Procurement vs sourcing: What Startup Management Needs to Know
As a startup executive, there’s a good chance you think about purchasing supplies all the time. After all, your team needs everything from printer paper and shipping boxes all the way to complex electrical components. To make matters worse, the last few years have taught us that we can’t always depend on our preferred supplier to deliver on time – often through no fault of their own.
What’s the biggest lesson we can learn from supply chain malaise? That it’s important to have a diverse supply chain management strategy. Part of this is understanding the procurement process, including careful sourcing. Since these terms are often confused for each other, let’s look at the differences in procurement vs sourcing.
A Quick Comparison
As Julie Young points out, procurement is the act of buying goods and services. Typically, the term is used for business contexts, because individuals usually just say they’re buying something.
On the other hand, sourcing is a process whereby a purchasing manager finds suppliers for something. It also includes vetting the supplier and negotiating a price.
Behind these basic definitions, though, there’s a lot of complexity. For instance, knowing where to look for something can be a complication within sourcing. Here’s a summary of the differences:
- We speak of a procurement process, as it covers multiple procedures. Meanwhile, sourcing is a subset of the procurement cycle.
- Procurement refers to purchasing goods and services for your business. Strategic sourcing finds those goods and services within the company strategy.
- A procurement process ensures that every department has what they need, when they need it. However, strategic sourcing expedites procurement by locating what the company needs.
- Procurement tracks the “what” through the purchase requisition and ordering process. Meanwhile, sourcing worries about “who” is providing goods and services.
- Sourcing is an important process to help ensure your company supply chain remains reliable.
The bottom line here is that sourcing is a part of the purchasing process. On the other hand, if you know where to get something upfront, such as with a repeat order, you might not need to perform sourcing every time.
How Procurement Gets Done
Overall, the procurement process needs to be disciplined. One reason for this is accountability, but you’ll also realize cost reduction through competitive pricing and the reduction of maverick spend. We’ll discuss the procure to pay process in depth later. However, your procurement team will usually start with a purchase requisition, determine that the company really needs something, and initiate the bidding and purchase order process. Then, they’ll perform supplier management to ensure goods are delivered, and performance is satisfactory. Finally, invoice processing will ensure the supplier is paid.
How Sourcing Gets Done
Naturally, because sourcing is only a part of an overall process, it’s a bit less complicated. However, strategic sourcing (what most experts recommend) is a thoughtful approach to getting the most out of your purchase. In a nutshell, the sourcing part of your procurement process involves analyzing what your business needs, then finding the best value for spend. After this, your procurement team will purchase the goods and services from the supplier according to the purchasing rules in place at your company.
Why Strategic Sourcing is Important to Business
Overall, the best method of supply chain management is strategic sourcing. However, there’s more to this technique than managing spend. According to Zycus, there are several benefits to using a strategy:
- Cost reduction without compromise. In other words, you can save money without the risk of always choosing the cheapest supplier in the moment.
- Avoid a disconnect between business objectives and sourcing. In other words, keep your supply chain free of items that are contrary to your business objectives. This can include indirect spend concerns about a supplier’s business dealings.
- Optimize supplier performance. If suppliers know what you expect, you’re more likely to get it. Seeing your purchase order coming in kicks them into gear and ready to do their best. This means that you can get the best value for your money over time.
- Enhance supplier management. Most businesses like to build long-term relationships, because it’s cheaper and more efficient than constantly getting new customers or suppliers. Plus, you’ll often save money through package deals or loyalty discounts.
There’s one more benefit worth mentioning: With strategic sourcing, you can more easily perform supply chain management through procurement software and other automation tools.
Steps to Strategic Sourcing
With that said, effective strategic sourcing requires a good bit of planning. In addition, you’ll need to re-evaluate your strategy every year. However, the time you spend with administrative tasks will make things easier in the long run, if only because purchasing becomes more streamlined. Here’s an expert example of how it’s done.
1. Understand what you need, and place it in a spend category
First, part of strategic sourcing is knowing what your company needs to purchase, whether that’s an occasional item or an ongoing part of your supply chain management. For instance, you might need to buy new computers every couple of years, but you’ll need copy paper once a month. Then, you need to place each expenditure in a spending category, such as equipment or office supplies. This way, it’s easy to track your expenses with accounts payable.
