Sourcing and Procurement: One

but Not the Same

As both sourcing and procurement are related to obtaining supplies for
the organization, confusing these two terms is easy. But they are different,
although closely related, processes.

Understanding their distinction can help you ensure the coordination

between the responsible teams and adopt the right strategies for improving
both sourcing and procurement.

Sourcing and Procurement Compared

In the following comparison table, you'll discover the main differences
between these two essential processes:

Sourcing Procurement

Tasked with choosing suitable

Tasked with acquiring the high-quality
suppliers
goods
and negotiating the most favorable
at the right time to meet company needs
contract terms

Involves multiple processes and

Contains fewer steps
numerous steps

Involves defining the need, Comprises sourcing, requisitioning,

Sourcing Procurement

researching the market, purchase ordering,

running sourcing events, vetting making a payment, examining data, and
suppliers, and negotiating contracts managing contracts

Focuses on who provides the supplies Focuses on what and how is supplied

Includes both strategic and tactical

Takes a strategic approach
components

Aims at minimizing costs and building Aims at fulfilling internal needs and
a robust supply chain gaining a competitive advantage

Manages supplier relationships to

Creates vendor and supplier relations
procure goods

Uses supply systems developed by

Builds supply channels and systems
sourcing

Emphasizes streamlining the flow of

Makes the flow of supplies possible
supplies
What Is Procurement Process?
Procurement is a set of processes related to acquiring goods and services
to satisfy a company’s needs.

For instance, if your company requires raw materials to manufacture its

products, you first choose where to procure these materials, send a
purchase order to the selected supplier, and pay for delivered items.

And all these activities are parts of the broader procurement process in
your organization.

The typical procurement process involves the following steps:

1. Spotting internal needs and creating a purchase requisition;
2. Evaluating the market;
3. Shortlisting suppliers and issuing RFQ or RFP;
4. Reviewing quotations and selecting vendors;
5. Negotiating with suppliers;
6. Creating a purchase order;
7. Expediting and receiving the ordered items;
8. Auditing the delivered order to ensure supplier compliance;
9. Receiving a goods receipt and an invoice;
10. Performing a 3-way-match;
11. Making a payment;
12. Keeping record;
13. Assessing the supplier performance and establishing a
vendor relationship.

Simply put, procurement steps combine sourcing (selecting and negotiating

with suppliers) and purchasing (placing a purchase order and paying)
processes.
However, it is crucial to understand that procurement is a multi-stage
complex process, which in addition to sourcing and purchasing, involves
supplier management, contract management, and data analysis.

With sourcing as its subset, procurement directly impacts a company’s

bottom line performance and competitiveness.

Effective procurement strategy allows negotiating the most favorable

payment terms and establishing solid relationships with reliable and
affordable suppliers.

In addition, procurement aims to guarantee that internal needs are satisfied

on time with high-quality products.

What Is Sourcing Process?

Sourcing in procurement is a process of assessing, selecting, and
managing suppliers to acquire the desired goods and services from them.

As the name suggests, sourcing focuses on creating sources through

which an organization can obtain its supplies.Thus, it enables procurement
and helps ensure the availability of necessary goods and services for a
company.

Another term that you will hear a lot when purchasing products from
vendors or suppliers is strategic sourcing.Strategic sourcing refers to
adopting various sourcing strategies and models to minimize the risks and
costs while increasing the purchase value.

The Role of Strategic Sourcing in Business

Strategic sourcing is crucial to a company's development. It allows to
negotiate the best price and quality of the purchase and thus directly
influences the company’s profit margin and net income.

Besides, the sourcing team helps ensure that chosen suppliers maintain a
high level of performance.Since potential vendors undergo an extensive
vetting process, the sourcing team can choose the most reliable and
qualified providers.Selecting suitable suppliers is essential, as the further
you go down the supply chain, the harder it will be to detect and correct
mistakes.

Moreover, sourcing specialists ensure that if the primary suppliers face

problems and cannot fulfill the contract requirements, alternative providers
can replace the man ones.This, in turn, helps mitigate supplier risk and
prevent supply chain disruption. So, sourcing starts the supply chain and
guarantees its stability and resilience in the long run.
Sourcing Process Steps
Typically, strategic sourcing contains the seven following steps, developed
by A. T. Kearney in 2001 and widely used since.

Step 1. Analyzing internal needs and understanding the spend

category

First, the sourcing team has to identify the company’s needs — what goods
or services must be purchased — and define specifications for these
products.Employees also have to analyze the spend and define the spend
category: are you buying food and beverages for the office or computer
software or maintenance services?

Who uses these goods or services? How much is used? Who’s involved in
the supply chain?

Step 2. Researching the market

Upon determining internal needs, the sourcing specialists search for

suppliers, review the market offerings, and evaluate the market for risks
and opportunities.They also break down the cost components of the
product and assess them along with raw materials, transportation, and
labor costs.

