Commercial sourcing is the process of obtaining goods and services for use in business from an external source. Learn more about commercial sourcing and how it works.
What is Commercial Sourcing?
Individual companies define sourcing policies that govern their selection of suppliers, products, methods, and procedures for communicating with suppliers. For example, companies often have specific procedures for requesting and evaluating proposals.
The sourcing process includes the following:
- Identifying the needs of customers and suppliers
- Selecting and preparing the tools and processes for communicating with suppliers
- Preparing requests for proposals and quotes
- Establishing policies to evaluate proposals, bids, and suppliers
These policies are not only about fairness but also deal with how the sourcing process relates to the company’s identity and brand. For example, if a company has positioned itself as an environmentally conscious business, its sourcing policies should support that stance.
How Does Commercial Sourcing Work?
Although some may consider sourcing to be merely the purchasing of goods and services, much of the sourcing process has already occurred before reaching the purchasing stage. These steps include:
- Identifying requirements
- Authorizing purchase requests
- Identifying suppliers
- Negotiating and selecting vendors
Of course, companies are more concerned with obtaining the best quality of goods and services that they can source at the best price within the preferred timeframe. However, this is not their only concern.
As people tend to be attracted to brands that they feel share their values, companies are also interested in ensuring that their sourcing policies reflect the values that potential customers will find appealing. For example, companies have a legitimate interest in sourcing policies that are considered fair, promote competition, and are conducted with commercial integrity.
Types of Commercial Sourcing
Many companies seek to adjust their sourcing policies in alignment with the public’s growing interest in issues and trends such as ethical investment and environmental protection.
Green Sourcing
An increasing number of companies practice green sourcing (also known as environmental sourcing or sustainable purchasing), establishing policies that emphasize the provision and procurement of goods and services that have less impact on the environment than comparable alternatives.
Green sourcing policies involve providing or procuring goods or services that have less environmental impact through:
- Reducing waste
- Lowering greenhouse gas emissions
- Conserving energy, water, and soil
- Using renewable energy sources
- Not containing toxic materials or pollution emissions
A company may choose to purchase a product from a supplier with less packaging than a comparable product or because it contains recycled materials.
Note: Public sector sourcing in Canada provides information about green sourcing to help companies identify available green products and services or define corporate requirements in terms of environmental considerations. The U.S. Environmental Protection Agency offers similar resources.
Ethical Sourcing
Ethical sourcing is another trend in sourcing that has gained significant attention in recent years. Some products are produced or manufactured in developing countries that may not enforce ethical labor standards. Poor labor practices in the clothing industry in countries like Bangladesh, Indonesia, China, and Vietnam have tarnished the reputations of companies like Nike and Walmart.
In response, Walmart adopted a policy for ethical sourcing in its supply chains. In 1999, Nike helped establish the Fair Labor Association (FLA), a non-profit organization committed to improving employment standards for workers worldwide by ensuring fair labor practices and safe working conditions.
Participating companies can join the FLA by enforcing compliance with the FLA’s labor standards and practices. Nike now conducts audits of factories and includes information about its sustainability commitments and fair labor practices in its annual reports. More and more companies are following this example.
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Regarding ethical sourcing, fair trade involves obtaining goods and services that are produced in an environment that respects the integrity of workers, pays them fair wages for their work, provides them with health benefits, and ensures reasonable working hours without using child labor.
Ethical sourcing policies typically include green sourcing practices and fair labor policies.
Avoiding Fraud in Commercial Sourcing
By its nature, the sourcing process is vulnerable to financial crimes, a problem that has been exacerbated by the rise in outsourcing. In fact, according to the PwC Global Economic Crime and Fraud Survey 2020, procurement fraud is one of the most commonly reported economic crimes worldwide.
The survey also reveals that 37% of fraud is committed by insiders, with senior management accounting for 26% of this fraud.
Bribery and bid rigging are common forms of procurement fraud in obtaining goods and services, as well as external fraud schemes. One of the most common methods is for a company to receive an invoice for products that were never delivered. The perpetrator hopes that the company will automatically pay the invoice.
Note: Companies can protect themselves from procurement fraud by:
- Allowing only authorized and trusted individuals to initiate purchase orders for goods and services
- Not accepting bids from unknown suppliers
- Rejecting unordered items
- Monitoring excessive or repeated purchases of faulty or low-quality supplies or services
These issues and others will continue to shape sourcing policies in companies for decades to come. If your company does not have its own policy, start drafting one with these factors in mind.
Key Takeaways
- Commercial sourcing is the acquisition of goods and services for business use from external sources.
- Individual companies define sourcing policies that govern their selection of suppliers, products, methods, and procedures they will use to communicate with suppliers.
- Many companies employ green sourcing and ethical sourcing.
- Companies should have policies in place to prevent procurement fraud.
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