The Total Guide to Building Strategic Vendor Sourcing

Every procurement team has favorite vendors — the suppliers that always go the extra mile, give consistently competitive pricing, and make the purchasing process easier. Finding those vendors isn’t a matter of chance. These relationships are the result of careful selection, good communication, and continued partnership.

Looking for vendors to fulfill procurement needs can be easier with the right strategy. This article covers the essentials of building a strategic vendor sourcing practice. It addresses the most common topics regarding sourcing programs, including:

What is vendor sourcing?
The benefits of vendor sourcing
Types of vendor sourcing
Steps in the vendor sourcing process
Best practices in vendor sourcing

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4 Benefits of vendor sourcing

Cost reduction might be the first thing that comes to mind when considering vendor sourcing, but it’s not the only benefit. Well-defined sourcing practices have the potential to lower risk, increase supply chain resilience, improve vendor relationships, and more.

The following four key benefits make strategic sourcing a valuable activity for any organization:

Lower costs: Careful vendor sourcing reduces costs through better bargaining, improved supplier contract negotiation, and increased vendor competition. By selecting the best vendors at the best prices, organizations maximize purchasing power and drive down costs. Strategic sourcing also ensures companies contract with reliable suppliers that deliver on time and meet quality standards, enabling confident purchases at a lower cost.

Risk management: Recent studies by Verizon estimate that 74 percent of data breaches have a human element, either intentional or caused by error. Vendor sourcing reduces risks from vendor fraud, unexpected price fluctuations, damages, and delivery exceptions. It creates a more resilient supply chain and minimizes the impact of issues. Strong supplier management processes also allow more accurate estimates of demand and pricing, better control of inventory levels, improved delivery times, and smoother supplier relationships so companies can respond quickly to changes in the market.

Sustainable procurement: Sustainable procurement requirements enable companies to identify suppliers committed to environmental, social, and governance (ESG) initiatives to improve their practices and reduce costs. It also improves your business profile with the 78 percent of consumers who consider sustainability important. Strategic sourcing increases an organization's ability to track environmental performance in its supply chain management, such as emissions or waste reduction. Through vendor sourcing, organizations ensure that their investments positively impact their operations and the broader environment.

Better vendor relationships: Organizations using proactive vendor sourcing techniques build better relationships by building partnerships rather than just ordering supplies. This enables close collaboration to meet goals and customer expectations and reduces delays and exceptions in procurement. Stronger vendor relationships facilitate access to cost-efficient suppliers and new markets, fostering long-term success through collaboration.

Types of vendor sourcing

Vendor sourcing is more than finding a supplier to fill an order. There are many approaches to vendor sourcing to consider when procuring goods and services.

Outsourcing: Outsourcing is when a company assigns work to an external entity rather than performing it in-house. By outsourcing certain activities, organizations reduce costs, access specialized skills without employing full-time staff, and increase operational efficiency. Outsourcing allows companies to focus on their core competencies and leave non-core functions to outside providers.

Insourcing: This method relies on the talent and goods already under your roof. It involves your business drawing on existing employees, business processes, and capabilities to fulfill needs instead of relying on external vendors. Through insourcing, an organization gains more control over its budget, resources, timeline, and other procurement-related factors. Insourcing also provides greater flexibility, allowing organizations to quickly adjust strategies or take advantage of new technologies in-house as required.

Near-sourcing: Sometimes, what you need is right in your backyard. Near-sourcing means procuring goods and services from local or regional vendors. It allows companies to access the same quality goods at lower prices due to reduced shipping and logistics costs. Near-sourcing also reduces reliance on overseas vendors, giving organizations more control over their supply chains.

Low-cost country sourcing (LCCS): Some companies save money by purchasing goods from a low-cost foreign country to achieve lower production costs. This technique involves assessing low-cost locations' economic stability and labor markets to find suppliers that meet pricing requirements. By outsourcing production to a low-cost country, companies can reduce overhead costs while maintaining quality control standards. LCCS countries include China, India, Mexico, Vietnam, and others in South America and Southeast Asia.

Global sourcing: Similar to LCCS, global sourcing is the practice of sourcing goods and services from suppliers worldwide. Companies use global sourcing to find cost-effective locations for purchasing materials or services. Global sourcing operations can take place in a variety of countries, including developed and emerging markets. It also involves assessing economic stability and labor markets to ensure that pricing requirements are met.

Steps of vendor sourcing

1. Conduct a needs assessment

Conducting a needs assessment involves examining the specific needs of the organization, such as the type of services or materials required, delivery timelines, and pricing expectations. It also includes considering different vendors that can meet these requirements. Knowing what is needed informs the entire vendor selection process.

2. Evaluate the market

Performing a market analysis is another key component of successful vendor selection. It helps the sourcing team understand the current scope of the market, including price benchmarking, delivery timelines, market leaders, and trends. Compiling a market analysis helps frame negotiations with the chosen vendor.

3. Establish vendor prerequisites

Every department — from procurement and legal to security and finance — should have a minimum set of expectations for every vendor and transaction. Codifying these table stakes items into a policy enables each vendor search to start from this baseline. Vendor prerequisites not only make the vendor search process easier, they reduce the time it takes to select and establish a relationship with a new vendor.

4. Create a sourcing framework

A supplier sourcing framework outlines the process for identifying and vetting vendors. It may include parameters such as geographic location, volume capabilities, reference reviews, proposal structure, and contract requirements for the vendor to be successful. Building a structure around the vendor sourcing process ensures that each search conforms to a standard review and procedure. It takes the guesswork and delays out of finding the right vendor.