Step 3. Developing a sourcing strategy:

The third step is choosing the right strategy — deciding where to buy
necessary goods to minimize costs and ensure the stability of the supply
chain. In this step, a company also devises the set of criteria for potential
suppliers.
Step 4. Issuing RFQs or RFPs and vetting suppliers: Next, employees
start the process of soliciting bids and evaluating vendors. An organization
can send potential suppliers a request for quote (RFQ) or a request for
proposal (RFP).

Both are business documents that announce a project and ask for bids to
assess each vendor’s ability to complete this project.

A request for proposal is usually more complex than a request for

quote and contains project details, pricing analysis, product specifications,
and delivery terms.

Step 5. Negotiating and selecting suppliers

Upon receiving quotations from vendors, a sourcing team evaluates

responses, asks for clarifications if needed, and begins negotiating with
shortlisted suppliers for lower prices, better payment terms, benefits, etc.

At the end of the negotiation process, a responsible person chooses the

most suitable suppliers based on quality and pricing, reputation, recognition
on the market, and possible risks.

Step 6. Arranging supplier integration process

Once the selected vendor was notified, the implementation process begins.
A buyer and a supplier sign a contract.

The sourcing team also has to develop a communication plan and a system
for measuring supplier performance.

Step 7. Benchmarking and assessing results

The final step takes place after the purchase is made. The sourcing team
benchmarks the status of the spend category and analyzes the suppliers’
performance based on established KPIs.

Sourcing vs. Procurement: How are

They Different?
Now that we broke down procurement and sourcing processes let’s look
closely at the differences between these two.

Process Components
Since sourcing is a subset of procurement, sourcing is a less complex
process with fewer components. It comprises defining internal
requirements, searching for vendors, arranging sourcing events, and
assessing suppliers.

On the other hand, procurement encompasses the sourcing process itself,

purchasing (placing of purchase orders, receiving of the order, and making
payments), data analysis, contract and supplier relationship management

Timing
Sourcing takes place mainly before the purchase is made. However, the
sourcing team can also step in during the purchasing process if suppliers
can’t fulfill their responsibilities in compliance with a contract.

Besides, at the end of the procurement process, it is a sourcing task to

judge the suppliers’ performance and decide whether to continue the
relationship.Unlike sourcing, procurement is an end-to-end
process covering all the activities before, during, and after the purchase.
Goals and Focus
Sourcing is a strategic process with long-term goals such as creating
relationships with the most suitable suppliers and building and maintaining
a resilient supply chain.

The procurement process, on the contrary, combines strategic (sourcing

and supplier relationship management) and tactical (purchasing)
components.

It mainly concerns itself with buying high-quality goods and services for the
lowest price and satisfying internal requirements.Simply put, sourcing
focuses on who provides the commodities, while procurement — on what
and how has to be purchased.

Function
1. Sourcing supports procurement by building supply chains
and systems for procurement professionals to use.

Sourcing specialists develop vendor relations, while the

procurement team leverages these relationships to obtain desired
products.

Thus, sourcing makes the flow of supplies possible, whereas

procurement aims at streamlining and optimizing this flow.

Besides, the sourcing team agrees on the pricing and quantity of

the product with suppliers.

Then, the procurement department uses that information to

forecast the spend and determine how much budget to allocate for
buying a certain quantity of goods.

To sum up, sourcing develops a foundation for procurement to fulfill

its aim.
 2. Procurement provides information for sourcing.

Just as procurement is impossible without sourcing, sourcing can’t

function correctly without data from procurement specialists.

Procurement managers gather information on supplier performance

during the purchasing process, and the sourcing team uses it to
evaluate vendors and either continue working with them or
terminate the contract.

How to Coordinate Sourcing and

Procurement?
As you can see, communication between procurement and sourcing teams
is crucial for organization operations to run smoothly.

Sourcing requires data from procurement to ensure that an organization

works only with effective suppliers.

And procurement needs statistics obtained by sourcing to make an

accurate spend forecast and increase cost savings.

The right procurement technology can help you store all the sourcing and
procurement data in one place and improve the collaboration between
procurement and sourcing teams.

Benefits of installing a comprehensive procurement software include, but

are not limited to:
 Enhancing communication between procurement and sourcing
teams in a centralized system
  Streamlining the purchasing process by eliminating manual, error-
prone work
 Improving supplier relationship management, featuring reports on
vendor performance
 Automating purchase ordering process and approval workflow

Precoro software allows you to do everything mentioned above and more.

In addition, Precoro can help you enhance purchasing operations, increase
transparency, and get insights into budget management.

Featuring real-time reporting and integration to your favorite accounting

systems and ERP software, Precoro is a one-stop solution for businesses
of all sizes.

Sourcing and Procurement Trends

Now that procurement and sourcing play an even more important role in
business, it’s useful to understand what tendencies they recently display.

Emphasis on Risk Management and Flexibility

The COVID-19 pandemic showed how important it is for a business to
adapt quickly to unpredictable circumstances and mitigate risks.

As a result, resilience and adaptability of supply chains became one of the

top priorities for organizations.

