What Is Sourcing Management? How It Works and How It Benefits Your Business

What Is Sourcing Management? How It Works and How It Benefits Your Business

Sourcing management plays an integral role in an organization’s supply chain, ensuring a company can procure the raw materials, tools, and other resources necessary to deliver its products and services at an optimal cost.

However, it’s far more complex than simply finding a good supplier. There are many considerations involved in sourcing management, from evaluating the quality and reliability of suppliers, to managing supplier relationships, to negotiating pricing/optimizing costs, and evaluating and mitigating known and unknown supply chain risks.

Let’s take a look at how sourcing management works and the role it plays in a company’s profitability, product and service quality, and resilience. 

What Is Sourcing Management? 

Simply put, sourcing management is the process of finding suppliers that can provide your business with what it needs at the lowest possible cost without sacrificing quality or reliability. 

With the COVID-19 pandemic disrupting supply chains around the world, sourcing is getting significant attention as companies focus on building resiliency to ensure business continuity in the face of supply chain disruptions. 

Sourcing vs. Procurement: Are They the Same?

Sourcing and procurement are closely related, but the two have rather different business functions and benefits:

  • Sourcing involves identifying the best suppliers, negotiating contracts and prices, and managing supplier relationships. Sourcing management analyzes procurement data to monitor supplier performance and make strategic decisions to lower costs or maintain the supply chain.
  • Procurement is the process of obtaining the materials, tools, and services the business needs to deliver its products or services. Working with the supply chains built from sourcing, procurement deals with ordering, tracking deliveries, and managing a procurement budget based on the costs negotiated in the sourcing process. 

The two go hand-in-hand and are mutually dependent, but it all starts with strategic sourcing management. 

How Strategic Sourcing Management Works

The strategic sourcing management process involves several steps:

  • Establishing a company’s needs and expectations for raw materials, products, and services 
  • Conducting market research to identify potential suppliers
  • Comparing current and prospective suppliers
  • Identifying the best suppliers based on quality and cost 
  • Identifying backup suppliers based on quality and cost
  • Negotiating contracts, minimum order quantities, payment terms, and pricing
  • Analyzing supplier risk 
  • Monitoring supplier performance to manage quality

In general, sourcing management aims to identify the best suppliers offering the best quality materials or products at the lowest cost. Companies don’t want to sacrifice the quality of their raw materials in order to get them at a lower cost. Doing so could diminish the quality of the company’s products or services, result in losing customers, and negatively impact the company’s reputation, all of which negatively impact a company’s bottom line. 

Establishing needs and expectations before researching suppliers enables the organization to choose the suppliers that meet minimum requirements at the most favorable price. The business benefits from a lower materials cost without risking quality. 

Of course, it’s not as simple as comparing per-item costs between suppliers offering two identical products. There are many other factors to evaluate, such as the payment terms, minimum order quantities, the availability of volume discounts, and the supplier’s reliability and resilience. 

Benefits of Effective Sourcing Management

According to Gartner’s Magic Quadrant for Strategic Sourcing Application Suites, 65 percent of businesses surveyed reported investing in strategic sourcing applications to increase productivity by automating processes, and 61 percent invest in these tools for increased cost savings.

By identifying suppliers offering materials that meet minimum quality standards at the lowest cost, companies can optimize procurement costs and increase profitability or pass those savings on to customers, which can create a competitive advantage and boost long-term business growth. 

Another benefit of effective sourcing management is risk mitigation. By considering factors beyond cost when evaluating suppliers, companies can build more resilient supply chains by contracting with suppliers that provide greater transparency into the delivery process and have a strong track record of on-time deliveries with few order errors. 

Additionally, strategic sourcing management involves securing multiple suppliers for the same materials, products, or services to ensure that the company always has access to essential materials and supplies when its primary supplier experiences a disruption or delay. For example, a business may contract with suppliers located in different parts of the world to ensure reliable procurement if one country or region experiences a supply chain disruption. 

This increased reliability gives companies another competitive advantage, enabling them to maintain business continuity and continue delivering quality products and services on time to customers despite supply chain disruptions, increasing customer satisfaction and loyalty. 

Optimizing procurement costs also enables businesses to avoid price increases while competitors may be increasing prices to compensate for higher procurement or logistics costs. Creating a process of continuous improvement through strategic sourcing management enables businesses to maximize value and quality at the lowest possible cost.

In the post-pandemic world, supply chains are in the spotlight, and sourcing management offers the tools and the opportunity to build resilience, minimize risk, and optimize costs within the supply chain, enabling a company to both increase customer satisfaction and create long-term stability fueling strategic growth.