What is a sourcing company?

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A sourcing agency helps a company or an organization to find the most suitable and reliable suppliers they might need and collaborate with them to offer attractive prices and increase the company’s profit and margin. The service usually occurs on a commission basis where the sourcing company remunerates itself by making a percentage of the purchase order´s value. 

A sourcing company must follow a rigorous process generally divided into several distinct categories. From precisely understanding your request, finding the most accurate supplier and vetting them, taking care of your logistics, to dealing with administrative procedures and standards, the number of services a sourcing company can offer are numerous, and most often long and complex. It is important to understand that using a sourcing agency serves exclusively to increase margins while reducing research and work effort. 

As the first step in your supply chain, it is essential for a company to find balance between the quality of its products and the exact amount it costs. A good sourcing company will allow you to have the necessary stock for your activity at the price you want allowing you to optimize your costs, margins and competitiveness. They will be responsible for negotiating with suppliers, developing the relationship with them over the time and dealing with the potential risks. 

Then where to start and what are the important steps a sourcing company guides you through?

Main steps of the process

The primary role of a sourcing company is to understand your request and to assist you in the procurement of your goods in order to amend the efficiency of your projects. If you don’t make profit after working with any sourcing structure, it hasn´t performed its role adequately. 

A competent sourcing company is multi-hatted and must have a meticulous sense of business and experience, good skills in languages to communicate effectively and be the link between you and the supplier, coordination between their different departments and a database of qualified and trusted domestic suppliers, greatly increasing your chances of discounts. 

After the first meeting where the company explains in detail the potential purchase order, the team in charge of the project will then start their investigation and ask various questions to potential suppliers that might suit the buyer’s needs. They will then request a quote from their preferred factory out of long negotiation for the best fair deal, fairness being the key to a strong relationship. 

The final requirements regarding product design and confirmation are then triggered and the final contract can be drafted. The buyer and the factory, assisted by the sourcing company, need to agree on diverse clauses to be able to build the final contract. They will discuss details such as the product´s specs, quantity required, delivery schedule and production, payment terms, incoterm, logistics, etc. 

After the signature of the three parties, the full production stage can finally begin. The sourcing company takes care of all administrative paperwork and obligations including quality control, reporting, import and export duties, tariffs and taxes. 

After dealing with these complex verification processes, it is finally time to ship and send the goods away by simply following the predetermined freight and logistics terms previously signed in the contract. 

Your request, their mission

For an outsourcing mission to be a success it starts with a company that´s able to provide as much technical details as possible and express how they want the deal to unfold. It’s crucial during the first meetings to explain all the necessary and significant elements that have to be taken into account, to define what is negotiable and what isn´t as to prepare a solid base of requests to be given to the future supplier. The more detailed the request, the more seriously it will be taken by the supplier, and the more fruitful the negotiation will be for both parties. 

After securing the information exchanged by signing an NDA between your company and the sourcing agency, the team can begin its inquiry. Whether by contacting suppliers with whom they have already worked in the past or by researching new ones, the questions addressed will be similar, querying about their experience, their flexibility, their production capacity or the payment terms policy they have. 

Once the supplier has been chosen and verified, a period of negotiation begins to define the product specifications, the final price, the payment terms, the delivery schedule, the volume chosen, the licenses and certificates, the incoterm, the indemnities and the jurisdiction. 

Keep in mind that the larger the quantity, the more likely it is to see the price decrease. Some factors such as payment terms, incoterm and stock availability can also influence that final price, sometimes forcing you to comply with some of the supplier´s requests if you want to stay within your prices. 

Negotiating the terms of the contract can be long and tedious, and the buyer is strongly advised to ask their legal department for help or hire a lawyer specializing in international law to guide them during the construction of the contract. 

After reaching an agreement, the sourcing company will then propose the company a final three-parties contract including the buyer, the sourcing company and the supplier (granting protection to all parties and describing in detail the core elements of the order).

Production and schedule

Before signing the final contract, it is sometimes essential for the buyer to receive samples. The sample stage is a frequent step in any purchasing process since it is always easier for a buyer to take the step when you have the product with you to verify it yourself. 

The sourcing agency takes care of sending you the different samples while waiting for your positive or negative feedback. If the product is accepted, we can move on to the final production stage. The production stages are discussed in advance and are generally flexible up to a certain point. 

Indeed, it is common to see a buyer request a smaller order during the first production part to audit the potential positive impact of his sales and then move on to a larger order and thus further reduce his initial purchase price. It is also very important for the buyer to understand all information related to import and export duties, taxes and tariffs. 

In the situation where your product is manufactured in Asia and must be imported into Europe, the choice of your licenses, certifications and import and export duties are absolutely fundamental. They will obviously be discussed beforehand, but it is essential to take them into account and to trust the on-site sourcing agent which can drastically reduce your logistics costs and get your goods out quickly, with less risk of seeing the merchandise restrained at the port. 

In some areas it will always be preferable to have an operator on site, familiar with local customs and authorities to minimize your risk of hold ups. Many buyers see their goods remain at the port because of local administrative unresolved issues. 

Quality Control and Freight

The team in charge of your order can take care of the quality control of your goods or simply recommend a trustworthy third-party company located nearby to handle the inspection. 

They will be responsible to examine every aspect of your product and confirm the SGS standard to attest to the quality required. Once the quality checkup has been concluded and certified, it is time to send the merchandise to the final destination. 

The sourcing company usually takes care of your freight & logistics by working jointly with a local or international shipping company. Once the model has been chosen and defined, the shipping center is responsible for the transportation and is obliged to keep you informed. 

Among the different delivery methods, three are to be considered: the just in time model, the continuous replenishment model and the on-demand delivery model. It is therefore up to the buyer to choose beforehand with the supplier which model is best suited to their sales strategy and stick to it. 

When the goods reach harbor, contact between buyer and sourcing company doesn’t stop, nonetheless. The agent is obligated to stay in constant communication with both parties to insure and guarantee the smooth running of future shipments until the contract ends. 

Useful information

Here some relevant information and aspects to consider when you want to work with a sourcing company.

It is important to ask the right questions from a practical point of view but also from an ethical one. A sourcing agency must be able to be transparent about the workers situation or its pollution immediate impact.  In a world in the throes of energy conversion, it is critical to review our priorities concerning ecology and minimize the impact of our decisions related to manufacturing and logistics as much as possible. Choosing more environmentally friendly manufacturing or logistics companies, even if a little more expensive, will always be more beneficial for the planet and the people in the short and long run. A good sourcing company must be able to ensure good working conditions for workers and compliance with the latest environmental standards. 

It is common for a sourcing company to earn a commission based on the total value of the purchase order. However, the primary goal for a buyer is to be able to control its flows, its margins and save money. By analyzing market prices, you will quickly realize that an agency inflates its commissions. It is then the responsibility of the buyer to check with several agencies in order to have the best prices, the best quality and the best services. 

Sourcing agencies generally do not disclose their supplier´s information, simply because this information are their main resources accumulated through the years. It is interesting to know that many qualified suppliers are not to be found on traditional networks, explaining why sourcing companies can offer their clients attractive prices. Even if the contact information remains hidden, an agent in charge of your order should be able to organize visits to the factory or set up meetings with the supplier if it is absolutely necessary. Also know that a reliable sourcing company should always collaborate with a top 50 world bank when proceeding to the payment between the buyer and the supplier, merely to ensure security and transparency for both parties. 

If you have any questions regarding the operation of our sourcing company, please feel free to contact us. We will be glad to help you! 

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Victor Brunet

Victor Brunet

Co-founder and Chief Executive Officer at NVR Sourcing & Logistics

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