The process of sourcing products or services is the first step in the supply chain. It’s about finding the balance between the quality of products and raw materials you need and the affordability. The less you spend, the more you’ll make. However, poor-quality goods won’t do the job.
Sourcing means finding the right suppliers that provide the quality you need at a price point that gives you the margin you need. A strategic sourcing process can be a difference-maker when it comes to your bottom line.
To make things easier, let’s break down everything involved with sourcing – from finding products, to finding the best people to buy those products from, to the delivery types involved from sourced supplier to customer. Creating a seamless pipeline to procure these products and bring them to consumers will keep your sales process functioning efficiently.
What is Sourcing?
When defining what is sourcing in procurement, they two go hand-in-hand. Before you can procure goods, you’ve got to find the suppliers and vet them out. Connecting with the right suppliers is crucial. If you make mistakes in the sourcing process, it can be difficult – and costly – to backtrack.
Simply put, sourcing is the process of selecting suppliers to provide the goods and services you need to run your business. It may sound uncomplicated, but the process can be complex.
Sourcing involves the following:
- Finding quality sources of goods and services
- Negotiating contracts
- Establishing payment terms
- Market research
- Testing for quality
- Considering outsourcing for goods
- Establishing standards
Why Is Sourcing Important?
What is sourcing in supply chain? Done well, sourcing allows companies to establish consistent supply chains. This keeps your shelves stocked and customers happy.
Strategic planning in the sourcing process is central to cost structure, profit margins, and competitiveness for businesses of all sizes.
Strategic sourcing provides benefits for both buyers and suppliers. Buyers can typically negotiate lower unit pricing for high-volume purchasing. This reduces the costs of goods and keeps retail prices competitive. Suppliers benefit because they have a consistent outlet for their goods which makes planning and cash flow more dependable.
When you find the right source for your products, it truly becomes a partnership. Both businesses rely on each other to keep the supply chain intact. Developing a close relationship can lead to higher quality (and efficiency) as suppliers and customers work together to identify and minimize the root causes of any defects that hurt both buyer and seller.
Besides identifying and solving problems, a strong relationship built of trust can help mitigate risk. When both parties know they can depend on each other, it opens the door to honest conversation. For example, if one party is having temporary cash flow concerns, it can be discussed openly. This lowers the risk for both parties.
How to Conduct Sourcing
If companies handle the sourcing themselves, there’s no shortcut. Selecting a supplier requires proper research and strategy.
Selecting a Supplier
Selecting a supplier as the source for your goods means investing the time and effort to get to know them and ask the tough questions. After all, it’s the reputation of the business that’s at stake. Companies need to do business with the suppliers that will ensure their products will deliver the best results.
Here are some characteristics to look for when choosing a supplier:
- Years of experience
- Flexibility in changed order times
- Wide range of available products and/or services
- Negotiable prices
- Customer reviews
- Prompt delivery times
- Accommodating customer service
- Financial stability
It’s important to remember that when you’re choosing a vendor, you’re choosing a business partner. This needs to be someone you can trust and someone you can rely on now and in the future. Vendors make a monumental impact on your business, so choose wisely.
Securing a Supplier
If you can visit a supplier in person, your chances of securing that vendor grow exponentially. Whether that’s a possibility or not, here are a few of the critical steps to consider when researching and securing a supplier:
Do Your Research
Do your homework. Start by doing online searches of the supplier’s reputation. You can check the Better Business Bureau, local Chambers of Commerce in areas where they do business, and online search engines for customer complaints. These can provide important clues and provide areas to probe.
Checking vendor social media accounts can be enlightening. Customers aren’t shy about leaving negative comments online. Be sure to verify registrations, business licenses, and any required certifications. There are a lot of shady operators out there and you want to make sure you won’t get burned.
You need to fully vet any supplier and verify their credibility. Once you have a strategy in place, you can be particular about which suppliers meet your needs and those that won’t.
