Every procurement team has favourite vendors who go above and above, offer competitive price, and simplify the buying process. Finding those vendors isn’t random. These partnerships result from deliberate selection, strong communication, and partnership. The appropriate method can make finding procurement vendors easier. Strategic vendor sourcing basics are covered in this article. It covers the most frequent sourcing programme topics:
- Vendor sourcing benefits
- Types of vendor sourcing
- Vendor sourcing steps
- Best vendor-sourcing practices
4 Vendor sourcing benefits
First-time vendor sourcing may focus on cost reduction, but there are other benefits. Well-defined sourcing practices can reduce risk, strengthen supply chains, and improve vendor relationships.
The following four benefits make strategic sourcing important for any organisation:
Lower costs: Better negotiations, supplier contract negotiation, and vendor competition lower costs with careful vendor procurement. By choosing the finest vendors at the best prices, companies maximise purchasing power and cut costs. Strategic sourcing also ensures organisations work with reputable suppliers who deliver on time and satisfy quality requirements, enabling confident, low-cost purchases.
Risk management: Verizon estimates that 74% of data breaches are human-caused, either intentionally or accidentally. Fraud, pricing fluctuations, damages, and delivery exceptions are reduced with vendor sourcing. It makes the supply chain more resilient and reduces difficulties. Strong supplier management systems increase demand and pricing predictions, inventory control, delivery schedules, and supplier relationships, allowing organisations to adapt swiftly to market changes.
Sustainable procurement: Sustainable procurement criteria help firms find suppliers who practise ESG activities to enhance and cut costs. With 78% of consumers prioritising sustainability, it boosts your business profile. Strategic sourcing helps companies track supply chain environmental performance like emissions and waste reduction. Through vendor sourcing, companies guarantee their investments benefit their business and the environment.
Better vendor relationships: Building partnerships with vendors through proactive sourcing can lead to better outcomes than simply acquiring supplies. This approach reduces procurement delays and exceptions by fostering strong collaboration to meet goals and customer expectations. Working closely with vendors can open new markets and find cost-effective suppliers, supporting long-term success.
Different vendor-sourcing methods
Vendor sourcing goes beyond finding a provider to fill an order. There are several vendor sourcing methods for buying goods and services.
Outsourcing: Outsourcing involves hiring an outside party to handle certain tasks. This strategy cuts costs, brings in specialized skills without needing full-time staff, and increases efficiency. By outsourcing non-core operations, companies can focus more on their main strengths.
Insourcing: Using your own talent and goods. Instead of using vendors, your organisation uses own workers, procedures, and capabilities to meet needs. Insourcing lets a company manage its budget, resources, timetable, and other procurement issues. Insourcing allows companies to quickly change tactics or adopt new technologies.
Near-sourcing: Sometimes you can find what you need in your backyard. Near-sourcing involves buying from local or regional merchants. Due to cheaper shipping and logistics expenses, organisations can buy high-quality goods at lower prices. Near-sourcing decreases reliance on international providers, offering companies more supply chain control.
LCCS: Some companies cut production costs by sourcing goods from low-cost countries overseas. This approach involves finding suppliers that meet pricing needs by evaluating the economic stability and labor markets of these regions. By outsourcing production to countries like China, India, Mexico, Vietnam, and others in South America and Southeast Asia, companies can save money while maintaining quality.
Global sourcing: Global sourcing, like LCCS, involves buying goods and services from international sources. Global sourcing helps companies obtain cheap commodities and services. Developed and emerging markets can host global sourcing businesses. It also evaluates economic stability and labour markets to meet pricing criteria.
Steps to find vendors
1. Evaluate needs
A needs assessment evaluates an organization’s requirements for services or supplies, delivery deadlines, and pricing expectations. It also involves comparing vendors who can meet these needs. Understanding these requirements helps in selecting the right vendor.
2. Assess the market
Market study is another important vendor selection step. It informs the sourcing team about market trends, pricing benchmarking, delivery times, and market leaders. Market study guides vendor negotiations.