2. Research the market
Next, find out what market conditions are like at a given time. For instance, if there’s trouble getting something shipped from Asia, you need to keep that in mind when choosing a supplier. Similarly, high commodities costs can make it harder to save money. On the other hand, ample supplies make later parts of the procurement process easier to navigate.
3. Choose your sourcing strategy
Next, decide how you’ll choose different suppliers. For instance, you can combine strategic sourcing with supply chain management with global sourcing. In this case, you’re trying to save money, even if it means importing a lot of supplies. Or, you might decide to purchase primarily from environmentally-friendly suppliers. There are other options, like buying from one supplier, that some businesses also use.
4. Solicit bids from qualified suppliers
Next, companies will ask suppliers to bid on their supply needs. This approach can be used for any kind of purchase. Many companies go for the lowest bid (most notably governments), which is called a reverse auction. However, every supplier that’s solicited needs to match the corporate sourcing strategy. For instance, if your company doesn’t want to import something, then you only ask domestic suppliers.
5. Negotiate with suppliers to get the best deal
Before you make a purchasing decision and continue with the procure to pay process, it’s worth negotiating with the two or three best suppliers. This gives a supplier the opportunity to distinguish themselves from the competition, but it also lets you realize further savings or better terms. For instance, a given supplier might have a faster fulfillment time that’s advantageous for you.
6. Sign contracts
Once you’ve gotten the right deal, it’s time to buy. Usually, you’ll issue a purchase order to the supplier. Then, the supplier will mail you the products, along with an invoice. Once your shipping and receiving department has inspected the goods, they’ll send the bill to invoice processing, where the formal payment process will be completed.
7. Assess supplier performance-and adjust if needed
As part of your overall supply chain management, it’s important to evaluate supplier performance. After all, if a supplier doesn’t deliver the goods on time, there can be serious problems. In addition, the procure to pay procedures require quality control of all goods and services to ensure that the company gets what it pays for. If there are discrepancies, you may need to source the next purchase from another supplier.
The Sourcing vs. Procurement Distinction
As you can see, the strategic sourcing procedure above includes aspects of every step along the procurement continuum. That’s because, in a strategic climate, everything you do with suppliers feeds into the strategy. In other words, you’re always looking to ensure that everything is consistent, from finding supplies, to issuing a purchase order and beyond. However, it’s important to understand where the lines are.
Sourcing is primarily interested in where you get your goods, while procurement covers the entire supply chain management continuum. However, sourcing can cross over to procurement somewhat, in that you have to consider issues like supplier performance and your overall strategy when deciding which suppliers to solicit quotes from.
With sourcing, you are looking for a place to buy something, and it’s usually done after your company decides it needs to make a purchase. However, you don’t need to do sourcing again every time your company places a repeat order. In this case, they’ll just send a new purchase order to the supplier, then send a copy to accounts payable. Likewise, if you already know where to get something, you might skip the sourcing step.
Generally speaking, the procurement process ensures that your company has everything it needs to work effectively. It also monitors indirect spend, because supplier costs do change over time, which affects prices. Also, any purchase needs to go through the procurement department.
Strictly speaking, sourcing is the only part of procurement that decides where to buy something. On the other hand, once suppliers have been approved most of the purchasing process continues with paperwork. In other words, each manager in charge signs off on the payment amount, quality of goods, and other items as part of the payment process. These days, most of the signoffs happen using automation.
How to manage procurement and sourcing effectively
There’s no question that the procurement and sourcing process is lengthy. Especially as your business grows and needs more supplies, your supply chain management needs will expand. In addition, you’ll need to carefully track your purchasing. This includes monitoring the requisition, purchase order, and invoice to ensure compliance with government regulations and corporate standards.
Luckily, procurement software makes all of this much easier. For example, Control Hub provides easy automation of all your procurement processes. ControlHub is an all-in-one purchasing solution that lets you request, approve, purchase, pay. and reconcile all your company’s purchases. Once an employee makes a purchase request, ControlHub automatically generates a purchase order, when the item and invoice arrives, the platform automatically does a 3-way match and afterwards you can easily sync all transactions with your accounting system such as Quickbooks or Netsuite.
Best of all, Control Hub keeps track of all your spending categories. This way, you can immediately identify areas where you might be spending too much. In short, using our automation you can navigate the procurement process much more efficiently, saving you time and money.