Sourcing and procurement aren’t separate business practices, where one has more value than the other. They are tightly inter-related business processes for purchasing goods and services. Together, they deliver great value to many businesses, especially those competing in competitive global markets.
Here are reasons why you would devote a business focus and resources to both sourcing and procurement areas.
- Identify and align with carefully vetted suppliers/vendors that serve as key business partners, helping you profit in your core market(s) and expand into new markets
- Ensure that you purchase from preferred, contracted suppliers at negotiated rates
- Lower your operational costs while ensuring the delivery of high-quality products and services
- Process purchase orders in a timely manner for an efficient supply chain
- Analyze corporate spending and supplier performance in real-time
- Proactively manage supplier risk
- Support corporate social responsibility and sustainability initiatives
What is Sourcing?
Sourcing, often referred to as strategic sourcing, is the procurement (or purchasing) process involved with the selection and monitoring of the suppliers (or vendors) that you do business with. When viewed as a strategic activity, sourcing serves as the foundation of a comprehensive procurement approach where the method for selecting suppliers can vary by industry segment.
To be effective and achieve best results, the sourcing process must involve cross-departmental support, so that preferred, contracted suppliers become the default option for anyone involved in a purchasing activity.
What is Procurement?
Procurement refers to those activities involved with the purchasing process: how you buy the products and services that you need for your business. Without proper management, the procurement or purchasing process can lead to negative business consequences such as high prices, poor quality of goods and services, shipment delays, or even litigation.
Furthermore, when procurement operations are disconnected from the accounts payable process, this can lead to additional problems: delays in purchase order and payment processing, disruption to the prompt ordering and delivery of goods and service, and strained relationships with suppliers when they aren’t paid on time.
Sourcing vs Procurement : How They Differ
Sourcing is a subset of the broad procurement process, with a focus on procurement strategy. This group concerns itself with building a reliable supply chain that can serve the long-term needs of your business. Procurement is more concerned with transactions: the execution of orders to the suppliers-vendors identified and monitored by the sourcing team.
Here is a breakdown of the typical areas of responsibility for sourcing vs. procurement:
|Role of sourcing||Role of procurement|
|Perform market research relating to defining business requirements and goods-services to be purchased||Enter supplier records into the company database to enable transactions|
|Identify and qualify suppliers across specific industries and/or categories of spend (e.g., office supplies, legal, marketing, raw materials for manufacturing, etc.)||Establish budgets for certain segments of spend or purchase categories|
|Negotiate contracts with suppliers including minimum order requirements, pricing/price levels (by quantity of purchases) and payment terms*||Manage contracts that the sourcing group has negotiated|
|When required, initiate competitive bid process via request for quote (RFQ) or request for proposal (RFP)||For products, generate and manage purchase orders (POs) and support the matching of POs with related documents such as invoices, advance ship notices, goods receipt, and contracts.|
|Benchmark spend categories||For services, manage service entry sheets to track milestones for service delivery, ensure accurate payment for work completed, and confirm satisfactory performance|
|Assess supplier performance-viability over time as market and business needs change||Capture information on supplier performance throughout the purchasing process and share with sourcing|
|Manage day-day supplier relationships|
*Ownership of payment terms can vary: sometimes this is managed by the sourcing group, other times by procurement or finance professionals in the treasury or accounts payable department.
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Importance of Sourcing
Sourcing is essential for organizations seeking to control their costs and ensure delivery of quality products and services that support business operations. With a sourcing group, you have a dedicated team that can help you consolidate purchasing power in key spend categories while minimizing any risks to your supply chain.
Here are some areas where sourcing can provide value:
- Share their broad understanding of global markets as part of the development of a strategic sourcing strategy
- Provide detailed profiles of specific product categories
- Drive corporate social responsibility and sustainability initiatives
- Identify spending pattern across company departments and forecast this spend over specific time periods or over the fiscal year.
- Consolidate purchasing with selected supplier so you get the best possible cost and optimize cost savings
- Vet suppliers for ensuring compliance to sustainability initiatives, environmental commitments, ethical values, and corporate social responsibility (CSR) policies
- Define request for proposal criteria for soliciting bids and negotiate with suppliers submitting winning bids
- Mitigate risks in your supply chain, which could be caused by:
- Unstable government or regional conflicts
- Working with non-compliant suppliers or those on sanction lists such as the Office of Foreign Assets Control (OFAC)
- Financially troubled companies
- Extreme weather or environmental disasters
- Cyber attacks
- Shipping losses or delays
- Identify backup sources of supply if needed for emergency purchases, short-term requirements, or to respond to unexpected demand in previously slow-moving product areas
- Leverage performance metrics to benchmark the state of any product category
- Stay abreast of dynamic market conditions that could negatively impact your supply chain
Importance of Procurement
Procurement is responsible for enforcing the contracts and business partnerships that the sourcing team has developed. Procurement’s role includes implementing and managing the systems for onboarding suppliers, executing orders, and managing transactions.
Here are some areas where procurement provides value:
- Set up systems for onboarding suppliers to enable transactions and collect performance data that can be shared with sourcing
- Ensure that employees make purchases based upon the contracts set up by sourcing
- Direct users to qualified suppliers by product category through use of electronic catalogs
- Manage purchase requisitions and generate purchase orders as a key step in ensuring compliance to procurement policies, where orders are approved up front before the order is placed vs. after the fact
- Help manage complex, project-based services that can involve time sheets, multiple line entries, wide range of service rates, confirmation of work performed, and milestone payments tied to contracts
- Work closely with the payables team to monitor the matching of purchase orders to invoices, goods receipts, and related transaction documents.
- Support compliance with tax legislation in multiple countries, currencies and languages when transacting in foreign countries
Why You Need Both Sourcing and Procurement
Sourcing and procurement are complementary business processes that offer compelling value to any business with multiple product lines or growing sales. To realize that value requires support for both activities.
With procurement expertise but no sourcing capabilities, you could manage transactions effectively. But you would not have the confidence that your source of supply is cost effective, compliant, or best suited to your business requirements.
With sourcing expertise but no procurement capabilities, you would not have an efficient processing for purchasing the goods and services from suppliers under contract. That would lead to much rogue or non-compliant spend and the inability to realize the value from the sourcing effort.
In addition, you would not be able to efficiently capture reliable supplier performance metrics. Because of that, sourcing would not be able to measure success from its strategies and recommendations.
Qualities of an Effective Procurement System
An effective procurement system makes it easy to track, manage and audit the entire procurement process, from sourcing through onboarding, ordering, transacting, and accounting.
A key component is a consumer-like shopping experience with simplified search capabilities that can quickly match products and services with buyer requests. The system should then be able to trigger the creation of purchase orders when needed and automatically route them for prompt approval.
Once an order is placed, the procurement system should automate the matching process, which could involve purchase orders, invoices, goods receipts, contracts and more.
On the back end, all order data should be captured and reported back to the sourcing group, so they can review supplier performance, examine order volumes and spend patterns, and perform other valuable analysis.
Organizations with an integrated procurement system in place enjoy a major business advantage over those that do not. It allows them to better manage corporate spending and ensures that suppliers fulfill their commitments. It also shifts the focus of procurement teams from transaction management so they can concentrate on developing sourcing and procurement strategies that offer sustainable competitive advantages and risk management.