3. Set vendor requirements
Every department—procurement, legal, security, and finance—should have minimal vendor and transaction requirements. Code these table stakes items into a policy to start vendor searches from this baseline. Vendor prerequisites simplify vendor search and speed up vendor selection and relationship building.
4. Develop sourcing structure
A supplier sourcing framework outlines how to select and vet vendors. It considers factors like geographic location, volume capabilities, reference reviews, proposal formats, and contract requirements. By following a structured process, you ensure that each vendor search uses a consistent evaluation method. This approach removes guesswork and prevents delays in vendor selection.
5. Shortlist vendors
Refine candidates after identifying providers and creating a sourcing methodology. When shortlisting vendors, examine their ability to meet your prerequisites and sourcing structure. Assess each vendor’s fit with your company’s values. At least three viable bids should be evaluated (the “three bids and a buy” technique).
6. Be thorough
Due diligence helps the team choose a reliable provider by collecting all necessary information. This process uncovers potential vendor issues, such as financial instability or reputational damage. To assess performance, check references and read customer reviews. This ensures the vendor can meet your needs and helps prevent future problems.
7. Choose a merchant
After collecting vendor bids and due diligence assessments, the team chooses the best provider. Create a score system to evaluate vendors based on your organization’s priorities to ensure objectivity.
Including diverse stakeholders in vendor selection can also help. This allows everyone to voice concerns and be heard before committing. Multiple perspectives can also reveal ignored nuances or opportunities for improvement before choosing a provider.
8. Arrange terms
After choosing a vendor, negotiate terms and pricing with clear goals and communication. Detail the services and cost estimates the organisation needs from the vendor. Prepare alternate options and timeframes to speed up debate and decision-making. Service delivery and quality issues should be discussed at this level. Negotiation requires compromise, so know what the corporation will give up. Strategic sourcing talks aim to partner, not win.
9. Sign contract
After negotiations, write a contract with terms. This document should list services, pricing, delivery dates, and other pertinent information. Understanding each party’s responsibilities and expectations in the contract is crucial. To establish a successful and mutually profitable vendor-company relationship and safeguard both parties in litigation or disputes.
10. Assess results
Measured things are handled. Compare vendor price and performance to agreement requirements. Regular check-ins or meetings maintain high standards and inform both parties of developments. Fix problems immediately to minimise service disruptions. To improve, consider both parties’ feedback throughout the process.
Best practices for vendor sourcing
Following sourcing best practices enhances results in various ways. It helps choose and evaluate vendors, shape agreements, and define long-term success.
Improve your sourcing with these five methods:
1. Define needs before vendors
Starting the sourcing process by assessing your supplier needs is smart. Take time to document vendor minimums, project budgets, performance timelines, etc.
Procurement can shortlist suppliers based on industry and project demands. Each should match the above criteria. The due diligence team can then examine each alternative and consider unique qualities or bonuses.
2. Consider overall value.
Value includes a vendor’s features and services, not just pricing. Your organisation gains value from customer service, turnaround times, materials, warranties, innovation, and customisation. Try to look beyond the base cost and include factors that affect the bottom line. Use this lens to negotiate with vendors or find better options.
3. Shorten and optimise your list.
Strategic procurement saves money and builds relationships. Keeping a shorter, preferred vendor list is one approach to get these benefits. A shortlist simplifies negotiations, builds trust, and enables for swift action. Optimise it by including merchants with competitive prices, quality items, and great service and response.
4. Considering sustainability
Many companies want supply chain sustainability. Suppliers that use recycled materials, Fair Trade labour, or environmental criteria are examples. Sustainable options save money and resources over time. Sustainable practices also boost the company’s worldwide economic responsibility. Companies can save money, conserve resources, and improve their reputation by choosing sustainable vendors.
5. Measure performance regularly.
Vendor sourcing programmes need regular vendor performance measurement. Assessing vendors’ product quality, responsiveness, sustainability, and customer service ensures they satisfy company needs and add value. Observing changes helps anticipate performance and choose vendors. Identify vendor weaknesses and design a communication plan to improve relationships.
