Table of contents
Here's a brief video summary to help you out if you don't have time to go through the full article:
Sourcing and procurement are two very similar processes and are often used by professionals interchangeably. In fact, in many cases, both are considered to be synonymous. That said, however, there is a fine line and a differentiation between the two processes, especially given that sourcing and procurement work together to generate the desired result.
Many of today’s organizations are turning to procurement operations to help reduce their production and operation costs. If these costs are lowered, so are the prices of the goods and services they produce. In turn, marketing and sales departments will have an easier time selling these products and services, which, itself, will further attract more business.
Procurement teams build effective strategies that are best suited to optimize and strengthen the company’s supply lines. These strategies can be a combination of procurement and sourcing best practices or can focus more on one or the other. There are numerous tactics involved in building a strategic sourcing process, leading to increased efficiency, higher lifetime savings, and increased customer satisfaction.
So, although procurement professionals use the terms sourcing and procurement interchangeably, they are actually two related but different processes. So let’s take a look at what each term means, how it should be used, and when.
What is sourcing?
As a subset of procurement, sourcing is the process of selecting suppliers that provide goods or services. It refers to making Supply Chain Management decisions with the intent to create distinctive value and to achieve a competitive advantage.
Strategic sourcing incorporates strategic dimensions and capabilities of suppliers such as emphasis on quality management practices, process capabilities, design and development, and cost reduction capabilities into the decision-making process. This makes it possible for organizations to achieve accurate information and best-in-class market results (Beaty, 2013).
Choosing the right suppliers is crucial. The further we go down the supply chain, the harder it is to track and correct mistakes.
Therefore, companies expect the sourced goods and services to be of high quality, low costs and delivered on time.
Selecting a supplier requires research and strategy. Getting to know suppliers and ensuring their products will deliver the best results has a monumental impact on your business. You need someone you can trust and someone you can rely on now and in the future.
The Sourcing Process
While the procurement process has more moving parts overall, the sourcing process is equally as important and an intrinsic part of the whole thing. Put simply, sourcing is about:
Developing your Needs as a Customer
The sourcing manager's job is to make sure that they get the goods, materials, and services needed to produce the products and/or services that your own customers need. This step can be further broken down into the following steps:
Identifying your customer needs
Assess the available market offerings
Develop the necessary material specifications
Define the desired supplier qualities
Assessing the Market
The next step of the sourcing process is to give suppliers the chance to provide you with a quote and a glimpse into how a potential partnership with them will work out over the long-term. This is typically initiated by submitting an RFI and/or an RFQ.
The Request for Information helps to identify the suppliers before the RFQ is sent out. It's typically in the form of a simple questionnaire that helps you narrow down the supplier market. The RFI is also optional and can be used only if needed. The Request for Quote, on the other hand, is a formal request for a quote from the supplier. It's a more complex document than the RFI and usually contains bidding, other sourcing events, and detailed project information.
Negotiation
After you've shortlisted some suppliers and formally invited them to provide you with their quotes, you can select the top choices for the negotiation part of the process. It's at this point where you start meeting with suppliers to determine what they can offer. It's at this stage where you can negotiate for lower prices, better payment terms, benefits, and more. By the end of the sourcing process, you should end up with a supplier capable of meeting all of your needs and requirements.
Do you want to learn more about how you can create an effective sourcing and procurement strategy to save time and money? Check out our guide.
What is procurement?
As an overarching process that also contains sourcing, procurement affects the supply chain from one end to the other. Procurement is the set of tasks associated with buying a product or service. It is defined as the process of acquiring goods, works, and services for organizational use, and it involves activities such as identification of needs, sourcing, selection, negotiation, ordering, receiving, and payments.
The procurement process covers all the tasks that happen before, during, and after the purchase of goods and services. It starts with the identification of needs and ends only when the need is fulfilled or no longer exists.
However, even if more companies are looking into procurement as a business strategy, the process is still lagging behind, when it comes to other areas of the supply chain. In its most basic form, procurement is about placing orders with suppliers, confirming those orders, paying for the goods, and following up to ensure that everything is delivered correctly. As such, procurement is essential to the supply chain, even if many organizations don’t consider it as a separate process, in and of itself. Yet, without a comprehensive strategy put in place, businesses can end up wasting large amounts of resources just by obtaining the goods and materials they need to operate.
The Procurement Process
There is a lot going on, that goes beyond just writing a quick email or making a phone call to get the goods and materials needed. To better understand procurement, it’s best to look at it through a short rundown of the procurement process steps.
A complete procurement process consists of:
Identifying internal needs - This refers to the goods and materials needed to run your operation and become successful.
