What is a Strategic Sourcing Process and How It Works?

2022-06-07

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A strategic sourcing process aims to build supply channels at the lowest total cost. It is different from conventional procurement, where the focus is on getting the lowest purchase price.

The total cost of the product depends on a number of factors such as labour cost, raw materials, tooling, volume, part complexity and logistics. An evaluation of the cost factors is a necessary aspect of strategically planning and implementing your sourcing.

Sourcing process flow 

Strategic sourcing follows a definite path, consisting of the following steps:

1. Creating the business plan 

What does your business want to achieve? What are your prospective markets? How will you position your brand? Defining goals, markets and brand positioning gives a clear direction to your sourcing strategy.

2. Selecting the supplier

Based on your business plan, identify the type of suppliers to work with. Create supplier selection benchmarks and send out requests for quotes. You need to contact Chinese factories in proper way to get their active response and support.

3. Negotiating with suppliers

The focus of negotiations will be on getting a lower cost. Based on the willingness of suppliers, determine the savings estimate for each. Keep expectations reasonable as driving costs too low inevitably leads to a decline in product quality.

4. Scheduling and logistics 

Set a delivery schedule and decide on the best logistical arrangement for your business. Compare the rates and services of logistics providers.

5. Monitoring performance

Strategic sourcing aims for continuous improvement. Examine your supplier's performance to identify what you can do to maintain a flexible and efficient sourcing process that adapts to a changing market environment.

Objectives of strategic sourcing 

A strategic sourcing plan considers these aspects to support the business strategy:

Cost

Western importers take advantage of lower costs in foreign countries. Of all low-cost destinations, China attracts the highest demand for its cheap labour costs coupled with enterprise clusters.

Law

Does the law in supplier's or buyer's country apply to the manufacturing contract? In the event of legal action, foreign judgments will be applicable in Chinese courts, subject to treaties and principle of reciprocity.

Currency

Though it is simpler for buyers to transact in their own currency, paying suppliers in RMB can result in a slight price reduction due to the better exchange rate compared to the USD. So, buyers should consider the possibility of using the supplier's currency when their country's currency is stronger.

Lead time

The lead time is longer for products manufactured overseas. That said, Chinese factories have the capability to handle large volume orders. To cut delivery times, you can consider shipping via air rather than sea. 

Culture

Unfamiliarity with the supplier's language and culture can make communication challenging and create the risk of miscommunication and misunderstanding. 

Transportation

Global sourcing involves using multiple modes of transport to bring goods from factory to the supplier's port and to the buyer's port and warehouse/business address. Consequently, logistics costs can add up and need to be optimised.

Payment

Foreign suppliers may insist on certain payment methods. Generally, transactions occur via international wire transfers and letters of credit. PayPal is preferred for small orders/samples. Credit/Debit cards are also accepted.

Benefits of strategic sourcing

To make your business profitable, you need to implement some purchasing strategies. There are benefits to taking a strategic view of all the activities that occur during the procurement cycle. By establishing such a sourcing process, you can:

Improve cost savings

Identifying suppliers that offer maximum value as opposed to the lowest price saves you money in the long run. Making decisions aligned to your business strategy can give you a competitive edge.

Minimise risk

By analysing total spend, you can make informed decisions on supply, quality and customer support. You will have the information you need to mitigate risks in these areas and maintain a good reputation on Amazon.

Recognise ideal suppliers

Profiling suppliers based on benchmarks and estimating cost savings for each increase the possibility of identifying the best supplier for your requirements.

Bring continuous improvements

Monitoring the strategic sourcing process enables you to pinpoint areas of improvement and work on them. If you identify a dip in supplier performance, you can take the necessary action to avoid any impact to your business.

Build better supplier relationships

Knowledgeable importers with concrete goals and instructions keep suppliers on their toes to get the best out of them. Establishing clear expectations from the start and rewarding suppliers with bigger orders for satisfactory work creates a foundation of mutual trust and respect.

Strategic sourcing requires relevant skilled personnel and capital investment 

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Large organisations have procurement officers to find suppliers and negotiate contracts. Online sellers looking to have their products custom-made at a Chinese factory lack the resources to manage all aspects of the procurement cycle strategically. Even if they can manage doing it on their own, the time and effort required is considerable. To make global sourcing easier, smoother and strategy-oriented, importers engage sourcing agents.

China sourcing agents are situated close to industry clusters and have their own product or industry specializations. They provide product sourcing services for your importing business. Their existing supplier relationships, proximity to factories and procurement services save you time and effort on finding suppliers. Based on your requirements and supplier benchmarks, they send out quote requests, lead price negotiations and assist with cost evaluation.

Usually, working with a sourcing agent helps importers realise the benefits of strategic sourcing. It strengthens their sourcing process in various ways. One of the ways in which sourcing services support strategic procurement is in ensuring a proactive stance throughout. For example, Maple Sourcing, provides order monitoring and status reporting so clients can plan delivery and the necessary communications to their customers about delivery times. Any delay due to external factors or unforeseen events, are duly communicated along with the revised delivery dates.

