What Is Sourcing in Supply Chain Management?

Most supply chain transformation tools and topics seem to focus on the middle or end, such as  supply chain logistics or optimizing inventory. Today, let’s start where we should start, the beginning: SOURCING.

Sourcing's strategic value in supply chain transformation lies in its ability to drive cost reduction, mitigate risks, and foster innovation through supplier relationships. By optimizing supplier selection and engagement, sourcing enhances efficiency, improves quality, and secures competitive advantages, directly impacting the entire supply chain's agility and resilience in a dynamic market. So what exactly does that mean…? Let’s dig into the definition.

What is sourcing?

Sourcing is a crucial, strategic function within every advanced supply chain management solution that focuses on identifying, evaluating, and engaging suppliers to meet a business's needs. This process goes beyond simply finding a vendor; it involves a deep analysis of the market and internal requirements to secure the best possible value.

Examples of sourcing in action include a technology company performing extensive market research to find a new microchip supplier, evaluating potential partners not only on price but also on their production capacity, ethical labor practices, and technological innovation. Similarly, a food manufacturer might engage in sourcing by vetting multiple farms to secure a consistent supply of organic produce, considering factors like a farm's proximity to their facility (to reduce transportation costs and lead times) and their certifications for sustainable farming.

Whether part of the supply chain or value chain, sourcing acts as the strategic front-end of the broader procurement process. While procurement encompasses the entire purchasing cycle—from the initial request to the payment of the invoice—sourcing is the crucial first step that defines the parameters of that cycle. By strategically selecting suppliers and negotiating long-term contracts, sourcing directly determines the cost, quality, and resilience of the supply chain. This proactive approach mitigates risks, fosters strong supplier relationships, and ensures that the company's purchasing activities align with its overarching business goals. 

Types of sourcing

To understand the benefits of effective sourcing management, let’s define some common means of sourcing. (Note that the specific approach a company takes depends on its business needs, industry, and risk tolerance.)

By location

• Global sourcing: Procuring goods or services from international suppliers. Often driven by the desire for lower production costs, access to specialized resources, or entry into new markets. It can, however, introduce risks like longer lead times and geopolitical instability.
• Near-sourcing (or nearshoring): Sourcing from suppliers in geographically close countries. Offers a balance between the cost benefits of global sourcing and the logistical advantages of shorter lead times and easier communication.
• Local sourcing: Sourcing from suppliers within the same country or region. Reduces transportation costs and lead times, supports local economies, and can offer greater supply chain resilience.

By supplier relationship:

• Single sourcing: A strategic choice to use only one supplier for a specific product or service, even when other options are available. This can lead to stronger, more collaborative relationships, simplified logistics, and potential for volume discounts.
• Sole sourcing: A situation where a company has no choice but to use a single supplier because only one provider exists for a particular good or service (e.g., due to a patent or proprietary technology).
• Multiple sourcing: Using two or more suppliers for the same product or service. This strategy increases competition, reduces dependence on a single vendor, and enhances supply chain resilience by providing a backup in case of disruptions.

By resource allocation:

• Outsourcing: Contracting with a third-party, either domestic or international, to perform tasks or provide goods that would traditionally be handled in-house. This is often done to reduce costs, access specialized expertise, or increase flexibility.
• Insourcing: The opposite of outsourcing, where a company decides to bring a previously external process or function back in-house. This is typically done to gain greater control over quality, intellectual property, and core competencies.

By strategic approach:

• Strategic sourcing: A systematic, data-driven sourcing aproach that goes beyond just seeking the lowest price. Involves analyzing market conditions, evaluating supplier capabilities on a holistic basis (including quality, reliability, and social responsibility), and building long-term partnerships that align with a company's overall business goals.
• Tactical sourcing: A more reactive, short-term approach to meet immediate and less complex needs, often with a primary focus on securing the lowest price for a specific transaction.

As with any business process connected to logistics, the means of sourcing you choose should support both your immediate needs as well as equip you for long-term strategic success.  (Want to get expert advice on enhancing supply chain logistics? Argano can help.)

Key steps in the sourcing process

At its heart, effective sourcing is a methodical process that can be broken down into a series of best-practice steps: Create a data-driven foundation for sourcing, leverage real-time insights for supplier collaboration, and adopt advanced planning and risk management strategies.

