The Different Sourcing Methods and Options in the UK
In the globalised economy, many companies source from the Far East - especially China. But things are changing. Sourcing options in the UK are rising as economic forces and the pandemic shift domestic manufacturers’ buying preferences towards the home market.
Sourcing is the process of evaluating suppliers, creating partnerships with them and procuring goods. Historically, western brands would form partnerships with emerging market suppliers. However, because of the reasons briefly mentioned above, that is changing. We are seeing the rise of a range of sourcing methods that UK businesses are using to expand their operations and improve their services.
Choosing sustainable and effective sourcing methods is essential because of the costs of procurement and transportation. Around 50 to 70 per cent of sales revenue goes to meet these expenses. So reducing them is a critical business objective.
UK firms have a variety of sourcing options available to them. We briefly list the different sourcing methods here and provide a full explanation of each below:
- Global sourcing
- Low-cost country sourcing
- Virtual enterprises
- Prime/Sub Arrangements
- Captive service operations
- Conventional agreements
Please note that these sourcing methods are not necessarily mutually exclusive. Outsourcing and low-cost country sourcing can occupy the same category.
Different Sourcing Methods in Detail
Insourcing is the practice of delegating tasks to people within the company and is the primary sourcing method for most firms.
Sourcing within the UK offers all kinds of advantages. It provides greater flexibility, saves money and improves the quality of final goods and services. It can also simplify management processes. Executives can simply give directives to managers in their organisation on payroll instead of having to negotiate with teams who are separate from the company.
Outsourcing is the process of transferring responsibility for the supply of goods and services from the client company to a third party. Firms can outsource domestically, meaning that they ask UK companies and contractors to take over responsibility for specific aspects of their operation. Or they can outsource internationally, asking firms in foreign countries to take up the slack instead.
Global sourcing is a type of outsourcing where companies seek to leverage international expertise. This method of sourcing is not necessarily about trying to get the lowest price. Instead, it is more to do with achieving success in local markets around the world by using local knowledge, business systems, brands and insight.
Low-cost Country Sourcing
Low-cost country sourcing focuses on locating production in regions with a competitive advantage. Typically, these countries have lower labour costs, allowing them to produce goods at a fraction of the cost of developed countries. Historically, brands outsourced factories in Taiwan, Thailand, Singapore, China and Malaysia.
Near-sourcing is the practice of locating production closer to target markets. Perhaps the most famous example of this is manufacturing in Mexico. Dozens of major businesses now locate final assembly in the country, ready to ship goods a few miles north to major US and Canadian markets.
Near-sourcing, however, can happen in any country, including the one in which the firm operates. It can also be either a form of insourcing or outsourcing. Companies, for instance, may decide to set up factories close to their target markets or use third-party facilities to help them meet demand instead.
Virtual enterprises are an emerging form of sourcing. These comprise networks of independent companies linked by information technology to share skills. For example, a brand might “source” IT management services or copywriting from a third-party agency it connects to via the internet.
Prime/Sub arrangements occur when firms work with established outsourcing providers to arrange procurement. Usually, the provider will outsource tasks to another company, dealing with all contracts under offshore law.
Companies take this approach to reduce the burden of import restrictions and get goods through customs faster.
Captive Service Operations
Captive service operations occur when the outsourced company is part of the same group of companies. Brands typically use this method when they want more control over processes. It also affords greater levels of confidentiality and security, while reducing the risk of intellectual property infringement.
The downside is that it doesn’t offer as many economies of scale. Firms cannot leverage the expertise of a third-party supplier.
Lastly, conventional agreements are a standard form of outsourcing that involves two companies coming to an agreement that maximises cost reduction. Firms will usually share their expertise, plant and facilities. However, each party must give up a certain amount of control and may need to leave sensitive data in the hands of the other.
How would your business be affected by material shortages from overseas? Read our useful guide to see whether sourcing parts in the UK can help you avoid stock issues.