When a client wants to add new products to the range or has an innovative idea for a product, but needs a different supplier to meet their requirements and support them in scaling up quickly, the sourcing agent can shorten the seach and keep strategy implementation on track. Importers looking to minimise long-term supply chain risks can also add value across the procurement process by engaging an experienced China sourcing agent.

Esourcing: What is it and how does it support strategic procurement? 

Electronic sourcing or esourcing is generally used to refer to the use of web-based systems to find, evaluate and select suppliers. The use of a single online portal for supplier selection offers a number of benefits, as explained below:

Reduces effort

Rather than using email or messaging various suppliers during your initial search, you can gather all quotes in a single place. It reduces the time and effort needed to contact suppliers, and also eliminates the risk of missing out on a message from a supplier in your inbox.

Improves transparency

Electronic sourcing levels the playing field for suppliers. It prevents the wrong perceptions from forming about preferential treatment. Showcasing transparency is also beneficial for the buyer as it does not disgruntle suppliers that haven't been selected, and encourages their participation for future requirements.

Identifies the best strategic option

Gathering requirements and reviewing quotes and proposals against benchmarks in a systematic way, increases the possibility of finding the ideal supplier. This is also important from the perspective of making new and differentiated products in the future.

Standardises supplier selection

A defined sourcing structure keeps everyone involved in the process on the same page about the selection process. The data collected by the web system is available for analysis and can be used towards improving the selection process.

Saves time for suppliers

Back-and-forth communication between buyer and supplier is time-consuming for both parties. Collaborating through a single system streamlines the process for everyone and saves them time.

Invite quotes from several suppliers

Sending out quote requests and tracking responses from a number of suppliers requires good time management skills. Importers occupied with other aspects of business may be disinclined to gather quotes from several suppliers, which can lead to missed opportunities for them. This is not an issue when supplier selection is done on an esourcing platform.

Esourcing software is designed for enterprises with established procurement teams to streamline, coordinate and collaborate with domestic and/or foreign suppliers. The features and tools also enable team members to collaborate internally, and as such, are unnecessary for Amazon sellers.

Electronic sourcing: Impementing strategic sourcing through China sourcing agents

In today's fast-paced, highly connected world, digital procurement has pretty much become the norm for Amazon sellers looking to China for custom manufacturing. Online supplier directories have simplified the search for Chinese manufacturers, and also offer services like quality inspection, testing and certification. But digital procurement through supplier directories like Alibaba still require considerable manual effort from the Amazon seller. So, even though the sourcing process can be implemented online, it isn't necessarily the most efficient or effective for Amazon businesses.

What does an efficient digital sourcing process look like?

A digital procurement process should give you total control over all stages of the purchasing process. You should have all the information you need within a single system (ideally, a portal) and maintain it to make informed decisions quickly. An efficient digital sourcing process offers benefits such as:

• streamlining and shortening the procurement lifecycle at all stages

• reducing or eliminating paperwork and boosting productivity

• making communication transparent

• establishing guidelines and maintaining compliance

• making all transactions available for optimal reporting

It makes the sourcing process flow smooth, with predictable steps and a consistent experience.

Where does a sourcing agent fit into all this?

An Amazon sourcing agent simplifies all stages of digital procurement. The agent's website serves as the one-stop system for requesting services. Communications occur via email, but you deal with the agent only rather than the tons of messages from all the suppliers you contact on directories.

The Amazon sourcing agent has web systems and knowledgeable staff to implement and coordinate various strategic sourcing activities seamlessly. You can leverage off of their IT systems to streamline your own sourcing process without having to sacrifice your control over it.

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Example:

Jason is an Amazon seller of electronic products. He has been placing orders with a Shenzhen supplier for the last seven months, and uses WeChat for all communications with them. The supplier sends him emails on order status but of late, has been replying late and missed out on sending him order status emails. Jason has been following up on WeChat also with his supplier but finds it taxing to repeat his queries. He wishes they could go back to responding promptly and keeping him updated about his order. As Jason doesn't speak Chinese, he is finding the right words to politely but firmly request his supplier to improve their response time. 

This problem wouldn't have occurred if Jason had used a sourcing agent for digital procurement. As a part of their dedicated order monitoring service, the agent's team would have kept Jason informed of the status of his order.

Amazon sourcing agents invest in order tracking systems that store a pipeline of purchase orders and send automated notifications to clients. They are incentivized to make this investment as order monitoring is a revenue-generating service for them. This is not the case for manufacturers, whose primary service is to make the product to buyer's standards.

Efficient communication is an important assurance that established sourcing agents are able to offer clients. They understand that technology is at the heart of executing a smooth sourcing process flow. Technology-driven processes are critical for digital procurement efficiency. All parties benefit from it. The buyer is kept in the loop about the order, the factory is impelled to remain on its toes, and the agent continues gaining the patronage of clients.

Simplify your sourcing process with Maple Sourcing

Maple Sourcing is a valuable partner for Amazon sellers looking to implement a strategic sourcing strategy. Technology is the backbone of our sourcing services, and we have the best digital solutions to assist with product purchase, order processing and logistical support.

We serve the needs of Amazon sellers seeking OEM design and development. Our comprehensive procurement services are offered entirely online. If you're interested in establishing a predictable esourcing process, we can be of able assistance.

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