How is Sourcing Different From Procurement in the Supply Chain?

September 6, 2022
Alok Suman
Procurement Management

In the context of purchasing goods and/or services while managing an organization's supply chain, the terms sourcing and procurement are often used interchangeably.

However, sourcing and procurement share a more synergetic relationship, where both the terms refer to various stages of the overall supply chain management strategy. Sourcing is generally the initial step of the procurement cycle. 

Playing a crucial role in the supply chain, both the above-mentioned processes are interconnected with each other. Data also suggests that the revenue of a decent number of service/manufacturing companies was primarily generated from procurement in the last few years. 

Considering such phenomenal growth and massive forecasts, both procurement and sourcing evolve separately yet in collaboration with one another. While the two terms are related, there are definite differences between them. 

In this post, we'll dive deeper into what sourcing and procurement processes are, how they are different from each other, and how you can help automate them to enhance the overall operational efficiency of your organization.

What is Sourcing?

Sourcing refers to the end-to-end process of assessing, shortlisting, selecting, and managing vendors/suppliers to acquire the required goods and services.

As the term indicates, sourcing primarily focuses on building sources through which an organization can get its supplies.

Put simply, sourcing is the process of finding, shortlisting, selecting, and vetting suppliers. Further, it can also require efficiently managing relationships with those suppliers and subsequently developing a network of alternate vendors.

Thus, the process of sourcing enables procurement and helps ensure that there is continuous availability of necessary goods and services for a company.

Steps Involved in Sourcing 

The process of sourcing consists of the following steps:

1. Defining the Purchasing Needs of the Business 

The foremost step in sourcing is identifying and determining the needs of the business. This also includes evaluating the current spending of the company, the details of things it is spending on against the budget, and identifying areas where cost savings can be implemented.

2. Assessing the Market Conditions

This step involves assessing the market by performing thorough research of various cost components, including labor, raw material, etc.

This is also the stage where the sourcing teams assess the competition, the strategies they are using, ongoing market trends, and key suppliers present in the market, among other things. 

3. Identifying and Reviewing Shortlisted Suppliers 

This is the step where scouting teams work on identifying suitable vendors or suppliers who are qualified enough to meet the various specifications set at the time of defining the purchasing requirements.

The different factors considered at this stage are pricing, work quality, delivery timelines, and payment terms. 

4. Selection of Suppliers

At this step, suppliers are selected by evaluating the RFIs (Request for Information) or RFQs (Request for Quote) submitted, identifying/shortlisting the most qualified ones, and engaging in negotiations with them for optimal pricing, favorable payment terms, and other similar benefits.

After the selection of suppliers is complete, the process of making and signing the contracts by both parties is initiated.

5. Onboarding of Suppliers and Managing Relationships

Once you have selected the supplier, the next step is to onboard them to build an ongoing relationship.

Managing supplier relationships is an important aspect of ensuring effortless workflows by the suppliers as per the organization's specific requirements.

What is Procurement?

Procurement refers to a collective set of processes related to acquiring goods and services to fulfill an organization's needs. It includes everything from the placement of orders with suppliers to confirming the orders, making the payment, and ensuring accurate and timely delivery of the ordered product/service. 

For instance, if your organization requires raw materials to produce and manufacture goods, procurement involves choosing where to procure the materials from, making and sending a purchase order to the selected vendor/supplier, followed by paying for the delivered items.

Serving as a foundation of supply chain management, a robust procurement strategy ensures that there is no time wasted in obtaining the required products/services the organization needs to function smoothly.

Also known as the Procure-to-Pay cycle, the overall process of procurement involves several steps. Each of these steps has risks and opportunities that must be considered carefully.

Steps Involved in Procurement 

The process of procurement typically has the below steps:

1. Reviewing the Requisition Made for Purchases

A purchase requisition refers to a detailed document from staff or an employee requesting to make a purchase for the organization.

The procurement team needs to check whether this document has all/sufficient information, along with a full-proof reason for approval.  

2. Sending a Purchase Order 

As soon as the requisition request gets approved by the concerned team, a purchase order is made, and the same is sent to the supplier with all the details regarding goods/services needed, along with other aspects such as price points, quantity needed, and more.

3. Expediting the Process

As the name suggests, this step is majorly about speeding up the process of communicating with the identified supplier about aspects such as quality, production schedules, and compliance to ensure that the agreed delivery deadlines of the order are met.  

4. Receiving the Ordered Goods 

Once the concerned team receives the completed order, it is checked for the specified quantity and quality standards against the original purchase order. 

5. Processing of Invoice 

At this stage, the supplier generates an invoice copy, which is thoroughly checked by the internal teams for the accuracy of aspects such as purchase orders and invoices, agreed quantities, and values.

This helps confirm that the procurement team received the completed order without any overspending. 

6. Making Payments 

The last step is to make the payment to the suppliers as specified in the payment terms drawn by both sides. The same is usually managed by the accounts payable department of the business.

Sourcing vs. Procurement: Main Differences 

The below table shows how sourcing and procurement differ from each other.

