Introduction
Sourcing and procuring sound similar in their meanings, as both indicate getting something. In terms of a supply chain, we define sourcing and procurement as different stages in a particular supply chain. Sourcing and procurement are similar terms that are used in similar ways, and due to this, people are often confused.
Sourcing and procurement both play pivotal roles in the organization. These terms have significance in the supply chain of an organization. As per a report published by Kearney, this report says that, in the last two years, 50% of the revenue of manufacturing companies and 30% of the revenue of service companies were predominantly from procurement. Before we proceed deep into procurement and sourcing. We must know the importance of procurement and sourcing in the supply chain. They establish a symbiotic relationship between themselves.
A forecast of spending Edge says that procurement and sourcing services can grow to an extent of $16 billion in revenue by 2024. The exponential industry forecasts and growth, which are all evolving these days, are also considered.
Sourcing vs Procurement
To differentiate between procurement and sourcing we can observe that sourcing focuses totally on the suppliers, on the other hand, procurement is also the process that focuses on purchasing. So, we can say that sourcing is the subject of procurement and takes place before the company makes a purchase.
Sourcing is mostly related to how one can obtain products that fulfill the needs of a business in terms of quality, location, time, etc. at a reasonable price.
Procurement, on the other hand, is a lengthy process that starts with sourcing. It implies a relationship between the supplier and the buyer through payment.
It attempts to obtain the highest value possible in the entire process. Also, to maintain relationships with suppliers and reduce the risks in the supply chain,
Difference between sourcing and procurement in tabular form
| Parameters of comparison | Sourcing | Procurement |
| Focuses on | Sourcing focuses on looking for good suppliers and vetting them | Procurement attempts to focus on the whole procure-to-pay process. |
| Ensures | Sourcing makes sure that good suppliers are identified to fulfill the organization's needs. | Procurement makes sure that it gets all that is required to operate the business |
| Sourcing and procurement involve | Sourcing entails RFPs, RFPs, and RFQs. | Procurement entails RFPs, RFIs, and RFQs. Moreover, invoices, POs, and payments |
| Meaning | The term sourcing is a process that means that a company keeps suitable resources for the good services it requires. | Procurement is the process of getting services and products from multiple vendors by way of competitive bidding, tendering, or direct purchase. |
| Connected to | Sourcing is about who will make the supplies available | Procurement is related to the firm's requirements |
| Process | Sourcing is the process of assessing and finding suppliers. | The process of procurement is a whole process, beginning with the needs and ending with the final payment. |
| Supply Chain | Sourcing is in connection with the management of the supply chain and also involves making a list of various options | Procurement utilizes the supply chain to build a smooth and constant flow of supplies for the organization. |
What is sourcing?
Sourcing is a process that identifies the appropriate supplier who makes the products available that are required at a specific margin. Sourcing is the initial step in a firm's supply chain. In an organization, balanced sourcing is essential and can work as a game changer for the organization. For many organizations, sourcing has now turned into another word for procurement. It has now become a corporate function.
Big and large companies have started to develop sophisticated departments for procurement. These departments are managed and controlled by corporate finances. The procurement department started to complete contracts with vendors. It significantly affects the growth of organizations.
When we discuss the difference between strategic sourcing and conventional sourcing, Then it is the cost that has become the significant factor. So, other elements like service, regulatory compliance, quality, supply assurance, and innovation
Rapid globalization is in association with technological innovation; the essence of competition is changing. In addition to that, outsourcing these days has become more complicated and sophisticated. Apart from this, manufacturing, engineering, and other functions have also become complicated.
It influences how a firm realizes its values and its standing among the various market competitors.
Progressive companies these days are improving their value chains by making them elastic, which also helps them achieve flexibility in their operations and provides new opportunities. This is the reason why, in some cases, strategic sourcing is converted into capability sourcing.
There are several steps involved in the process of sourcing.
The first step highlights the souring category and also involves the spending amounts, volumes, suppliers, current price, and specification details.
Additionally, the different types of users, departments included in the supply chain, and locations of users are analyzed.
In the second step, it is very important to make the supply for market research and comprehend the purchasing power, which is based on the sourcing pattern and strategy. Kraljic’s matrix is used by many organizations for segmenting vendors. A sourcing strategy is prepared by figuring out the supply chain using two important elements: profitability and risk.
Now the next step is the development of the sourcing strategy. Under this, the team created for sourcing in the organization is created to decide where to purchase at a reduced price and with less risk. In this, the organization's strategy is discussed with the shareholders to choose from various alternatives based on market competition. Once the strategy is developed, The business decides on requests and bids from potential vendors. The service required and product specifications must match the organization's needs. This includes legal and financial terms, price breakdowns, and conditions.
In this step, the sourcing team starts the process of negotiating with the supplier. It is very important to shortlist a handful of vendors and organize multiple negotiations before approval.
