Sourcing Vs. Procurement: The Fundamental Differences

Sourcing and procurement are common business terms that are frequently used interchangeably. However, these two widely used words in supply chain management mean different things. Even though they’re all crucial to procurement, each has diverse goals and needs for various organizational strategies, procedures, and resources. Online merchants must recognize these differences in sourcing vs procurement, and handle every procedure to enhance the company’s value,  streamline the supply chain, and reduce expenses. 

Procurement and sourcing often refer to the same process for purchasing goods. While they aren’t the same thing, they do share many similarities.

Larger companies divide these procedures into several divisions, with sourcing and procurement operating as complementary operations. Stakeholders frequently view sourcing and procurement as separate divisions. In smaller firms, these might not have separate departments. Sourcing is often considered a subset of procurement.

Despite the differences between these two operations, sourcing and procurement share fundamental ideas. Both are necessary to reduce costs and risks associated with purchasing and allow businesses to maximize their ROI.

It’s essential to understand how the two activities should be employed in unison to maximize their advantages to each other rather than concentrating exclusively on how they vary.

Sourcing vs. Procurement: Understanding Their Key Differences

When purchasing products or services for a company, sourcing and procurement are two crucial procedures. Sourcing is the process of finding goods or services from sources other than your company. Procuring is the process of negotiating contracts and obtaining the best deals on necessities. Combining the two procedures can increase productivity and reduce costs for your company.

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A Quick Look at Sourcing 

The first step in finding, evaluating, and negotiating with suppliers of products and services is called sourcing. These suppliers’ products and services are often necessary for regular company operations. The effectiveness of those activities depends heavily on the product’s cost and quality.

Sourcing, a component of the larger procurement process, is crucial to creating and managing a productive supply chain. High-quality products and services help lower financial risk and increase operational efficiency. Also, lower pricing guarantees that costs are kept under control. Finding the right balance between these two factors—obtaining high-quality items at a lower cost—is a crucial step in the sourcing process.

Even though sourcing is seen as a singular process, it isn’t a one-time procedure. Even after the procurement department negotiates a deal and a contract is signed, there is more to do. Sourcing is an essential and continuous step in the procurement process. Your business should always look out for new suppliers, reallocate resources, and conduct routine analyses of its suppliers and supply chain.

A crucial aspect of the sourcing procedure is bargaining with suppliers to cut prices without sacrificing quality. Large corporations use their purchasing power to negotiate competitive bulk purchase order prices. However, small and medium-sized companies can also make profitable agreements. Levers that can be used to cut expenses include order minimums and long-term contracts.

Procurement: The Big Picture

On the other hand, procurement refers to obtaining products, services, or labor from outside sources. It entails determining needs, finding, negotiating, buying, receiving, and inspecting items. Another crucial aspect of procurement is the billing, payment, and management of suppliers.

It serves as supply chain management’s cornerstone. Without a robust procurement strategy, a business loses valuable time trying to obtain essential goods and services.

Procurement management usually consists of several phases. Risks and opportunities are present at every stage and need to be properly considered. The Procure-to-Pay Cycle, a smaller version of the broader Source-to-Pay cycle, describes the process of acquiring products and services.

With procurement, it is vital to identify a provider who can fulfill your unique requirements. Before you sign a contract, make sure that the vendor has the required insurance, licenses, and permits. Lastly, negotiate for a fair agreement that benefits both sides.

Sourcing vs. Procurement: Synergy for Streamlined Processes

Business owners need to accept that it’s not a matter of procurement vs. sourcing. Both must cooperate to accomplish their goals.

For instance, the procurement department needs to utilize the information provided by the sourcing department to determine how much to budget each time a specific amount of goods is required. However, the sourcing department is responsible for negotiating contracts with suppliers about price and minimum order quantities. Without instant access to this data, the procurement department may encounter delays and errors.