Create and review a purchase requisition - This is a formal document that details the needed materials by an employee or department to purchase on behalf of their company. The purchase requisition informs department managers and/or procurement staff about the department’s needs and will initiate the procurement process. The finance department will also use the purchase requisition to coordinate with accounting.
Researching the market - This section of the procurement process is about examining the available sources of information to uncover the available goods, services, and supply sources, which are capable of meeting critical business requirements. The more complex the procurement process, the more effort should be put into market research.
Shortlisting potential suppliers - Once all of the aforementioned steps have been complete, check your list of business requirements against the common criteria of choosing a supplier. Among these, we can include their financial security, the length of time since they've been in business, any recommendations, or if they are on any supplier lists from trade associations or local governments. Last but not least, they should also be able to deliver what you want, when you want it.
Creating an approved list of suppliers - The main purpose of an Approved Supplier List (ASL) is to ensure the contracts and purchase orders are only limited to those vendors and suppliers that have met the company's standards and criteria of selection, evaluation, and re-evaluation.
Creating an online purchase order - Unlike purchase requisitions, purchase orders (POs) are documents issued once a purchase requisition has been approved. The purchase order acts as a legally binding document sent to the supplier with a request for their goods and/or services.
Requesting proposals and evaluating quotations - A Request for Proposal (RFP) is used whenever the request needs some technical expertise or the requested product or service does not exist yet. The RFP includes preliminary requirements for the product or service and may also dictate the structure of the supplier's response to varying degrees. Similar requests include the Request for Quotation (RFQ), where the customer is asking the supplier for a price quote. Likewise, there is the Request for Information (RFI), where the customer asks for more information from the vendor before actually submitting an RFP or RFQ.
Selecting the right supplier - Based on the information provided, you will be in a far better position to select the right supplier that will be able to fulfill your needs and specifications. Just keep in mind that, once the vendor acknowledges and accepts the PO, the document will automatically become a legally binding contract.
Receiving goods - The next stage of the procurement process is regarding the delivery and receiving of goods or services from the supplier. Depending on the exact mechanisms put in place, you may need to provide proof that the goods and services have been delivered in accordance with the PO. Therefore, goods may need to be signed for, or you may need to sign a client satisfaction document.
Developing and managing contracts - Developing and managing a contract allows for both parties to be an incomplete understanding of their obligations and clearly define the intellectual property and essential criteria. The development phase will act as the foundation for successfully managing the contract and future supplier relationship over the long term.
Obtaining invoice approvals and fulfilling payment terms - Once proof of signature has been received by the supplier, they will submit their invoice, either electronically or through the post. Finally, paying the supplier for their goods and/or services.
Establishing a good supplier relationship - One of the most effective ways of building strong supplier relationships is by being transparent and sharing your plans, strategy, and goals. And as mentioned earlier, maintaining accurate and organized records, will not only speed up any follow-up orders but will also help maintain good relationships with suppliers.
If this rundown stands to show something is that the procurement process is anything but simple. Funnily enough, procurement is also often mistaken for purchasing. But just like sourcing, purchasing is only a small subset of the broader procurement function that includes activities like ordering, expediting, receiving, and fulfilling payments.
Also, purchasing is less competitive than procurement because purchases can be considered one-off each time. You have the freedom to research and change suppliers each time a purchase is required. In contrast, procurement creates competition amongst suppliers. But this is good for you as a buyer because the competition allows for innovation among suppliers and a healthy business environment.
The key difference between sourcing and procurement
Though there is a clear difference between the sourcing and procurement functions (sourcing is just a small part of the procurement cycle), often, smaller organizations combine the two.
And because it’s so easy to mistake one for another, here’s a diagram that further illustrates how procurement and sourcing are different.
Stages of a procurement process/ Sourcing vs Procurement
As you can see, sourcing focuses on identifying internal requirements, researching suppliers, running sourcing events, evaluating responses, and awarding suppliers. Procurement, on the other hand, encompasses multiple processes: sourcing, contract management, requisitioning, purchasing, payments, analysis, and supplier management.
To put it somewhat differently, sourcing is about creating supply channels, which are used by procurement to acquire supplies to satisfy the company's needs. Procurement, on the other hand, is about getting the necessary goods, materials, and services that the organization needs for its operations. This is done with the help of sourcing, which is necessary for building and maintaining vendor relations, vetting suppliers, and building supply chain resilience.
Simply put, procurement focuses on the what and how, while sourcing is about the who.
Procurement concerns itself with streamlining the flow of supplies, while sourcing guarantees the supply chain that makes that flow possible. The procurement process is aided by the supply systems and relationships built through sourcing suppliers.