Negotiate a Fair Deal
You need to strike a deal at a fair price that allows you to make the kind of profit you need. Everybody, however, deserves to get a fair deal and make money. You may find that the supplier you really want to do business with is unable to meet your price point. If that’s the case, you’ll need to make a decision on whether you can accept their price or need to find other sources.
Negotiation means more than just price. Payment terms, guaranteed delivery dates, and volume discounts are all part of the discussion. For example, some suppliers will have minimum order quantities (MOQs). Do they align with your needs?
Determine Payment Terms
Everyone wants to get paid for the work they do or the items they supply. How and when you will pay for the goods to be supplied can make a difference to the cash flow of both companies. There are plenty of examples where two sides strike a deal on everything else, but get hung up on lines of credit or payment terms. Often, you can get better deal points if you guarantee payments within shorter time periods.
Before getting to the numbers, start by establishing good communication and take time to understand a supplier’s business. Make sure they know your relationship will be mutually beneficial to both parties, and be honest about what you expect from the relationship.
Don’t be afraid to ask for better terms than what’s offered. For example, if vendors expect payment in 30 days, you can certainly ask to extend credit for 60 or 90 days. You may not get it, but you might! Or, maybe you’ll end up at 45 days which gives you extra time to pay.
Regardless of where you wind up, think carefully about what you want before you sign off on payment terms. You’ll live with the consequences. It’s always better to have the discussion upfront and be transparent about what you plan to do rather than have to go back to a supplier later and ask for changes.
Specify Delivery Expectations
The importance of a strong supplier-to-business relationship applies to delivery times as well. Depending on your business structure and needs, there are various options. In negotiating an agreement, discuss your needs fully. You may find the supplier is unable to meet your needs. You may also be able to negotiate better pricing or terms by adapting your delivery expectations to work the way the supplier prefers. If you have the flexibility in your supply chain or timeline, you may be able to conclude a better deal.
Managing your inventory effectively helps reduce your holding costs and tying up capital that could be used elsewhere in your business. Whether you choose continuous replenishment, just in time inventory, or on-demand delivery, all require the cooperation of reliable businesses and suppliers.
Supplier Delivery Models
Continuous Replenishment Model
In the continuous replenishment model, suppliers make deliveries off a predetermined schedule, often in short periods, based on a company’s inventory data and/or real-time demand. When companies employ continuous replenishment, they encourage reduced inventory levels because they’re ordering in small batches, rather than large batches that are more costly and reduce supplier’s flexibility.
Depending on the supplier, more frequent but consistent deliveries may be preferable. For others, they may be more costly and can increase the price you pay.
Just in Time Delivery Model
Under a just-in-time delivery model, companies receive supplies on an as-needed basis. In doing so, they reduce inventory levels and costs because just in time delivers only what is needed to increase efficiency and decrease excess waste. With the help of inventory management software, you can better predict inventory demand with forecasting tools to have the right amount of goods.
On-Demand Delivery Model
In an on-demand delivery model, suppliers deliver goods when demanded by the customer. This gives you the flexibility to wait to take delivery – and trigger payment – until your stock reaches the level where it’s time to reorder.
In this model, it’s especially to choose a supplier who has plenty of products and can be flexible when order times change rapidly. If a company demands it, the supplier must be ready and on time with prompt delivery.
Create a Contract
Once you’ve negotiated the terms, it’s time to draw up a contract. Don’t skimp on an attorney. If you make a mistake or leave it up to the supplier, you may limit your recourse should anything go wrong.
Oral agreements or invoices leave room for error. While they may have some enforceability, it may be expensive and time-consuming to prove if you ever need to take legal action.
Write up a written contract that includes all parties involved, establish payment terms, and commit to any important details, such as timely delivery. A standard contract should cover what’s expected and what happens when one party fails to live up to the agreement.