Without supplier performance data or risk criteria, the sourcing department may struggle to determine which suppliers and contracts to renew. Your operations won’t function properly when sourcing and procurement are at odds. In other words, procurement cannot function without sourcing, and procurement cannot function without data from the sourcing department. Therefore, it might be counterproductive to frame the two as “sourcing vs procurement.”

Traditionally, procurement sourcing processes have been thought of as back-office tasks. It has been a rising trend to see procurement and sourcing as strategic front-end tasks due to the need for flexibility in response to shifting business needs. The following advantages are ensured by strategic sourcing and procurement procedures working together:

Cost Optimization

Teams in charge of sourcing keep and evaluate the database of suppliers and vendors, updating the list of providers that fit the company’s budget. Purchasing teams use the information supplied by the sourcing team to make purchases within budgetary constraints. Conversely, the sourcing team uses vendor feedback from the procurement team to update the suppliers’ list and their expertise level. This kind of synergy supports budgeting operations and prevents unnecessary spending.

Mitigate Risk

As businesses grow, the procurement process needs to adhere to regulatory standards. However, supply chain teams must also address risk exposure, mitigation initiatives, and transfer pricing. To guarantee optimum ROI, simplify sourcing and supply choices. Dynamically handling new metrics and a strong sourcing department are essential.

Increased Sustainability

A robust supply chain is needed to satisfy the needs of a rapidly changing market. You’ll need strategies beyond cost-cutting and concentrate on sustainability by maintaining a steady supply over time. Moreover, sustainable initiatives prevent disruptions to your business’s operations. To ensure sustainability, circular supply networks must replace traditional linear ones.

Globalization

As supply and demand dynamics in emerging regions gradually change, corporations are under increasing pressure to expand internationally. Being globally present would mean integrating into several nations’ supply systems. Strong ties between each country’s sourcing and procurement departments are necessary. The procurement sourcing partnership uses labor division and forecasting to guarantee supply consistency.

Cybersecurity Through Collaboration

Information security is critical for businesses to stay competitive. Cooperation between the sourcing and procurement teams is necessary to guarantee thorough supplier onboarding and offboarding procedures. This collaboration can strengthen the security and integrity of updated supplier data and oversight and management of important suppliers.

_{Supply Chain Top 25 Field Report: Digital and Talent Trends (gartner.com)}

Technology and automation can gather data, facts, information, and analytics, making them easily accessible to all supply chain stakeholders. Integrating supply chain technology can help sourcing and procurement organizations collaborate more effectively. Automation can define strategies and conditions to optimize value for money, help with analytical decision-making, and guarantee supplier relationship continuity. Many logistics software programs offer access to data throughout the company and supplier base. Additionally, automation can guarantee the scaling up of strategic sourcing skills to avoid delays in business outcomes.

The use of software in the sourcing (e-sourcing) process is progressively gaining relevance. Tech-assisted transactions for sourcing and procurement have been a mainstay for many operations. These are especially useful in the execution of procure-to-pay procedures. A complete platform that manages procurement sources may provide smooth coordination with all stakeholders, optimize savings and impact achieved from corporate expenditure, and provide data access to all stakeholders. For planning reasons, it can also offer an extensive database regarding suppliers, requirements, needs met, and purchasing patterns.

Procurement managers must understand the distinction between sourcing vs. procurement to maximize the use of automated procurement systems and save time and costs.  Understanding these gives procurement managers a competitive edge in negotiations and supplier contracts in a rapidly evolving business environment.

Forward-thinking businesses will move beyond thinking of the two as separate pieces of the supply chain puzzle. Instead of sourcing vs. procurement, online merchants will create a productive procurement environment where sourcing can shine. After all, a robust sourcing process is the foundation of a successful procurement operation.

ZhenHub helps your business scale globally with multiple eCommerce platform integrations. Get connected to a distribution network of international logistics partners. Get real-time updates through our online dashboard by signing up at our website. Contact our fulfillment experts for more details on how our software can help your sourcing and procurement needs.