Sourcing & types of sourcing

Discover the types of sourcing and how it differs from procurement

What are the types of sourcing?

Sourcing is the locating of products or services that are required for your organisation to operate. It’s about identifying your organisations needs and then deciding on the best suppliers to get the products or services from. Some sourcing types are listed below:

Global sourcing: this type of sourcing is the process of finding products and services outside of your geographical borders. Its particularly used when organisations want to find the most cost-effective way to manufacture.
Local sourcing: this type of sourcing is the finding of products or services within your home country. Often, local sourcing is not as cost-effective as global sourcing.
Single sourcing: this type of sourcing is where a supplier is purposefully chosen, even when there are other suppliers available for the product or service.
Sole sourcing: this type of sourcing takes place when you only have one supplier for the required product or service.
Outsourcing: This type of sourcing involves moving a non-core activity/operation/process/function that the procurement organisation has previously undertaken to an external third party. An example could be customer service.
Insourcing: This type of sourcing is where an activity/operation/process/function that has previously been undertaken by an external third party is moved back in-house.
Offshoring: This type of sourcing refers to the relocation of a business process/activity/operation/function to another country. This is usually a country located overseas, where the costs of production are lower. It is not the same as outsourcing, as the activity may still be undertaken by the original organisation and not a third party. For example, a manufacturing organisation may decide to open a new facility in a lower-cost location and offshore existing processes to the new location.
Onshoring: This sourcing decision involves moving a process/activity/operation/function (such as the supply of goods or provision of a service) back from overseas, closer to the organisation's home market.
Nearshoring: This type of sourcing is where a company outsources its business processes/functions/services etc., to a nearby country.
Low-cost country (LCC) sourcing: This sourcing strategy involves an organisation sourcing products or services from countries with lower labour and production costs to reduce its operating costs.

There are also two types of approaches when sourcing, tactical and strategic.

Tactical sourcing: this is a reactive approach, that covers unplanned business requirements and is often based on short-term decisions. It’s an approach that comprises of lower-level decisions, relating to high profit, low-risk, and non-critical items.
Strategic sourcing: this approach is proactive and planned. It’s based on the analysis of supply markets and selection of suppliers to meet your organisation’s needs. It’s often used for longer-term decisions related to high-profit and high-risk items.

What are the steps in sourcing?

Sourcing is a critical part of the procurement process and includes all activities necessary to ensure the organisation’s needs are met. The stages of the sourcing process can be linked to the pre-contract award stages of the CIPS Procurement and Supply Cycle.

Define business needs and develop the specification. This stage involves outlining and agreeing on the organisation’s requirements. Clearly specified, understandable requirements are essential for identifying potential suppliers capable of fulfilling the need.
Market analysis and make-or-buy decisions. This stage involves researching the best method for fulfilling the requirements defined in the previous stage. It also includes identifying whether there are suppliers available in the marketplace capable of delivering the need.
Develop the strategy and plan. This stage is where a sourcing strategy or plan is developed. It will include considerations such as the types of suppliers to approach (global, national, or local) and how the tendering process should be conducted.
Pre-procurement market test and engagement. This stage involves engaging with the market and potential suppliers to gauge market interest and readiness.
Develop documentation – Pre-qualification questionnaire and detailed specification. This stage involves preparing and creating the relevant documentation to send out to potential suppliers.
Supplier selection to participate in the tender. This stage involves identifying potential suppliers to be involved in the tender process.
Issue tender documents. This stage involves sending out the request for quotations (RFQs) or invitations to tender (ITT) to suppliers.
Bid and tender evaluation and validation. This stage involves assessing the quotations, bids, or tenders submitted by suppliers and identifying the most suitable option.

What's the difference between procurement and sourcing?

The key difference between procurement and sourcing is that procurement is the profession and departmental title. Sourcing is an activity undertaken by the procurement team.

Procurement

Procurement teams are responsible for overseeing the steps of the procurement cycle, covering core department activities such as market analysis, sourcing, negotiation, contracting and supplier relationship management. Procurement adds value and reduces risk across the supply chain by establishing the right working relationships with suppliers. The process spans the whole procurement cycle from the identification of needs, through to the end of a services contract or the end of the useful life of an asset. It involves options appraisal and the critical “make or buy” decision.

Sourcing

Sourcing involves assessing the market to identify viable suppliers that can meet your organisation’s needs, in terms of quality, quantity and speed of delivery. A sourcing strategy is a plan for creating an advantage by continually reviewing current needs against purchasing opportunities.

Sourcing strategy

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