The importance of local and strategic sourcing

In early 2022, when geopolitical tensions disrupted supply chains across Eastern Europe, companies like Volkswagen and BMW found themselves facing potential production halts due to shortages of crucial wiring harnesses. With many of their suppliers located in the affected region, these automotive giants were staring at a crisis that could severely impact their operations. However, Volkswagen's strategic sourcing team quickly implemented contingency plans, relocating the manufacturing of wiring harnesses to alternative sites in North Africa and Eastern Europe. This nimble response allowed the company to minimise disruptions and continue production, showcasing the vital role of effective sourcing strategies in today's volatile business climate.

A new way to supplier relationship

From navigating geopolitical upheavals to mitigating natural disasters, effective sourcing strategies have become a critical differentiator for companies striving to gain a competitive edge. Additionally, more business and procurement leaders are focusing on cutting costs while improving productivity and results. This shift reflects an evolving business practice where the strategic sourcing approach is fundamentally reshaping how businesses and procurement leaders handle their buyer-supplier relationships. On the other hand, local sourcing focuses specifically on leveraging suppliers within close geographic proximity. It aims to reduce supply chain distances, reducing transportation costs, lead times, and carbon footprints while supporting local economies. Both approaches have their advantages and are often used in combination depending on the specific needs and strategies of the organisation.

What is strategic sourcing?

Strategic sourcing is not a one-time effort but a systemic approach that continuously re-evaluates purchasing activities, aligning the goals and requirements of the business with those of the suppliers. It is a holistic supply chain management process that aims to help businesses obtain the maximum value from their purchasing decisions. The goal is to secure the best possible total cost, emphasising overall value rather than just the lowest purchase price of goods. This disciplined process follows a structured set of seven steps to ensure a systematic and effective sourcing strategy. These steps are:

• Data collection and spend analysis
• Supply market analysis
• Strategy development
• Supplier negotiation
• Contract development
• Implement and integrate
• Evaluation and continuous improvement

Benefits of strategic sourcing

From cost savings and supply chain optimisation to quality assurance and risk mitigation, the benefits of strategic sourcing are far-reaching and can truly transform the way organisations operate. Here are a few reasons a robust sourcing strategy is important.

• Cost Savings: By consolidating spend, negotiating better contracts, and optimizing the supply base, strategic sourcing can help organisations achieve significant cost savings on purchased goods and services.
• Risk Mitigation: It can help identify and mitigate potential supply chain risks through supplier diversification, contingency planning, and rigorous supplier evaluation processes.
• Quality Improvement: Strategic sourcing focuses on selecting suppliers that can consistently meet quality standards, leading to improved product/service quality.
• Innovation: Fostering collaborative relationships with key suppliers can drive innovation through shared knowledge and co-development efforts.
• Improved Efficiency: Streamlining and optimising procurement processes reduces lead times, minimises maverick spending, and improves overall operational efficiency.
• Spend Visibility: Conducting in-depth spend analysis provides organisations with better visibility into their purchasing patterns and opportunities for consolidation or negotiation.
• Supplier Relationship Management: Building long-term, strategic relationships with key suppliers aligns interests and promotes continuous improvement.
• Compliance: Robust processes and centralised control ensure compliance with regulations, policies, and ethical standards across the supply chain.
• Competitive Advantage: By optimising the sourcing function, organisations can gain a competitive edge through cost leadership, quality differentiation, or increased agility.

Local sourcing: When closer is better

As government leaders and business managers grapple with the challenge of de-risking supply chains amidst widespread uncertainty, there has been an explosion of interest in a wide range of sourcing strategies beyond simply ‘offshoring.’ At the heart of many of these approaches lies an effort to pivot from global supply chains back to regional or even local ones. For its part, the U.S. government is actively working to incentivise businesses to bring supply chains closer to home with the passage of legislation such as the $280 billion CHIPS and Science Act.

Driven by a confluence of economic, environmental, and consumer-driven factors, businesses worldwide have been embracing a transformative trend towards local sourcing. This strategic shift reflects a departure from traditional global supply chains towards more localised procurement strategies. One key motivation behind the move towards local sourcing is the desire to support and stimulate local economies. By sourcing goods and services from nearby suppliers, businesses play a pivotal role in fostering economic growth within their communities. This support translates into job creation, increased spending in local markets, and the development of robust business ecosystems that contribute to overall prosperity. Industries that prioritise freshness and quality often embrace this strategic approach, recognizing the value of sourcing from nearby suppliers to ensure optimal product freshness and quality control.

Advantages of local sourcing

Local sourcing offers a multitude of advantages that extend far beyond the realm of mere product procurement, bringing a range of economic, environmental, and social benefits to businesses and communities alike. Here are some of the key benefits of embracing a local sourcing strategy:

• Fresher Products: Locally sourced goods travel shorter distances, resulting in fresher and higher-quality products for consumers.
• Lower Carbon Footprint: Local sourcing reduces the environmental impact of transportation and long-distance shipping, lowering carbon emissions and promoting sustainability.
• Supporting Local Economies: By purchasing from local suppliers, businesses help stimulate the local economy, creating job opportunities, and keeping money circulating within the community.
• Product Traceability: Sourcing locally often means better traceability and transparency in the supply chain, allowing businesses to understand the origin and production methods of their products.
• Unique and Specialised Products: Local suppliers may offer unique or specialised products that are not readily available from larger, national, or international sources.
• Supply Chain Resilience: Diversifying sourcing channels by including local suppliers can help businesses mitigate supply chain disruptions and become more resilient.
• Brand Reputation: Consumers often perceive locally sourced products as more authentic, ethical, and environmentally conscious, enhancing a business's brand reputation. Agility and Responsiveness: Local suppliers can often respond more quickly to changes in demand or customisation requests, providing businesses with greater agility and flexibility.

Maximising tax incentives: The financial benefits of local sourcing

Local sourcing can extend its advantages beyond sustainability and community support by offering businesses substantial tax benefits. Furthermore, businesses may be eligible to deduct specific expenses incurred through local sourcing, while local governments frequently provide tax breaks, abatements, or financial incentives to entities that actively contribute to the local economy, thereby stimulating job creation and economic development.

Finding the right balance for your supply chain

As businesses navigate an ever-changing business landscape, the capacity to nimbly adapt sourcing strategies will prove crucial in meeting evolving market demands while upholding corporate social responsibility commitments. By carefully evaluating sources and making thoughtful decisions about where to procure materials, components, and services, businesses can optimise cost-efficiency, quality, and reliability while simultaneously supporting local economies and minimising environmental impact. Ultimately, strategic sourcing that prioritises both global and local considerations can drive competitive advantage, mitigate risks, and unlock long-term value for organisations across industries.