Under this step, those who supply are informed for their confirmation, and then the process of implementation begins.
Any changes and improvements to the service will also be made.
We are now in the final step of the sourcing process. In the ongoing cycle of benchmarking, the status of products and their monitoring of the results are finalized. Once the target is finished, the organization then moves back to the first step and initiates the process again.
What is procurement?
Procurement is defined as getting services and goods. Those goods that the company needed to put to use as inputs to produce finished goods With proper management of the process related to the procurement of the raw materials, the organization can arrange all the costs related to the inventory arrangements in the best manner. For any business corporation, procurement is always considered a strategic function to get costs under control.
One important factor that we should know is that the process of procurement includes a lot of activities. The compilation of such activities must be done sequentially, apart from the various types of organization, patterns of ownership, and procurement materials.
We must consider that each business has different needs. So it is obvious that the procurement must also be different.
This function provides the facility for the undisturbed flow of required input materials. Components and parts for a particular type of quality and quantity from suppliers to the production center. These suppliers are certified for quality.
It includes:
- The firm craves quality and quantity in its inputs. So it involves the ascertainment of the inputs.
- It includes an analysis of the procurement source.
- It includes the process of negotiation and making the supply contract final.
- Placement of orders
- Input the consignment's shipment.
Stages involved in procurement
Stage 1: The first stage of procurement is the sourcing stage. This stage involves the basic steps in which a company identifies the requirements for goods and services, makes purchase requests, makes an evaluation of suppliers, makes a selection of suppliers, and builds strong relationships with suppliers.
Stage 2: The second stage in this process is the purchase stage. This stage includes the terms for negotiation and conditions with suppliers. Also, it entails order placement and inspecting goods and services.
Stage 3: The final stage is the stage of making payment. In this stage, invoices are approved by buyers, and the payments are released by the accounting department. After this, they carefully record all invoices, payment receipts, and purchase orders.
The procurement process
Identifying needs: The business must determine the needs for a particular good or service. The thing might be brand new or used already. It entails looking into the fundamental elements of an enterprise's requirements, such as the precise technical specifications, material type, component number, etc.
Purchase request submission: Following the completion of the business needs analysis The company is required to file a formal purchase request via a purchase requisition to obtain the appropriate quantity of materials. The concerned department has submitted a purchase request for the necessary materials. It informs the purchasing division that it must exist.
Assessing and selecting vendors:
Finding the best vendor and filing an RFQ, or request for quotation, are steps in the assessment and selection process. To obtain quotes, the purchasing team sends RFQs to potential vendors. It facilitates comparing different possible vendors. In addition to price, reputation, timeliness, quality, and reliability are important considerations when evaluating vendors.
Negotiating: Before making a decision, it is advisable to obtain at least three estimates from the supplier. To do this, the business must thoroughly review each quote and bargain over the terms.
Creating an order for purchase: finish the purchase order, then send it to the supplier. To determine the proper set of materials and supplies, it must be complete in every way. The supplier will be able to satisfy the company's criteria if only the purchase order is complete.
Approving the invoice and making payment: When three-way matching is accurate, the firm authorizes the bills and makes the payment. Following that, it pays the supplier.
Keeping records: Under this, every document—invoices, receipts, order requests, etc.—is kept on file by the company. These are crucial for several reasons, including taxation, auditing, restocking, and others.
Difference between sourcing and procurement in points
- Sourcing and procuring are different on various grounds. First, sourcing evaluates the supply chain and supplier. Procurement manages the relationship and external risk.
- Sourcing helps build and manage supply chains. But procurement is mainly concerned with managing the movement of already-created supply chains.
- Sourcing focuses on who makes supply possible, but procurement focuses on things such as supplies.
- Sourcing is a process that makes sure that the identification of suppliers is perfect to fulfil the needs of the organization. Procurement ensures that an organization gets all the resources it needs to run its business.
- Sourcing connects with the management of the supply chain and prepares a list of various options. It’s difficult to overlook the fact that procurement and sourcing need to work hand in hand. Procurement makes use of the supply chain to build a smooth and ongoing flow of supplies in an organization.
- When we talk about the connection, then sourcing is all about understanding who will provide the supplies. But procurement is connected to what is needed by the firm.
- To ensure an easy supply of materials, sourcing plays an important role. Sourcing streamlines the process of procuring materials. Here, procurement makes sure continuous flow.
- Sourcing is the building and management of the supply chain, and procurement has an impact on supply chains.
Conclusion
To conclude, sourcing and procurement are both essential, but the sourcing process means making sure that the organization has the necessary sources for the goods and services it requires. To conclude this process of procurement, we can say that this is the process of making more products available from vendors by way of purchasing directly or, perhaps, by bidding. These points, as mentioned above, will help you understand the concept of sourcing and procurement. We have covered this topic from very basic to advanced and includes all important points for understanding the difference.
