Sourcing suppliers and materials can feel overwhelming for small businesses. Which should come first: finding the lowest cost supplier or prioritizing quality and reliability?

Here are the steps you can follow to create a sourcing plan that supports your business goals — and some best practices to help you succeed.

But, First – What is a Sourcing Plan?

A sourcing plan is a roadmap for how your business will procure the raw materials, components, finished goods, and services needed to create your products and serve your customers. It defines:

• What inputs you need to source
• The criteria you'll use to select suppliers
• How you'll engage and evaluate potential suppliers
• Your contracting and purchasing process
• Key performance indicators (KPIs) to track supplier performance

The sourcing plan touches every part of your supply chain - from identifying suppliers to managing ongoing relationships. So it needs to be closely tied to your overall business strategy and goals.

Why a Sourcing Plan is Important

For small businesses, getting sourcing right is critical. Your suppliers are an extension of your business. Their performance directly impacts your:

• Product quality and customer satisfaction
• Ability to manage and forecast costs
• Capacity to launch new products and enter new markets
• Flexibility to adapt to changing demand

A poor sourcing strategy can lead to disrupted production, damaged customer relationships, and an eroded bottom line. In fact, 50% of small businesses fail within the first five years — and research shows supply chain issues are a top reason why.

On the other hand, a well-executed plan helps you build a high-quality, dependable supplier network to support your growth. Effective sourcing can lead to a 12-20% reduction in spend. More importantly, it frees you to focus on delighting your customers and scaling your business.

Key Components of an Effective Sourcing Plan

Don't be intimidated by the idea of a formal "sourcing plan." You likely have elements of a plan already. Spend a few hours packaging it into a more proactive strategy. Focus on these five key sections:

Business objectives: 

How does sourcing tie to your sales, production, and growth goals?
Example: We need to reduce COGS by 10% to expand margins and fund product development.

Current supply base assessment:

How is your current supplier network performing? Example: 80% on-time delivery overall, but only 20% for key component X. Need alternative sources.

Supplier selection criteria: 

What factors matter most in your suppliers? Example: For commodity Y, prioritize cost and volume capacity. For part Z, quality and lead time are critical.

Procurement process: 

What are your policies for contracting, purchasing and payment? Example: Require NDAs and exclusivity clauses for strategic partners. Net 60 payment terms.

Performance metrics: 

How will you objectively track supplier performance and intervene when needed? Example: Measure and report on quality defect rates, on-time in-full delivery, and cost reductions quarterly.

Having these components documented provides clarity for your team and accountability for your suppliers. It also allows you to adjust your plan as your needs evolve.

Steps to Create a Successful Sourcing Plan

With this framework in place, you can follow these seven steps to build out a comprehensive sourcing plan:

Align sourcing with business objectives 

Start by pressure-testing your upcoming initiatives against your current supply chain:

• Do you have the materials and capacity to support your sales forecast and production plans?
• Will you need new equipment, ingredients, or components for product development?
• Are you entering new markets that require different logistics and distribution partners?

Documenting these needs provides the roadmap for where you need to focus your sourcing efforts.

Identify gaps in your current supply base 

With your future requirements mapped out, turn a critical eye to your existing suppliers:

• Where are you single-sourced today and what risk does that pose?
• Which suppliers are underperforming on the metrics that matter most for that input?
• Do you have sufficient geographic diversity and backup suppliers to make your supply chain agile?

For key materials, consider two sources minimum, qualified in two different locations. Keep in mind too that your 'A-team' suppliers could be strong partners for your new initiatives.

Determine supplier criteria by category 

For each component or service you're sourcing, define your selection criteria:

• Criticality: How important is this input to your production and your customers?
• Spend: What's your annual budget and target price for this item?
• Specifications: What technical, material, and performance requirements must the supplier meet?
• Scope: What are your volume, location, and logistics needs?

Assign weights to each factor based on its importance. A $5 part that can shut down your line is more critical than a $500 part you can easily substitute.

Evaluate candidates and negotiate terms 

Narrow the pool with formal RFPs and audits as appropriate. Visit their facilities to see their process in action. Check references, dig into their financials, and assess the long-term fit.

When you've identified the right partners, ensure your contract terms and service level agreements (SLAs) are clear:

• Align on criteria and frequency for price reviews
• Define order and delivery parameters and penalties
• Specify inspection and acceptance processes
• Secure the appropriate indemnification and insurance requirements

Contracts should protect your interests, but also lay the foundation for a collaborative relationship.

Onboard and integrate new suppliers 

Once the deal is signed, dedicate sufficient resources to setting your new suppliers up for success:

• Introduce them to your key stakeholders and share relevant business context
• Integrate them into your ordering, receiving, invoicing, and quality processes
• Set up regular touchpoints and communication channels
• Share forecasts, product roadmaps, and business updates frequently

The more your suppliers understand your overall business, the more invested they'll be in your success. For strategic partners, consider quarterly business reviews to exchange feedback.

