What is sourcing? Meaning and role in procurement

Most organisations don’t set out to do sourcing badly. It tends to happen quietly as buying decisions spread across teams, suppliers and systems. Over time, this lack of structure makes it harder to control cost, manage risk or see which suppliers are delivering real value.

Without clear rules, systems or visibility teams default to making decisions based solely on price because it’s the easiest thing to compare. The problem is that this approach exposes the business to the risk of not adhering to compliance and drives total costs up in cases where there are delays or work has to be repeated.

This is why it’s important to understand what sourcing actually means in practice. When you define processes clearly, your procurement teams can see where decisions break down, where risk enters the equation and how tools can streamline sourcing. 
 

What sourcing means in procurement

In procurement, sourcing is the process of identifying, evaluating and selecting suppliers to meet your organisation’s needs. It also involves decisions around how you measure success and how you balance risk, cost and performance over time.

Don’t confuse it with purchasing. Here’s how they’re different:

• Sourcing sits upstream in the procurement process, shaping which suppliers are available, under what terms and for which categories or use cases

• Purchasing is transactional and happens later. It covers buying activities such as raising purchase orders, placing orders and processing payments. 
   

Key steps in the sourcing process

The sourcing process gives structure to how organisations make decisions relating to suppliers. While the exact steps can vary sourcing activities usually follow a sequence that helps procurement teams move from need to selection with confidence.
 

Defining requirements

Sourcing starts by defining what your organisation needs. This step helps teams move towards supplier selection and aligns sourcing decisions with organisational priorities. 

Requirements typically cover:

• Quality standards and specifications

• Budget limits and cost expectations

• Delivery timelines and service levels

• Compliance and responsible sourcing considerations.
  
  

With clear requirements the procurement team can compare suppliers consistently rather than in isolation. 
 

Supplier identification

Once you’ve set your requirements you can start identifying potential suppliers that realistically meet your criteria. This step focuses on expanding options while filtering out poor fits early. 

Supplier identification may involve:

• Conducting market research to understand available providers

• Reviewing supplier directories or approved supplier lists

• Capitalising on existing partnerships or preferred suppliers

• Running formal sourcing activities such as a request for information (RFI), request for quote (RFQ) or request for proposal (RFP).
  
  

Your goal is to build a shortlist that balances availability, capability, cost and resilience. 
 

Supplier evaluation

Supplier evaluation looks beyond price alone to understand how reliably a supplier can deliver over time. This step is all about risk management. It allows you to avoid sourcing decisions that appear cost-effective initially but lead to higher costs or disruptions later.

Procurement teams assess quality, delivery track record, financial stability and operational capacity alongside risks such as supply chain disruption and over-reliance on a single provider. At this point you’ll look at past performance data and due diligence to validate supplier claims. 
 

Negotiation and contracting

Negotiation is the point where your organisation and the chosen supplier agree on price and tangible goods or services. You’ll set payment terms, define service levels and lock in expectations relating to delivery, quality and issue resolution. 

Clear contracts then turn these agreements into something enforceable and strong contract management is important here. With everything clearly in writing it’s easier to assess performance against expectations, resolve problems faster and avoid disputes caused by vague or missing terms. 

Done well this step protects both sides and sets up a more dependable working relationship.
 

Supplier onboarding

The onboarding step prepares a supplier to deliver on a day-to-day basis. At this stage you’ll typically do the following:

• Set up suppliers in your procurement and finance systems

• Confirm compliance, tax and regulatory requirements

• Align on purchase order and invoice formats, payment terms and workflows.

Completing these steps means suppliers can transact smoothly with you from day one while also reducing delays and unnecessary friction or risk.
 

Common organisational sourcing strategies

As sourcing matures organisations apply different approaches to different types of buying. Categories vary in their complexity and impact on business goals so you need to make sourcing decisions with these variations in mind. 

Sourcing strategies give this process structure. They define the way you make decisions, where ownership sits and how you evaluate benefits relative to cost savings, risk and outcomes.
 

Tactical vs strategic sourcing

The distinction between tactical and strategic sourcing comes down to the transaction’s urgency, whether it’s likely to recur and why it’s being done in the first place. One supports immediate needs, while the other takes a longer-term view.

Tactical sourcing is often used when demand is urgent, spend is low-risk or the purchase is unlikely to repeat. The focus is on getting what you need quickly, often by selecting from known suppliers and negotiating primarily on price. Because the relationship is short-term there is usually limited supplier evaluation or ongoing performance tracking.

Strategic sourcing happens when spend is recurring, categories are business-critical or supplier failure would cause disruption. It involves planning sourcing activities in advance, evaluating suppliers more deeply and managing performance over time. The goal is to secure the best value across cost, reliability and risk rather than optimising a single transaction.

Centralised vs decentralised sourcing

Centralised and decentralised sourcing describe where sourcing decisions sit within your organisation.

Centralised sourcing places supplier selection and standards with a dedicated procurement or sourcing team. This approach comes into play when compliance, cost management and transparency matter more than speed. With a central team managing supplier selection, contracts and standards you strengthen your negotiating position and improve spend analysis.

Decentralised sourcing gives departments more autonomy to source based on local needs which can speed up decisions. This approach works best when you need flexibility or have specialist requirements that are hard to manage centrally. However as you scale decentralised sourcing can lead to reduced visibility across total spend and increase risk if teams continue to make supplier decisions in isolation.
 

Responsible sourcing

Responsible sourcing involves assessing suppliers against criteria such as:

• Environmental impact

• Labour practices

• Supply chain transparency and traceability

• Data protection and security practices

• Business continuity and resilience 

• Regulatory compliance.