We will explore these in detail, but first a quick exploration of the benefits of sourcing when — as a practice and process — it’s part of your larger transformation. For example, when you integrate sourcing into an ERP system (by, say, creating a dedicated sourcing or procurement module), benefits increase exponentially, such as:

• Integrated spend analysis: The ERP would automatically pull data from various departments (e.g., finance, inventory, production) to provide real-time, comprehensive spend analysis. This eliminates manual data entry and provides a single source of truth for all purchasing data.
• Centralized supplier database: The system would house a master list of all suppliers, including their profiles, past performance, and compliance certifications. This makes it easy to research new suppliers and monitor existing ones.
• Contract lifecycle management: The ERP would store all contracts in a central repository, with automated alerts for renewals and key milestones. This ensures compliance and provides a clear audit trail.
• Supplier performance management: The system can automatically track supplier KPIs, such as on-time delivery and quality ratings. This real-time data allows managers to proactively address issues and collaborate with suppliers for improvement.

Ultimately, this ERP integration (whether Oracle, Microsoft, SAP, or something else) provides a holistic, transparent view of the sourcing process, transforming it from a series of disjointed tasks into a streamlined, strategic function. And now for some brief detail on the aforementioned best-practice steps in sourcing.

Create a data-driven foundation for sourcing

In every business process, the data should be the driver. With data-driven sourcing, you shift the function from reactive purchasing to a strategic driver of efficiency, quality, and competitive advantage.

A data-driven approach to sourcing provides the supply chain with a clear, objective foundation for decision-making. By analyzing historical spending, market trends, and supplier performance data, companies can identify cost-saving opportunities and negotiate better contracts. This process enhances supply chain resilience by enabling proactive risk management, such as identifying financially unstable suppliers or potential geopolitical disruptions.

Leverage real-time insights for supplier collaboration

Real-time supplier performance data is a game-changer for supply chain professionals. By providing immediate visibility into key metrics like on-time delivery and cost volatility, it empowers them to be highly responsive. They can identify and address potential disruptions as they happen, rerouting shipments or engaging alternative suppliers before a delay escalates. This proactive stance significantly reduces the impact of unforeseen events.

Furthermore, this data fosters better supplier relationships. Instead of reacting to problems after the fact, professionals can use the data to have collaborative discussions with suppliers, identifying areas for improvement and rewarding strong performance. This transparency builds trust and transforms the relationship from transactional to a strategic partnership, while building a far more resilient supply chain (read some winning strategies for building resilient supply chains).

Adopt advanced planning and risk management strategies

Risk management is often about predicting the future as effectively and accurately as possible. Predictive analytics and scenario modeling are powerful tools sourcing professionals can tap to proactively manage risk and volatility.

Predictive analytics leverages historical data and AI to forecast potential disruptions, such as a supplier's financial instability or a spike in raw material costs, enabling professionals to take preemptive action. Scenario modeling then builds on this by simulating various "what-if" situations — like tariffs or natural disasters — to evaluate potential impacts and develop contingency plans.

Integrating these insights into an ERP system provides immense benefits. It gives sourcing professionals a unified platform to visualize potential risks and the effectiveness of different strategies, facilitating better supplier diversification. By centralizing this data, the ERP also improves spend visibility, allowing the organization to see how spend is allocated across suppliers and categories, which is essential for making informed decisions and strengthening the supply chain's resilience.

Transform sourcing into a strategic growth driver

Essentially, strategic sourcing relies on three pillars: data visibility, providing a clear, unified view of all sourcing information; real-time collaboration, enabling seamless communication with suppliers and internal teams; and risk-aware planning, which uses predictive analytics to anticipate and mitigate potential disruptions. Together, these pillars create a resilient, efficient, and data-driven supply chain.

But it’s when they are part of your overarching platform that the greatest benefits are realized. Embedding sourcing tools within an ERP system creates a unified platform that eliminates manual data entry and silos. This integration boosts efficiency, improves data accuracy, and provides real-time visibility into spending, ultimately leading to better decision-making and a more resilient supply chain.

Are you satisfied with how your business manages this cornerstone of supply chain management? Are you driving all possible value, both in terms of raw materials and data? Contact us for a sourcing assessment. Let’s uncover the best path to smarter sourcing.