Common Challenges in Sourcing and How to Overcome Them

Small businesses face unique hurdles in strategic sourcing. Here's how to tackle the most common ones:

Lack of dedicated resources or expertise 

Sourcing is often an "other duty as assigned" in lean teams. But that can lead to reactive, inefficient procurement.

Solution: Assign clear ownership of sourcing, even if it's a part-time role. Invest in training, tools, and templates to streamline the process. Consider outsourcing tactical pieces to free up internal resources.

Limited purchasing power and leverage

It's challenging to get suppliers' attention - and best prices - when your spend is a fraction of their volume.

Solution: Consolidate spend with fewer suppliers to increase your importance. Join group purchasing organizations to benefit from bulk rates. Focus on total value generated, not just price.

Inadequate supply chain risk management 

From supplier disruptions to counterfeit parts, small businesses can struggle to get ahead of supply chain risk.

Solution: Proactively monitor supplier health and capacity. Diversify supplier base and build readiness plans for disruptions. Inspect inbound materials for quality.

Insufficient performance monitoring and management 

Without robust procurement systems, small businesses can lack visibility to supplier performance until issues escalate.

Solution: Define service level agreements and measure compliance. Use supplier scorecards to track cost, quality, and delivery. Schedule regular performance reviews.

Best Practices for Strategic Sourcing

Implementing these best practices can significantly improve your sourcing strategy and outcomes:

Align sourcing with business strategy: 

Your sourcing plan must be closely tied to your overall business objectives. Take the time to understand your company's short and long-term goals - whether that's entering new markets, launching new products, or improving profitability. 

Then develop sourcing strategies that directly support those aims. For example, if your goal is to increase market share by 20%, your sourcing plan might prioritize suppliers that can scale quickly and offer competitive pricing for volume growth.

Take a holistic view of costs: 

Seasoned procurement pros know that the price on the invoice is just the tip of the iceberg. 

To make sound sourcing decisions, you need to consider the total cost of ownership (TCO). That includes not just the unit price, but also inventory carrying costs, transportation expenses, quality and rework costs, and even the cost of managing the supplier relationship. A supplier with a higher upfront price tag might actually be more cost-effective in the long run if they offer superior quality, just-in-time delivery, and value-added services.

Focus on total value: 

While cost is always a key consideration, the best suppliers bring much more to the table. When evaluating potential partners, look at the full package of value they offer. That might include innovative design capabilities that help you get to market faster, robust quality management systems that reduce defects, or exceptional customer service that reduces your administrative burden. 

Also consider how a supplier can support your sustainability and social responsibility goals. A myopic focus on cost savings can lead you to miss out on suppliers that could be real strategic assets.

Rationalize your supply base: 

More suppliers isn't always better. In fact, a bloated supply base can be a real drain on efficiency and effectiveness. 

Every supplier relationship requires time and effort to manage - from vetting and onboarding to ongoing performance monitoring and issue resolution. Consolidating your spend with fewer, more strategic suppliers can simplify your procurement processes, leverage your purchasing power, and foster deeper, more collaborative relationships. 

Of course, you don't want to put all your eggs in one basket either. Aim to strike a balance between consolidation and diversification that optimizes costs, reduces risk, and aligns with your business needs.

Monitor supplier performance diligently: 

You can't manage what you don't measure. Establishing clear, objective key performance indicators (KPIs) is essential to effective supplier management. 

Common metrics include on-time delivery rates, quality defect rates, cost savings or avoidance, and responsiveness to issues. 

Share your KPIs and targets with suppliers upfront and include them in your contracts or service level agreements (SLAs). Then track performance religiously. Invest in tools that give you real-time visibility to key metrics. 

And establish a regular cadence of supplier reviews to discuss scorecard results, identify root causes of underperformance, and agree on improvement plans.

Evaluating and Selecting Suppliers

Choosing the right suppliers is one of the most important decisions a sourcing team makes. The suppliers you select have a direct impact on your product quality, customer satisfaction, and profitability. But with so many factors to consider - from cost and quality to delivery and innovation - it can be tough to make apples-to-apples comparisons.

That's where a structured, weighted scorecard comes in handy. By assigning a specific weight to each key criterion, you can objectively assess suppliers' overall fit and value. Here's a closer look at the five critical factors to include and how to evaluate them:

1. Cost (30%): 

For most businesses, cost is the biggest driver of sourcing decisions. But it's important to look beyond unit price to get a true picture of a supplier's cost competitiveness.