Another key function of sourcing that sets it apart from procurement is about determining whether or not to continue or terminate vendor relationships. This is done by using data generated by the procurement team to judge a supplier's performance over time.
Today, strategic sourcing professionals are seen as decision-makers, their role growing more important as they help reduce costs and ensure resource input availability for all departments (Ketchen Jr., et al., 2014).
E-sourcing + E-purchasing = E-procurement
Before we dive any further in, we need to mention that the letter e in e-sourcing, e-purchasing, and e-procurement, stands for electronic, just as is the case with email (electronic mail). In today’s increasingly digital age, you’ll come across an increasing number of words such as email, iPhone (intelligent phone), or e-procurement. The fact of the matter is that there are a wide range of digital tools used by companies. But unlike other departments, such as marketing, for example, procurement still lags behind. Luckily, however, things have started moving in the right direction.
That said, the first step in the e-sourcing process is identifying the need for goods and services. Then, depending on each organization’s needs, various strategies can be implemented to find the right suppliers. Contracts are negotiated only with suppliers that are favorable both logistically and financially.
E-purchasing can be viewed as the transaction and compliance part of procurement. This includes requisition, authorizing, ordering, receipts, and payments for supplies. E-purchasing is e-sourcing’s counterpart; it performs the process electronically and begins once the supplier contract is signed.
E-sourcing can be used strategically to ensure that the best pricing and value are locked in the contract, while e-purchasing is strictly tactical to ensure the optimal flow of goods and services based on the contract.
Though they are different processes, both e-sourcing and e-purchasing are necessary for efficient, streamlined ordering, and to keep costs as low as possible while maintaining excellent relationships with suppliers.
Future Trends in Sourcing and Procurement
Over the coming years, it's expected that sourcing and procurement will become an extensive part of doing business. The hope is that this trend will help increase transparency, risk avoidance, and help businesses navigate their biggest challenges. Below are some of the future trends in sourcing and procurement.
Risk Avoidance
It's expected that, in the foreseeable future, procurement will shift from simply compliance and begin encompassing a more comprehensive perspective. This broader approach will help accommodate for total risk exposure., risk transfer pricing, and risk mitigation. To achieve these objectives, however, companies will need to rethink their strategies for supplier risk management. New metrics and KPIs will need to be adopted as a means of streamlining sourcing and supply chain decisions. This will help minimize waste and maximize the value generated from each purchase.
More Sustainability and CSR
It has long been known that Millennials and younger generations are more interested in sustainability and Corporate Social Responsibility (CSR). And as they are already the dominant purchasing powerhouse, it only stands to reason that procurement functions will have to develop supply chains capable of satisfying these needs. As such, procurement should start looking beyond basic cost-cutting measures and also consider sustainability and CSR. In time, it's also possible that organizations will transition from linear to circular supply chains.
Building and Maintaining Strong Supplier Relationships
Another trend that's expected to take place over the coming years is a more structured approach towards building better, deeper, stronger, and long-lasting relationships with suppliers. While this has always been a strategic goal for most procurement organizations, it was always difficult to implement. This approach will start by segmenting suppliers into tiers, into those that are an integral part of the supply chain and those who aren't. The next step is to implement a set of tools and measures for each tier, so as to monitor all strategic partnerships and improve relationships.
While this particular strategic approach isn't anything new, it was incredibly hard to achieve until now. What changed is the increased technological and analytical capabilities available on the market, capable of seeing this strategy through. If implemented correctly, this approach will result in broader, more transparent partnerships between customers and suppliers.
Faster Digital Transformation
As mentioned previously, procurement is lagging behind in terms of the digital tools that it employs. However, more and more top-performing procurement functions have become reliant on digital technologies. Going forward, those who will not invest in these technologies for their procurement needs will struggle to play catchup and remain relevant on the market. This trend is also true in the event that the wider organization is undergoing its own digital transformation.
Today, there are plenty of digital procurement tools to choose from. In fact, the challenge is in selecting the one that will best fit your company's needs and goals. At the end of the day, you will want something that will bring value and not invest in new technology for its own sake. Generally speaking, it's expected that organizations will make significant investments in digital tools oriented towards SRM, spend analytics, risk management, and contract management.
About Prokuria
Prokuria is a cloud-based procurement solution designed for organizations that need better control over the procurement process and want to achieve significant time and cost savings. Unlike other complex and expensive solutions on the market, Prokuria is fast to start, easy to use, and cost-effective.
Find out how you can better plan a sourcing event, manage relationships with suppliers, and organize fast and efficient RFQs/RFPs or Reverse Auctions by downloading our 7 Steps to Effective Sourcing.