Procurement specialists aim to thoughtfully evaluate and manage supply

chain risks and design better contingency plans, such as establishing
relations with backup suppliers and optimizing inventory.
Digital transformation and adoption of cloud-based software solutions allow
an organization to improve supply chain management, become more agile
and mitigate risks more effectively.

Sustainable Procurement
Now, when the consequences of pollution and global warming become
impossible to ignore, more and more organizations begin to take a
sustainable procurement approach.

Its practices include, for example, consideration of local sourcing, selection

of suppliers who also align with sustainability values, and switching from
linear to circular supply chains. The latter allows to reduce waste and
adds up to cost savings.

Image source: SupplyChain247

Prioritizing Corporate Social Responsibility

Aside from sustainability, businesses are also expected to become more
socially conscious and positively impact the community.

One example of corporate social responsibility initiatives includes switching

to ethical sourcing — procuring goods from organizations that offer safe
and fair working conditions to their employees and minimize their negative
impact on the environment.

Focus on Increasing Collaboration with Suppliers

Nowadays, organizations focus on strengthening collaboration with
suppliers by ensuring transparency and better communication.

Supplier collaboration can help you improve stability, manage risks more
effectively, negotiate more favorable terms, and boost the company’s
competitiveness.

Spend Optimization
In these uncertain times, cost reduction became one of the key practices
companies turn to. It helps increase revenue and contributes to the
sustainable growth of an organization.

Modern expense management practices increase transparency and spend

visibility, control the maverick spend, and manage contracts more
effectively

Make-or-Buy Decision
What Is a Make-or-Buy Decision?
A make-or-buy decision is an act of choosing between manufacturing a
product in-house or purchasing it from an external supplier.

Also referred to as an outsourcing decision, a make-or-buy decision

compares the costs and benefits associated with producing a necessary
good or service internally to the costs and benefits involved in hiring an
outside supplier for the resources in question.
To compare costs accurately, a company must consider all aspects
regarding the acquisition and storage of the items versus creating the
items in-house, which may require the purchase of new equipment, as well
as storage costs.

KEY TAKEAWAYS
 A make-or-buy decision is an act of choosing between
manufacturing a product in-house or purchasing it from an external
supplier.
 Make-or-buy decisions, like outsourcing decisions, speak to a
comparison of the costs and advantages of producing in-house
versus buying it elsewhere.
 There are many factors at play that may tilt a company from making
an item in-house or outsourcing it, such as labor costs, lack of
expertise, storage costs, supplier contracts, and lack of sufficient
volume.
 Companies use quantitative analysis to determine whether making
or buying is the most cost-efficient method.

Understanding a Make-or-Buy Decision

Regarding in-house production, a business must include expenses related
to the purchase and maintenance of any production equipment and the
cost of production materials. Costs to make the product can include the
additional labor required to produce the items, which takes the form of
wages and benefits, storage requirements within the facility, holding
costs overall, and the proper disposal of any remnants or byproducts from
the production process.

Buy costs related to purchasing the products from an outside source must
include the price of the good itself, any shipping or importing fees, and
applicable sales tax charges. Additionally, the company must factor in the
expenses relating to the storage of the incoming product and labor costs
associated with receiving the products into inventory. It also includes
signing any contracts with suppliers that might require the company to be
locked-in to certain deals for a certain period of time.

In a make-or-buy decision, the most important factors to consider are part

of quantitative analysis, such as the associated costs of production and
whether the business can produce at required levels.

Choosing Make or Buy

The results of the quantitative analysis may be sufficient to make a
determination based on the approach that is more cost-effective. At times,
the qualitative analysis addresses any concerns a company cannot
measure specifically.

Factors that may influence a firm's decision to buy a part rather than
produce it internally include a lack of in-house expertise, small volume
requirements, a desire for multiple sourcing, and the fact that the item may
not be critical to the firm's strategy.

A company may give additional consideration if the firm has the

opportunity to work with a company that has previously provided
outsourced services successfully and can sustain a long-term relationship.

If a firm is going to buy or outsource, it's essential that they work with a
company that they can rely on for the long-term.
Similarly, factors that may tilt a firm toward making an item in-house
include existing idle production capacity, better quality control, or
proprietary technology that needs to be protected. A company may also
consider concerns regarding the reliability of the supplier, especially if the
product in question is critical to normal business operations. The firm
should also consider whether the supplier can offer the desired long-term
arrangement if that is what it requires.

Why Choose?
If a company is already in business there may be a point when certain
situations arise that will cause a company to pause and consider which
direction it should proceed in; whether it should buy or make the parts or
products it needs.

Some of these events could be a trusted supplier shutting down, an

increase or decrease in demand for the product, or a possible path for new
opportunities. At these junctions, management will have to consider the
advantages of either making or buying the product, which can also be
outside of a cost-benefit analysis. Will one decision lead to economies of
scale, to a possible new product line, or a restructuring of the core
business?

Depending on the business and its place in the market, there will be both
advantages and disadvantages of continuing down the same path or
forging a new one.