Start by considering the total cost of ownership (TCO). That includes the purchase price, of course, but also factors like transportation costs, inventory carrying costs, financing costs, and even the cost of poor quality (COPQ). A supplier with a higher upfront price might actually be cheaper in the long run if they offer more reliable delivery, lower defect rates, or more favorable payment terms.

Also evaluate a supplier's cost structure and their willingness to collaborate on cost reduction initiatives. 

• Do they have a clear understanding of their own costs drivers? 
• Are they open to ideas for process improvements or design changes that could reduce costs? 
• Do they proactively bring cost-saving suggestions to the table?

Finally, don't forget to factor in any transition costs associated with switching suppliers. Even if a new supplier offers a lower price, the cost of qualifying them, integrating them into your systems, and potentially carrying additional inventory during the transition could negate any savings.

2. Quality (25%): 

A single quality issue can damage your brand reputation, lead to costly recalls, and even put you at legal risk. That's why it's critical to thoroughly vet potential suppliers' quality management systems and performance.

Start by assessing their quality certifications and accreditations. 

• Do they have ISO 9001 or other relevant industry certifications? 
• Do they use statistical process control (SPC) or other tools to monitor and maintain consistent quality?

Also look at their actual quality performance. What is their defect or reject rate? How often do they deliver products that meet your specs on the first pass? Do they have a robust corrective and preventive action (CAPA) process to address quality issues when they arise?

3. Delivery (20%): 

In the era of just-in-time manufacturing and lean inventories, reliable delivery is more important than ever. Late or incomplete shipments can shut down your production lines, damage customer relationships, and cost you big in expedited freight and lost sales.

The most basic measure of delivery performance is on-time delivery (OTD) - the percentage of orders that arrive on the promised date. But it's also important to look at other delivery metrics like lead time (the time from order placement to receipt), fill rate (the percentage of orders that are filled completely), and delivery accuracy (the percentage of orders that are delivered to the right location, with the right products, in the right quantities).

4. Service (15%): 

A supplier's service and responsiveness can have a big impact on your overall experience and satisfaction. No matter how good their products are, if they're difficult to work with, it can strain the relationship and even impact your operations.

Also consider their flexibility and problem-solving skills. How do they handle change requests or rush orders? Are they willing to customize products or packaging to your specifications? When issues arise, do they take ownership and work collaboratively to find solutions?

Finally, don't forget to assess the breadth and depth of value-added services they offer. 

• Can they provide design or engineering support? 
• Do they offer vendor-managed inventory or just-in-time delivery programs? 
• Can they handle sub-assembly or kitting for you? 
• The more a supplier can do to lighten your workload and improve your efficiency, the more valuable they'll be as a partner.

5. Innovation (10%): 

The best suppliers don't just react to your needs - they proactively bring new ideas and solutions to drive your business forward.

When evaluating a supplier's innovation potential, start by looking at their technical capabilities and expertise. Do they have a dedicated R&D team? Are they investing in new technologies and processes? Have they recently launched any new products or services?

Future Trends in Sourcing Strategies

The pace of change in sourcing is accelerating. Keep these trends on your radar:

• Increased supply chain digitization: Automation, analytics, and AI are becoming table stakes. Invest in user-friendly tools and look for tech-savvy suppliers.
• Focus on resilience and agility: COVID exposed deep vulnerabilities in lean global supply chains. Diversifying your base and building in flexibility is crucial.
• Emphasis on sustainability: Consumers and regulations are raising the bar for responsible sourcing. Engage suppliers to reduce waste, emissions, and materials impact.
• More collaboration and visibility: Strategic supplier relationships are moving beyond transactional. Aim for transparent, collaborative partnerships with your key suppliers.

Effective sourcing managers are looking around the corner to proactively prepare for these shifts.

FAQs about Sourcing Plan

1. How often should I review and update my sourcing plan? 

At a minimum, revisit your plan annually as part of your strategic planning cycle. But build in quarterly check-ins to track progress and course-correct. And be prepared to adapt in real-time as business needs and market conditions change.

2. What are some red flags to watch out for when evaluating potential suppliers? 

Watch for suppliers that are consistently unresponsive, unwilling to provide references, or hesitant to share information about their business. Misalignment on key contract terms, negative online reviews, and high employee turnover are also concerning signs.

3. How can I convince my suppliers to agree to service level agreements (SLAs)? 

Position SLAs as a tool for mutual success, not a punitive measure. Collaborative SLAs clarify expectations and provide an objective framework to measure performance on both sides. Including continuous improvement targets can make SLAs more palatable too.

4. How do I balance cost savings with other priorities like quality and service? 

It's critical to take a holistic view of value. Saving 10% on a part is no benefit if it causes quality spills or production delays. Develop a balanced scorecard that weights the importance of cost, quality, delivery, service, and innovation for your business. And remember, strong supplier relationships often generate the biggest ROI.

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