External sourcing refers to the procurement of goods necessary for business operations from third-party organizations. It is often a good idea, especially in cases where it is cheaper and easier to secure the items that way.

There are several factors that may influence a business's decision to source for goods externally. They include financing requirements, lack of necessary skills, scheduling or incapability of the business. While outsourcing means the bringing in of goods, services, and manpower from external sources, internal sourcing refers to the use of internal labor to achieve the same. All businesses are faced with the decision of whether or not to source externally for needed resources.

Most businesses often face several challenges in the bid to enhance their financial standing. These challenges include inadequate cycle time, the cost of goods sold, and product design and quality. The application of supply chain management techniques helps businesses to control these factors resulting in improved costs, quality and delivery cycle time. These goals are achieved by leveraging strategic sourcing — which helps the business to decide whether to outsource certain production activities to third-party concerns or keep them in-house.

Service Organizations Internal Sourcing

An offshoot of the make-or-buy concept, most service organizations leverage internal sourcing to keep certain business functions in-house.

The resultant effect of internal sourcing means that businesses retain what they do best as their core competencies. As such, the business can focus on taking care of customer needs while doing what it does best. Since the selection and management of an outsourced service organization is expensive, internal sourcing may be the best option for most businesses.

Many organizations prefer to internally retain services such as research and development, financial auditing and service consulting. This enables them to keep a close watch on these activities, thus ensuring quality control. It also allows them to focus on core competencies, minimize value leakage, as well as better product and service delivery to customers while keeping to their vision, mission and value statement.

Manufacturing Organization Internal Sourcing

Manufacturing concerns often face the same dilemma as service organizations when it comes to choosing strategic sourcing of business functions. Although manufacturing firms focus on the making of products that satisfy their client base while service organizations offer services to their customers, they both wish to retain their core competencies.

Manufacturing organizations can identify the business functions that are best left for external sourcing by executing and refining its core competencies through a make versus buy analysis and the use of value engineering. Most manufacturing organizations opt to keep research and development as well as final assembly/production in-house. This is because such activities impact significantly on customer satisfaction levels and reflect the organization's vision, mission, and value statements. If these vital business functions are sourced externally, the organizations may lose visibility and control of the processes.

Service Organization — External Sourcing

Reports show that there has been a significant increase in the number of organizations that outsource internal business operations to specialists — thus converting them into procured services. Several internal functions such as product design, technical service, and customer service are now being sourced externally to enable organizations to focus on their core business competencies.

By leveraging e-sourcing and spending analysis tools, a service organization can justify and rationalize the types and number of external sources it should use. Some of the functions that a service organization should outsource include accounting/backroom operations, limited research and development, preliminary auditing or accounting translation, preliminary research and analysis (for instance in legal or medical transcribing), and IT functions.

Manufacturing Organization - External Sourcing

External outsourcing for manufacturing organizations is done in much the same way as that for service organizations. However, additional research is needed since manufacturing organizations deal with the production of physical goods.

By leveraging several tools (including a team-based approach) to the global outsourcing of business functions it usually performs, manufacturing organizations will find external outsourcing cheaper with little or no adverse effect on customer satisfaction and performance of core competencies.

When looking to externally source some of its business functions, organizations should adhere to the following steps

  1. Identify the reasons for strategic sourcing
  2. Outline clear objectives and goals
  3. Create cross-functional teams
  4. Undertake supplier research
  5. Prepare RFQs (request for quote)
  6. Send RFQs to vetted suppliers
  7. Analyze responses
  8. Undertake site visits and negotiations
  9. Award the outsourcing contract

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