Sourcing 101: Process, Types, Examples,Benefits Guide 2024

Sourcing is a critical aspect of any business or organization. Whether you're a small business owner, a procurement professional, or an entrepreneur launching a new venture, understanding the sourcing essentials can significantly impact your success.

This guide is designed to provide a concise overview of sourcing, focusing on key concepts, strategies, and features for strategic sourcing software that can help streamline your procurement process and ensure you make informed decisions.

In just 10 minutes, you'll gain valuable insights into the sourcing world, empowering you to navigate the supplier landscape confidently and efficiently.

What is sourcing?

Sourcing is the process of finding, evaluating, and selecting suppliers or vendors to fulfill the needs of a business or organization. It involves identifying the right suppliers who can provide the required products, services, or materials at competitive prices and with reliable quality and delivery.

In a broader sense, sourcing in procurement encompasses various activities, including supplier identification, supplier evaluation and selection, negotiation of contracts and terms, and ongoing supplier relationship management.

The goal of sourcing is to ensure that the organization has access to the right resources from reliable and cost-effective suppliers to meet its operational requirements.

Effective sourcing involves understanding the organization's needs, conducting market research to identify potential suppliers, assessing their capabilities and suitability, and engaging in negotiations to establish mutually beneficial contracts.

It requires careful consideration of cost, quality, reliability, sustainability, and the ability to meet specific requirements or standards.

Sourcing is not limited to physical products but also extends to services, such as outsourcing customer support or IT operations. It is a crucial function within procurement and supply chain management, directly impacting an organization's efficiency, cost-effectiveness, and overall success.

What Is an example of sourcing?

Let’s examine the following sourcing example:

A technology company, Tech Innovators Inc., is looking to source components for its latest smartphone model. They need a reliable supplier for the high-resolution display screens required for their devices. After conducting market research and seeking recommendations from industry experts, they identified a potential supplier, DisplayTech Solutions. 

Tech Innovators Inc. evaluates DisplayTech Solutions based on product quality, pricing, manufacturing capacity, and delivery capabilities. Impressed by DisplayTech's track record, they negotiate to establish favorable terms and pricing. 

Once the negotiations are successful, Tech Innovators Inc. finalizes a contract with DisplayTech Solutions, outlining the specifications, quality standards, pricing, and delivery schedules. 

Over time, Tech Innovators Inc. maintains a strong relationship with DisplayTech, regularly communicating, monitoring performance, and collaborating to ensure a steady supply of high-quality smartphone display screens.

In this example, Tech Innovators Inc. goes through the sourcing process to find a supplier for their display screens. They identify DisplayTech Solutions, evaluate their capabilities, negotiate terms, and establish a contract, showcasing the key steps involved in sourcing.

What are the different stages of the sourcing process?

The sourcing process consists of several stages that collectively facilitate supplier identification, evaluation, selection, and management. While the specific stages may vary depending on the organization and industry, here are the commonly recognized stages of the sourcing process:

1. Need identification

   This stage involves clearly defining the organization's requirements and needs for goods, services, or materials. It includes determining the quantity, quality, specifications, and any specific standards or criteria that must be met.

2. Supplier identification

   In this stage, potential suppliers are identified through various channels, such as online research, industry directories, trade shows, referrals, or requests for proposals (RFPs). The goal is to compile a list of suppliers who may be able to fulfill the organization's needs.

3. Supplier evaluation

   The supplier evaluation stage involves assessing and comparing potential suppliers based on predefined criteria. This evaluation may include product quality, pricing, reliability, delivery capabilities, financial stability, sustainability practices, and compliance with relevant regulations.

4. Negotiation

   Once a shortlist of potential suppliers is created, negotiations take place to establish mutually beneficial terms and conditions. This stage involves discussing and finalizing pricing, payment terms, delivery schedules, quality standards, warranties, and other contractual elements.