A vendor contract should cover the following:
- Details of the work the supplier agrees to provide
- The quality of the supplied goods or provided services
- Length of the contract term
- Payment terms
- Indemnity, in the event of loss arising from negligence
- What actions can be taken in case of a breach
A contract is only legally enforceable after the customer and supplier both sign it demonstrating an agreement to live up to the contract’s terms and conditions. Besides legal reasons, it’s also important to establish a relationship built upon mutual expectations.
Typically, the customer includes a statement within the agreement that describes the quality and quantity of goods. Payments made to the supplier are based on the successful fulfillment of this statement.
Some companies decide they would rather give an outside party the responsibility to choose goods and services instead of doing it themselves. Outsourcing occurs when a company purchases goods and/or services made in-house from an outside supplier. Here are some sourcing examples of why some companies may choose to outsource suppliers for the following reasons:
- If an unexpected increase in demand occurs
- Equipment breaks down
- Lack of plant capacity
- Desire to test the products somewhere else
Many companies outsource the process so they can focus their attention on other areas. This allows them to stay on task with what they do well. They stay focused on their core competencies and let suppliers do what they do best.
Common Questions About Sourcing
Here are the answers to a few common questions when you’re getting started with sourcing.
What’s a good way to find quality suppliers in the sourcing process?
There are several ways to start the sourcing process Some companies will look first to companies that have good reputations in their particular industry and see how they use as suppliers. They also solicit referrals from others in the business. Check industry publications, industry trade organizations, and trade shows for sources.
You can usually count on the industry-leading suppliers to be tried-and-true, but you may also be paying for a name. Regardless of who you source, do your due diligence to make sure they are who they say they are.
And, remember the saying: if it seems to be too good to be true, it probably is.
Should I ask for references?
Yes. You can learn a lot about companies from who they do business with – both their customers and their suppliers. While you can expect any references they give you will likely say good things about them, it gives you a chance to discuss with a neutral party to see if the source is a good fit for the way you do business.
You should also ask for product samples. This gives you a way to see first-hand how a company fulfills an order, the quality of the product they provide, and the way it’s packaged.
Are there different types of sourcing?
Depending on the goods you are trying to procure, you may choose to work directly with manufacturers, source from distributors, or use wholesalers. Here are sourcing examples of how these relationships might work:
- Working directly with manufacturers cuts out the middleman and may allow you to get products at the most affordable price. Not every manufacturer will work with every vendor directly, however, or they may have MOQs that exceed your abilities.
- Working with a wholesaler may allow you to get products from multiple vendors. That way in case a particular manufacturer is unable to provide you with what you need, they can still fulfill your order switching to another vendor. You will pay a mark-up on goods to work through a wholesaler, but you’ll also get better pricing than through the open market – unless you can buy direct.
- Some manufacturers only sell through distributors. If that’s the case, ask the manufacturer for a list of recommended distributors to make sure you can trust the supply chain.
What else should I know?
Keeping your shelves stocked with the right number of products is the goal. If you have too many products in your warehouse, you increase your holding costs and run the risk of getting stuck with products that aren’t selling. Too few products on the shelves can lead to stock-outs and frustrated customers.
Creating a strong supply chain means managing your vendors and managing your inventory. Using an Inventory Management System, such as SkuVault, gives you access to real-time information to manage your stock accurately. You can track your suppliers and automate the reordering process when stock levels fall to pre-set limits. You can manage the amount of safety stock you need to maintain until replacement products arrive. And, you can use reports, such as the replenishment report, to make better business decisions.
Sourcing suppliers will take an investment upfront but it’s key to creating an efficient supply chain. It’s just the beginning of the supply chain as you lock in vendors that can provide the quality of goods you need at a price point that works for your business.
We’ve all seen what happens when the supply chain breaks down. It leads to lost sales, unhappy customers, and can damage a company’s reputation. Take the time to thoroughly vet suppliers in your sourcing process. It will pay off in the long run – and maybe the short-term as well.