among manufacturers, every party tries its best to develop a suitable sourcing strategy due to its own interest. That's why, taking an organized approach to strategic sourcing can better line up procurement processes with supplier activities along with many benefits. Let's highlight the most common advantages:

  1. Cost Saving: Since many companies' bottom lines include reduced direct and indirect costs, this is a significant benefit for sure. And savings has a really positive effect on financial profitability in businesses. Sourcing provides advantages for both buyers and sellers. Buyers can bargain on the unit price of a product and this action results in decreased cost of goods and keeps retail prices competitive. On the side of suppliers, they benefit because they have an outlet for their products. This helps planning and cash flow be more dependable.
  2. Long-Term Relationships: Sourcing in supply chain plays a key role in making the right supplier selection decision. Once sourcing definition and objectives are fully understood, manufacturers can easily select valuable suppliers developing long-term and collaborative relationships. Beyond all that, the sourcing process needs to include performance measurement and consistent feedback to suppliers for continuous improvement to meet service level agreements. For the sourcing department, the aim of mutual success is better supported for future decisions to guarantee the right supplier is selected whenever required.
  3. Improved Efficiency: Still there are many manufacturers in many different sectors that handle their sourcing activities on papers. Spreadsheets, e-mails, phone calls, buyer memories to track... This reliance on manual efforts can result in lack of control over the whole process. In this way, manufacturers also lose the chance to identify the most suitable supplier with the best overall price, monitor supplier performance accurately, and empower supplier development. However, with the digital transformation wave, automating sourcing activities and introducing sourcing standards across the organization is getting relatively practical. Manufacturers gain a systematic approach for accurately selecting the lowest cost and optimal source of supply for the many raw materials, products and services. Automated workflow reduced human error and guesswork to a big extend and this helps ensure a standard sourcing process results in the right contract with the right supplier.
  4. Moderated Supplier Risk: Procurement and sourcing executives are looking for innovative ways to maximize sourcing efforts. To better connect manufacturers with suppliers the only need is an integrated supplier management. And the result is most probably a foundation for direct material and indirect cost reduction, better efficiency, and risk mitigation. The question you should ask yourself is "How effective and digital is my company's sourcing strategy?" If the reply hasn't satisfy you, leveling up by a sourcing software company may be a good idea for you to enjoy all the benefits of the concept, lessen the supplier risk, and most importantly reduce direct and indirect costs.

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Sourcing vs. Procurement: What Is the Difference?

By looking at the names only, you might think that sourcing and procurement mean the same. They do not. Though they are highly related to each other and play key roles in a company, they function differently in some strict ways. In this article, you will see the basic nuances between those two and better understand the definitions.

Procurement is the process of acquiring the goods and services an organization needs for its operations. In other words, it is the full sourcing process and then using the suppliers to find and bring all the materials a company needs for its products, services, and indirect costs. Placing orders with each supplier, receiving products, and paying. Simply put, procurement is an end-to-end process that covers everything from purchase planning to handling inventory control and warehousing. With a solid procurement in place, you have the power to rule the operations safe and sound. On the other hand, sourcing is the stage that comes before acquiring goods. You may think of sourcing as a subsection of procurement and a key part of its function. because you need to find a supplier that sells the product you demand. This mission is easier with a strategic sourcing plan which brings you reliable, affordable, and quality supplier alternatives. Sourcing is also about balance. Finding a balance between raw material quality and price. The less you pay for the materials, the more you profit. Sourcing helps you get cost savings, which is important even for your products' quality at the end of the day.

Finally, procurement is the process of acquiring the materials you need, whereas sourcing is the process of finding the suppliers of those materials.

Different Types of Sourcing for Different Business Models

Due to the product you need to purchase, there are various sourcing tools and working methods. You may choose between working directly with manufacturers, sourcing from distributors, or using wholesalers. For example, if you work directly with a manufacturer, there will be no middlemen between, and the prices will be relatively affordable. Not every manufacturer will work with every vendor directly. However, they may have MOQs that exceed your abilities.

Working with a wholesaler, on the other hand, you'll have the chance to buy from multiple vendors and get a price advantage. This way, you also have more room to maneuver. How? For example, a manufacturer cannot provide you with a specific product; you can still run the process working with the other available option.

Some manufacturers only sell goods via distributors. In this kind of situation, you may ask the manufacturer for a list of distributors he recommends to guarantee the supply chain credibility.

Why Do Companies Outsource?

To better understand why companies choose to outsource from time to time, we need to figure out the definition of the term first. Outsourcing is the process of contracting out certain aspects of a business to an alternative company as a means of working to reduce overall costs. This concept brings many pros and cons to companies, and we will see some common ones here below:

  1. Reduced Labor Costs: Especially globally working companies conduct outsourcing to reduce many costs. For example, China and India are well-known countries for their cheap labor force. Some companies manage to save a fair amount of money by outsourcing to these sorts of countries.
  2. Working with Part-time Contracted Employees: If a company decides to employ a talent for a specific role, the recruitment department needs to spend significant time, energy, and budget to find that person. And after hiring the employer, the company has to provide them with health insurance, meal & transportation support, and some other funding. On the other hand, when companies choose to outsource, they do not have to go through all these details except signing a contract with the employee. This brings money-saving for the company at the end of the day.

On the other side of the coin, sourcing out may have some disadvantages for some sort of businesses including:

  1. Negative Effect on Internal Employees: When you outsource, especially to the global workforce, the full-time employees in the company may feel insecure about their jobs. This can cause internal workers to lose focus and finally reduced work efficiency.
  2. Communication Problems: If a job has been outsourced to far-away countries, there can be inevitable communication barriers among internal and contracted employees. Language setbacks, bad internet connections, different time zones, and cultural differences are just a few of these potential barriers.
  3. Lack of Control: This is valid if the contracted personnel is located in another country or if they work remotely. Monitoring these workers can be difficult from time to time, and company executives can be unaware of errors or problems with the work before it is too late.

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Erhan Musaoglu

Written by Erhan Musaoglu

Erhan Musaoglu is the CEO and Co-Founder of Logiwa.