5. Contract finalization

   Once the negotiations are successfully concluded, a contract is drafted and finalized. The contract clearly outlines the terms and conditions agreed upon, including the roles and responsibilities of both parties, quality specifications, delivery schedules, pricing structures, dispute resolution mechanisms, and any other pertinent details.

6. Supplier relationship management

   After the contract is signed, the organization engages in ongoing supplier relationship management. This stage involves monitoring supplier performance, managing risks, addressing any issues that arise, and nurturing a collaborative partnership.

Regular communication, performance reviews, and feedback are crucial to maintaining a healthy and productive supplier relationship.

Read: The Complete Strategic Sourcing Process Explained: Step-By-Step

It's important to note that the sourcing process is not always linear and may involve iterations or concurrent activities across these stages. Flexibility and adaptability are key as organizations strive to optimize their sourcing efforts and build strong, sustainable supplier partnerships.

What are the different types of sourcing?

Here are four different types of sourcing that you must consider before strategizing your procurement process:

1. Single sourcing

   In single sourcing, a company works with only one supplier from a pool of potential suppliers that can provide the required products or services. This strategy is often employed to establish a long-term relationship with a trusted supplier.
   
   The benefits of single sourcing include cost savings through bulk purchasing, streamlined supplier management, and potential opportunities for collaboration and customization. However, risks are associated with relying on a single supplier, such as supplier disruptions or limited negotiating power.

2. Sole sourcing

   Sole sourcing occurs when there is only one supplier available who can fulfill the organization's specific requirements. This could be due to the supplier's proprietary technology, expertise, or unique products that cannot be obtained from other sources.
   
   In such cases, the organization has no alternative but to source exclusively from the sole supplier. Sole sourcing can provide advantages like specialized products or services, customized solutions, and strong supplier relationships. However, it can also limit competition and potentially result in higher costs or dependence on a single supplier.

3. Co-sourcing

   Co-sourcing involves partnering with an external supplier or service provider to collaborate with a company's internal team on a specific task or project. It is a joint effort where the vendor works alongside the company's team, sharing expertise, resources, and responsibilities.
   
   Co-sourcing allows businesses to leverage external capabilities, access specialized skills, or manage temporary workload spikes. The collaboration can enhance efficiency, speed up project completion, and bring fresh perspectives to problem-solving.

4. Dual sourcing

   Dual sourcing involves engaging two suppliers to provide the same product or service. This strategy aims to diversify the supply base, mitigate risks, and create supplier competition.
   
   By having multiple suppliers, an organization can reduce the impact of supplier disruptions, negotiate better pricing and terms, and ensure a consistent supply. Dual sourcing can offer flexibility, leverage market competition, and provide a backup in case one supplier encounters issues.
   
   However, managing relationships with multiple suppliers requires effective coordination and monitoring.

Benefits of sourcing

Sourcing offers several benefits to organizations. Here are some key advantages:

1. Cost savings

   Effective strategic sourcing strategies can lead to cost savings by identifying suppliers who offer competitive pricing, favorable terms, and economies of scale. Organizations can optimize their procurement spend and achieve cost efficiencies through negotiations, bulk purchasing, and strategic supplier selection.

2. Access to expertise

   Sourcing allows organizations to tap into external suppliers' specialized knowledge, skills, and expertise. This can be particularly valuable in areas where the organization lacks in-house capabilities or requires specific technical know-how. Engaging expert suppliers can enhance product quality, innovation, and overall business performance.

3. Quality assurance

   Organizations can ensure consistent product quality and reliability by sourcing from reputable suppliers. Thorough supplier evaluations, audits, and quality control processes help select suppliers meet quality and compliance standards. This results in delivering high-quality products or services to customers, fostering customer satisfaction and loyalty.

4. Risk mitigation

   Sourcing from multiple suppliers or diversifying the supply base reduces the risk of dependence on a single supplier. This helps mitigate the impact of supplier disruptions, production delays, or other supply chain challenges. Effective supplier relationship management and risk assessment strategies enable organizations to proactively address potential risks and ensure business continuity.

