Sourcing vs. Procurement

Procurement

Procurement is the full process of sourcing and then using suppliers to gather all the materials you need for your products, services, and indirect costs. It involves placing orders with each supplier, receiving the goods, and paying for them. Procurement is an end-to-end process that covers everything from planning purchases to negotiating pricing, making the purchases, to handling inventory control and storage.

Procurement is the process of placing purchase orders with each of the suppliers, getting order confirmation, following up with suppliers until materials are delivered, and then ensuring the materials are paid for. Procurement starts overall supply chain because once the materials you need for manufacturing are in place, you can begin making the products you sell to others.

Without a solid procurement strategy in place, there’s always a chance that operations will have to halt. If you can’t get access to the materials you need to make a product, then you must stop production until a suitable alternative is developed.

Procurement involves a number of steps, with each step in the procurement process presenting both risks and opportunities for efficiency gains. To add another term to the mix, the process of purchasing goods and services is often referred to as the Procure-to-Pay Cycle. The commonly acknowledged major steps in the cycle include:

1. Needs recognition
2. Requesting goods and services
3. Review and approval
4. Sourcing
5. Purchase order
6. Receipt of goods or services
7. Receipt of invoice
8. Pay invoice

Sourcing

Sourcing is the stage that comes before any purchases are made and can be considered a subsection of the procurement department. Before you can procure materials from your suppliers, you must first find and vet those suppliers. When you have an effective strategic sourcing process in place, you’ll find reliable, affordable, and quality suppliers to supply the goods you need. Good work here makes the procurement process more streamlined and efficient.

Sourcing is about finding the balance between the quality of raw materials and the affordability. The less you can spend on materials, the more profit your business can earn. But, if you are too cheap and buy shoddy materials, your resulting product is of lesser quality. It is important to retain standards of quality because your customers want quality, too!

Sourcing is a balancing act. It is the process of requesting quotes for new products, obtaining vendor information and uploading into your procurement software, determining the lead time, pricing, minimum order quantities, and so on. Generally, this is done one time for each supplier, with the exception of updating pricing information. However, because it’s important to have a backup supplier or two in case one is not able to meet your needs for any reason, sourcing departments are always busy. With global sourcing you may find a more expensive supplier may be more reliable and able to deal with larger volumes than your preferred cheaper alternative. Or you may need to identify alternative suppliers due to supply chain risks.

Before sourcing can begin, you must assess your purchasing needs, map out a plan, conduct market research, and identify potential suppliers. After all this is completed, you’ll then evaluate the suppliers, and then choose the most suitable supplier for the need. Then, the process repeats for all other purchasing needs, until suppliers are in place for everything you must buy.

Sourcing is concerned with finding the best supplier for goods and services. Sourcing is the subset of procurement that comes before any purchases are made. Here we can tack on another term: strategic sourcing. Strategic sourcing generally refers to a process of developing supply channels at the greatest value, not just the lowest purchase price. While it might sound simple, it is a broad and far-reaching subject. It’s noteworthy that there are certification programs and even degree programs available to teach the specifics of strategic sourcing.

Importance

Sourcing adds value to the procurement cycle:

1. Strong supplier relationships help ensure consistent quality and availability.
2. Vendor contracts and purchase orders spell out terms and eliminate potential misunderstandings.
3. Businesses with the most advanced collaboration with suppliers outperform peers by a twofold margin.