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?
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 product 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.
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?
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.
A complete procurement process consists of:
Identifying internal needs;
Researching the market;
Shortlisting potential suppliers;
Creating an approved list of suppliers;
Creating an online purchase order;
Requesting proposals and evaluating quotations;
Selecting the right supplier;
Developing and managing contracts;
Obtaining invoice approvals and fulfilling payment terms;
Establishing a good supplier relationship.
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 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.
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.
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
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.
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.