Differences Sourcing Procurement
What is it for? Sourcing is responsible for identifying, shortlisting, hiring, and building relationships with the best suppliers who are equipped to fulfill specific needs. Procurement is responsible for purchasing goods/services for organizational needs.
Objective The objective of sourcing is to cut down the overall costs and build a powerful and collaborative supply chain. The key objective of procurement is to fulfill organizational needs and maintain business profitability.
Meaning Sourcing is primarily about creating supply channels, which are used by procurement teams to acquire supplies to be able to fulfill the company's needs. Procurement, on the contrary, is about obtaining the necessary goods, materials, and services that the organization needs for its operations. This is done with the help of sourcing, which is essential for building and maintaining supplier relations, vetting suppliers, and also building supply chain resilience.
Key focus Sourcing focuses on identifying the internal requirements of an organization, running sourcing events, evaluating various responses, and awarding suppliers. Procurement, on the contrary, encompasses multiple processes, including sourcing, contract management, purchasing, requisitioning, payments, analysis, and overall supplier management.
What does it include? Sourcing is one activity that is included in the procurement process. Procurement affects various aspects of the entire supply chain.
Cost In sourcing, the entire cost of supplier hiring and ownership can be made at the optimal possible price. In procurement, on the contrary, the total cost can be done at the lowest value possible.
Value Sourcing allows the highest quality products to be available or sourced at the lowest possible costing. Procurement allows bulk discounts to be available for producing products at high volumes.
Relationship In this case, the organization's and vendor's/supplier's relationship is well-maintained and sustainable. In this case, the relationship between the two is not intense and is merely developed and maintained on the basis of knowing each other.
Skills needed The skills required for efficient sourcing include collaborating, problem-solving, and making adjustments as and when required. The skills needed for a smooth and effortless procurement process include better negotiation and thorough analytical skills.
Process involved The sourcing process involves selecting and thoroughly comparing the most suitable and cost-effective services. Procurement involves identifying what and from whom to buy the required products.

How Can You Automate Your Sourcing and Procurement Functions?

Technology is one of the key enablers that can allow you to automate your sourcing and procurement functions. An increasing number of organizations are utilizing procurement/sourcing software to simplify and streamline their supply chain operations.

Data also shows that the procurement software market is growing at a rapid pace, valued at almost $5.5 billion in 2020 and estimated to reach $9.5 billion by 2028.

Likewise, the global sourcing software market is also growing rapidly and is expected to register a CAGR of more than 7.4% during the forecast period of 2021 to 2026.

Here are some of the advantages of bringing automation to sourcing and procurement:

  • Data-driven decision-making- Having an automated, comprehensive source of information allows various stakeholders to access the supply chain data, which they can then use to make data-driven decisions and increase operational efficiency.
  • Faster approval - By automating sourcing and procurement workflows, purchase requisitions, supplier information, and purchase orders can be directed to the right people and approved faster.
  • Better compliance - Bringing automation to sourcing and procurement prepares the business to ensure higher compliance as it allows in-built checks into the process.
  • Reduced risk - Automation in sourcing and compliance allows a clear and accurate overview of spending so that organizations can identify any anomalies. 
  • Improved visibility of the budget - Tracking all spending in a central repository helps organizations ensure accurate and up-to-date budget calculations and highlights unnecessary spending at the same time.

Bringing in a powerful and feature-rich procurement and sourcing software is, therefore, an excellent way to enhance workflow automation. The seamless integration of coming-age technologies such as AI and ML in procurement software further creates several new ways and opportunities to explore this space. 

Organizations today need to find and adopt the best sourcing/procurement software and other technologically advanced tools to implement these supply chain functions efficiently in collaboration with other technologies like AI, cloud computing technologies, and machine learning.

As the need for workflow automation in sourcing and procurement rises, businesses also need to shift their focus on acquiring the best software solution that fulfills their specific needs and offers them unique features.

Among the most useful ones to look for are automated RFQs, a detailed supplier database with their offerings/rankings, collaborative data access, better security checks, easy purchase requisitions and order generation, along with effortless procurement solutions.

Wrapping Up

With the supply chain becoming more sophisticated and technologically advanced in recent times, an increasing number of businesses are adopting and strengthening their sourcing and procurement strategies.

This makes it important to know the difference between the two and at what point the two intersect with each other. It not only helps you strengthen the overall supply chain of your organization but also influences its growth.

Overall, a powerful and effortless syncing between sourcing and procurement functions, coupled with automation software solutions, can be instrumental in significantly improving the organization's efficiency.

When working in collaboration with each other and leveraging common data points, there can be multiple advantages that organizations can enjoy. These include better relationships with suppliers and effective business strategies for enhanced revenues. 

Furthermore, automation offers organizational access to data across multiple platforms and supplier bases, thus reducing lags and delays. Powered by automated workflow, a strong collaboration between sourcing and procurement can enhance the supply chain by enabling uninterrupted supply and effective long-term planning.

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