5. Scalability and flexibility

   Sourcing allows organizations to scale their operations based on demand fluctuations. Organizations can efficiently manage production volumes, expand into new markets, and respond to market trends by engaging suppliers who can quickly adapt to changing business needs. This agility supports business growth and competitiveness.

6. Time savings

   Sourcing allows organizations to save time by leveraging the expertise of suppliers who can manage certain tasks or processes more efficiently. This enables the organization's internal teams to focus on core business functions, innovation, and strategic initiatives. Time savings can improve productivity, faster time-to-market, and increase operational efficiency.

7. Strategic supplier relationships

   Sourcing encourages the development of strong and collaborative relationships with suppliers. Building strategic partnerships with suppliers who align with the organization's values, goals, and vision fosters long-term collaborations. These relationships can lead to benefits such as preferential treatment, access to new opportunities, joint innovation, and shared cost-reduction initiatives.

What features should a comprehensive sourcing system have?

A comprehensive strategic sourcing software should have several key features to effectively support and streamline the sourcing process. Here are some important features that a comprehensive sourcing system should possess:

1. Supplier database management

   The system should have a robust supplier database that allows for easy storage, organization, and retrieval of supplier information. It should enable the categorization and segmentation of suppliers based on various criteria, such as industry, location, capabilities, product offerings, pricing, and performance history.

2. Supplier evaluation and selection tools

   The sourcing system should provide tools and capabilities to assess and compare potential suppliers. This may include creating supplier evaluation questionnaires, conducting supplier audits or site visits, tracking supplier performance metrics, and generating supplier scorecards or rankings.

3. RFx Management

   The system should support the management of requests for information (RFIs), requests for proposals (RFPs), and requests for quotations (RFQs). It should facilitate the creation and customization of RFx documents, automate the distribution of RFx to suppliers, and streamline the process of receiving and evaluating supplier responses.
   
   Read: What’s the difference between request for information (RFI), request for proposal (RFP) and request for quotation (RFQ)?

4. Bid management

   Bid management allows businesses to manage the entire bidding process effectively, from setting up bidding events to inviting suppliers, tracking bids, and comparing bids. By having bid management as a core functionality in a sourcing system, businesses can ensure transparency, streamline the evaluation process, and ultimately select the most suitable vendor for their projects or requirements.

5. Collaboration and communication

   The system should enable effective collaboration and communication between the sourcing team and suppliers. This can include features like messaging, document sharing, and task assignment within the system. It should provide a centralized platform for communication and collaboration, ensuring transparency and seamless information exchange.

6. Performance monitoring and reporting

   The sourcing system should offer tools for monitoring supplier performance and generating reports. It should allow for tracking key performance indicators (KPIs), capturing and analyzing supplier data, and generating performance reports and dashboards. This helps identify improvement areas, evaluate supplier compliance, and make data-driven sourcing decisions.

7. Integration and data exchange

   A comprehensive sourcing system should be capable of integrating with other relevant systems, such as enterprise resource planning (ERP) or supplier management systems. This allows for the seamless exchange of data and information, reducing manual data entry and ensuring data accuracy and consistency.

8. Security and compliance

   The sourcing system should prioritize data security and compliance with relevant regulations, such as data protection and privacy laws. It should have robust security measures to protect sensitive supplier and sourcing data, including encryption, access controls, and regular data backups.

How can Kissflow Procurement Cloud help with your sourcing functions?

Kissflow Procurement Cloud offers a range of features to support your sourcing functions. It is equipped with the following:

1. Centralized supplier management
2. Big management to invite suppliers, track responses, and compare quotes
3. Different options to customize sourcing events
4. Streamlined RFx processes
5. Insights into best supplier quotes make it easy to choose the best deal
6. Collaboration tools for effective supplier communication
7. Analytics and reporting capabilities for performance monitoring and data-driven decision-making

With its user-friendly interface and integration capabilities, Kissflow Procurement Cloud helps optimize and streamline your sourcing activities, saving time and improving efficiency.

To learn more about Kissflow’s sourcing capabilities, book a free live demo with us.