5. Compile a vendor shortlist

Once you identify vendors and create a sourcing framework, refine the list of possible candidates. When compiling a shortlist of vendors, consider the potential for each to meet the requirements in your prerequisites and sourcing framework. Evaluate each vendor's compatibility with your organization's goals and values. Aim for at least three viable bids to evaluate (referred to as the “three bids and a buy” method).

6. Conduct due diligence

Due diligence is an important part of the vendor sourcing process for ensuring the team has all the information necessary to select a reliable and trustworthy vendor. Due diligence screenings help identify potential issues with the vendor, such as financial concerns or reputational damage. It's also important to check references and get feedback from previous customers to assess performance quality. This helps validate that the vendor will meet your expectations, reducing the risk of future problems.

7. Select a vendor

Once the team collects the vendor bids and conducts due diligence reviews, it's time to select the most appropriate vendor. To ensure this is done objectively, create a scoring system to evaluate each vendor according to criteria important to your organization. CriteriaThis could include factors such as cost-effectiveness, customer service history, and compliance with industry standards.

It can also be useful to involve multiple stakeholders in the decision-making process when selecting a vendor. This gives everyone an opportunity to provide their input and ensure that any concerns are addressed before committing. Additionally, having multiple perspectives can help identify overlooked details or areas of improvement that should be considered before selecting a vendor.

8. Negotiate terms

Once you choose a vendor, negotiate terms and pricing using clear objectives and communication. Be precise about what the company requires from the vendor, both in terms of services and cost estimates. Be prepared with alternative options and upcoming deadlines to speed up the discussion and decision process. Contingencies around service delivery or quality should be discussed during this stage as well. With negotiation comes compromise, so be sure to understand what concessions the company is willing to make. The goal of strategic sourcing negotiations isn’t to win but to form a partnership.

9. Execute a contract

Once negotiation is complete, draw up a contract that outlines agreed-upon terms. This document should specify the scope of services, pricing structure, delivery dates, and any other relevant information. It's important to clearly understand the responsibilities and expectations of each party within the contract documentation. This ensures a successful and mutually beneficial relationship between the vendor and the company and protects both parties in case of litigation or disputes.

10. Measure performance

What gets measured gets managed. Measure vendor performance by evaluating price and performance against the requirements specified within the original agreement. Regular check-ins or meetings ensure high standards are upheld and that both parties are aware of any changes. If issues arise, address them immediately to minimize disruptions in service. Be sure to incorporate feedback from both parties throughout the process to drive improvements over time.

Best practices for vendor sourcing

Following established best practices in the sourcing process improves the outcome of your efforts in several ways. It creates a framework for choosing and evaluating vendors, provides a lens through which to view negotiations, and helps define what success looks like over time.

Use these five techniques to improve your sourcing:

1. Identify needs before vendors

Taking stock of what you need in a supplier is a great first step in the sourcing process. Take time to document the minimum requirements for a vendor, budgetary considerations for the project, timelines for performance, etc.

With the industry and project needs in mind, procurement can develop a shortlist of potential suppliers. Each should meet the criteria outlined above. From there, the due diligence team has the information needed to evaluate each option and factor in specific qualifications or perks.

2. Take a total value approach

Total value extends beyond price-per-item, encompassing a vendor's extras and service offerings. Factors such as customer service, turnaround times, materials, warranty, innovation, and customization boost the deal's value for your company. Assess overall value with an open mind — consider not just the base cost but added elements that indirectly impact the bottom line. Negotiate with suppliers or explore more efficient alternatives using this lens.

3. Keep your list short and optimized

Strategic procurement offers many benefits in terms of procurement savings and strong relationships. Keeping a shorter, preferred vendor list is one of the best ways to secure these benefits. A shortlist allows for more concise negotiations, greater trust, and the ability to move quickly when needed. The key is to optimize it — include vendors that have competitive prices and quality products paired with great service and responsiveness.

4. Consider sustainability

Many companies are now looking for sustainability across their supply chain. This can include suppliers that use recycled materials, employ Fair Trade labor practices, or adhere to environmental standards. These sustainable options often help reduce long-term costs and save resources. Additionally, a sustainable focus adds to the company's public image as a responsible actor in the global economy. By selecting sustainable suppliers in the vendor selection process, companies can benefit from cost savings, resource conservation, and a positive boost to their reputation.

5. Conduct regular performance measurement

Regular measurement of vendor performance is critical to the success of vendor sourcing programs. Evaluating vendors on product quality, responsiveness, sustainability practices, and customer service ensures they continue to meet company needs and provide value. Tracking changes over time helps predict future performance and inform vendor selection. Identify areas where current vendors fall short and create a communication plan to discuss with them to build a stronger relationship.

How Order.co makes vendor sourcing easier

A procurement platform brings your preferred vendors to a streamlined, data-informed process. It creates a centralized place for vendor data, spend analysis, and insights that strengthen negotiations and empower strategic vendor sourcing programs.

Order.co gives you access to many advanced sourcing features, including:

Easy ordering through curated catalogs of vendors and products hand-selected by your organization
A trusted network of over 15,000 high-quality vendors
Spend controls and reporting that make negotiation and vendor selection easier and better-informed

To streamline your vendor selection process, schedule a demo of Order.co.

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