These choices affect two things at once. First they shape how resilient the supply chain is. Suppliers that score low on these metrics are more likely to cause delays or service failures. Second they shape what your organisation stands for, as the suppliers you choose influence product quality, service reliability and organisational reputation. 

If your customers, regulators or internal stakeholders care about sustainability and ethical practices your sourcing decisions will directly affect credibility as well as continuity.
 

Data-driven sourcing

Data-driven sourcing relies on insight rather than instinct. You use spend analysis, supplier performance data and real-time reporting to guide sourcing decisions. With this type of insight teams can adjust sourcing decisions before small issues turn into disruptions.

For example spend data might show that you’re sourcing similar items from multiple suppliers at different prices or on varied payment terms. Alternatively performance data might highlight that a low-cost supplier causes frequent delays while a slightly higher-priced alternative delivers more reliably. 
 

Why sourcing matters in modern organisations

As your organisation grows sourcing decisions increasingly have a bearing on cost control, supply chain resilience, compliance and how confidently your teams can meet internal and external expectations. Strong sourcing operations offer the structure and insights needed to manage these pressures.
 

Cost optimisation

Keeping expenses in check remains one of the most immediate sourcing challenges. According to Bamboo Rose’s 2025 State of Sourcing and Supply Chain Strategies and Solutions survey almost 50% of retail companies say their biggest sourcing issue is controlling costs. This problem gets worse if you’re making sourcing decisions reactively or without clear requirements.

To minimise expenditure you need clearly defined sourcing operations with repeatable processes. In practice this means putting a few fundamentals in place:
 

• Outline requirements upfront so suppliers quote against the same expectations

• Compare suppliers consistently using shared criteria

• Use spend analysis to understand pricing patterns across suppliers and categories.
   

With this approach you can focus on total cost rather than headline price alone and facilitate cost reduction without sacrificing quality.
 

Supplier reliability and risk

Bamboo Rose’s survey also found that more than 30% of retail companies struggle to find reliable suppliers. This is a problem since unreliable supply chains can lead to interruptions to business operations.

The best way to handle this issue is to formalise supplier evaluation and selection. Use consistent assessment criteria that look at performance, capacity and exposure to supply chain disruptions. This gives you a clearer picture of how risky a supplier is before you sign a contract. 
 

Compliance and control

Increased decentralisation can mean decreased control. When teams source independently and outside agreed processes purchases drift away from approved suppliers and contracts. This is how maverick spend occurs. 

Over time this loss of structure makes it harder for procurement leaders to get insights on spend. It becomes trickier to see where spend is going, which suppliers you’re using and whether purchases follow agreed terms. This affects your ability to minimise costs and risks.

Clear sourcing processes restore control without adding friction. When you define your preferred suppliers, payment terms and buying workflows upfront, purchasing stays within approved channels. This reduces maverick spend and gives your procurement teams reliable oversight across sourcing decisions.
 

Advancing responsible purchasing

Responsible sourcing reflects growing expectations related to sustainability, ethics and transparency. Yet many organisations struggle to make progress. Source Fashion and Insider Trends’ 2025 State of Sourcing Report found that 75% of large companies say they are not making progress with sustainable sourcing because clear strategies are missing.

When you support sourcing operations with defined strategies, responsible purchasing becomes easier to implement. With clear assessment criteria your teams can evaluate suppliers consistently across environmental impact, labour practices, regulatory compliance and supply chain resilience. This allows sourcing decisions to support the business’s operations and reputation while aligning procurement with wider sustainability goals.
 

Sourcing is evolving with analytics and AI

As your sourcing operations grow it becomes harder to manage cost, risk and supplier performance through manual processes alone. Analytics and AI give your team smart solutions so they can enact sourcing in a disciplined manner even as volume and complexity increase.
 

Improving visibility using analytics

Analytics give you clear visibility into where and how money is spent, which suppliers you rely on and how sourcing decisions play out over time. 

Rather than working from static reports or fragmented data, analytics software gives you an understanding of:

• Patterns across categories that are difficult to spot manually

• Factors driving up costs that influence pricing and supplier behaviour

• Where sourcing activity drifts from the agreed strategy or approved suppliers.

This makes it easier to intervene early rather than after you've lost anything.
 

AI-enabled sourcing support

AI and automation help your team handle sourcing work at scale by reducing manual effort and improving consistency across decisions. In practice, AI can be involved in the following:

• Identifying suppliers more quickly based on defined criteria

• Drafting and structuring RFPs using consistent requirements

• Analysing bids to highlight key differences in pricing, terms and risk

• Reviewing contracts to highlight key terms and potential issues.
  
  

By taking care of repetitive and time-intensive tasks AI gives your team more time to apply judgement, assess trade-offs and make better sourcing decisions.
 

Bridging capability gaps

Increased sourcing demands can make it difficult for your team to keep up. Analytics and AI help bridge gaps in skill and capacity by guiding teams through defined sourcing processes. This reduces reliance on individual expertise and makes it easier for everyone to follow best practice.
 

Moving from reactive to proactive sourcing

With real-time insights and predictive signals your team can anticipate issues before they escalate. Instead of reacting to delays, cost increases or supplier failure you can adjust sourcing decisions sooner and protect business operations from interruptions. This shift turns sourcing into a proactive driver of stability and competitive advantage.
 

Sourcing that fosters smarter buying

Through effective sourcing your organisation can control costs, reduce risk and buy with confidence even as complexity grows. When you define sourcing using these steps and support it with data your procurement teams are able to make consistent decisions that align with business goals, not just short-term needs. 

If you’re looking to improve your sourcing insights, boost control and support smarter purchasing at scale, explore how Amazon Business can help you build more effective sourcing operations.