Sourcing and procurement are two related processes that are often talked about interchangeably. But much like a set of twins, just because they look and sound similar does not mean they are the same. Parents of identical twins can alter a hairstyle or change up some clothing to help differentiate between the two. In the world of business, however, we need a clear idea of how these two ideas differ and how procurement software can make them easier.
While this article may be about sourcing vs procurement, these two are more similar than different. Most articles pitting two processes against each other discuss how one is better or how they conflict. These two processes actually work together and are vital processes that help keep supply chains healthy and competitive.
In this guide we will cover a number of topics, feel free to skip down to the most relevant:
- What Is Procurement?
- The Procurement Process
- Must-Have Procurement Software Features
- What Is Sourcing?
- The Sourcing Process
- Sourcing Vs Procurement: The Differences
- The Future of Sourcing and Procurement
- Finding The Perfect Procurement Software System
What Is Procurement?
Let’s take a look at procurement first as it is the overarching process that contains sourcing. Procurement is a process that affects the supply chain from end-to-end. Even though more businesses are beginning to take procurement more seriously, it still does not receive the recognition it deserves among the other pieces of a successful supply chain.
Procurement is the bread and butter of your supply chain. Before a supply chain can begin cranking out manufactured products, it is going to need to purchase the requisite materials to do so.
At its most basic definition, procurement is the process of placing orders with suppliers, confirming the orders, paying for them, and following up to ensure everything was delivered correctly. As you can see, procurement is the backbone of a supply chain. Without a strong strategy in place, a business could waste vast amounts of resources simply obtaining the materials they need to function.
Let’s take a look at the entire process to get a better handle on the topic:
The Procurement Process
A lot goes into this process. It would be nice if you could write out a quick email or make a phone call to get the materials you require, but there are simply too many moving parts. Here is a quick breakdown of the full process:
- Recognize Your Needs – What materials do you need to be successful?
- Create a Purchase Requisition – Create an official purchase requisition detailing needed materials
- Get Your Purchase Request Reviewed – Allow management to review the request
- Negotiate Contracts – Discuss purchasing terms and contracts
- Request Quotes – Find out what prices are being offered and if they fit your price points
- Get Budget Approval – Once the budget is approved by relevant parties, supplies will be on the way
- Receive Goods – Receive, store and organize the materials that were requested
- Match Invoice To Purchase Order And Receiving Report – Sometimes called three-way matching, ensure there are no errors or missing items
- Invoice Payment – Quite simply, paying the supplier for your goods
- Keep Records Of Transactions – Maintain organized and accurate records to speed up any follow-up orders in the future
As you can see, this isn’t exactly a simple task. A strong cycle relies on organization, collaboration and the quick exchange of data. One of the best ways to keep things moving smoothly is to adopt a system. These platforms come with a number of features that take the complexity out of this process.
Must-Have Procurement Software Features
As the world of business technology continually marches toward digitalization, more and more companies will move toward cutting edge tech to stay competitive. Strangely, a recent study shows that even though 94% of supply chain leaders say digitization will change the landscape of supply chains, only one in four has a digital strategy in place.
To prevent yourself from being overwhelmed, keep some of these must-have tools in mind when hunting down your software solutions.
Dashboards are an important feature that help convert data into easily digestible visuals. This is where your important status updates for requests and other time-sensitive matters will appear. They don’t have to be customizable, but it doesn’t hurt to be able to put a personalized spin on your dashboard to make it fit better with your workflows.
Being able to integrate with your favorite pieces of tech is important. Ask vendors if their platforms include integration support with API and any of your favorite apps.
Real-Time Reports and Data Visibility
Having visibility tools in place is critical to planning and dealing with demand. Many systems include features that generate real-time reports on your important daily processes to see if any are suffering. Not only that, these tools give users the ability to position for the future while heading off problems before they happen.
Here are some more important features to consider:
- Cloud-Based Storage
- Pre-Generated Templates
- Spend Control Support
- Risk Mitigation Tools
- Customizable Features
If you are already in the market for a system, take a look at our comparison guide to get a look at some top industry performers. We’ve spent a good amount of time on this topic, let’s move on to sourcing.
What Is Sourcing?
Now for our other twin, sourcing. If procurement is one of the first steps in a successful supply chain, then sourcing is what makes it possible. Before all of your valuable materials can be purchased and delivered to your manufacturing sites, suppliers need to be found and vetted first.
The short version of what sourcing is goes something like this: sourcing is the process of finding, vetting and then eventually procuring necessary materials from said suppliers.
The Sourcing Process
While the procurement process is much lengthier, sourcing is just as important and makes everything possible in the first place:
Develop Your Consumer’s Needs
As a sourcing manager, your job is to ensure you get the materials required to produce the products your customers require. This process can be broken down into some easy steps:
- Identify Customer Needs
- Assess Market Offerings
- Develop Material Specifications
- Define Winning Supplier Qualities
Assess the Market
The next step is giving suppliers a chance to pass on a quote, and to give a look at how a partnership with them would work out. This is normally initiated by submitting an RFI or an RFQ:
- Request for Information (RFI)
- Helps qualify suppliers before RFQ is sent out
- A simple questionnaire to help narrow the market of suppliers
- Optional – if you don’t need it, you don’t have to send one out
- Request for Quote (RFQ)
- A formal request for a quote from a supplier
- Much more complex than an RFI, usually contains bidding and detailed project information
Now that you have formally invited some suppliers to pass on quotes you can select your top choices and begin the negotiation process. This is the point where you start meeting with suppliers to see what they can offer to make their services more desirable. Now is the time to push for lower prices, better payment terms and the like.
At the end of this process, you should have a supplier that meets all of your unique requirements.
Discussing and Creating Contracts
There isn’t much left for us to discuss here, you’ve discovered your top supplier, negotiated all of your important rates and services and are ready to lock them in as your supplier.
Sourcing vs Procurement: The Differences
It’s obvious that both of these processes are necessary to get the materials you need in order for your supply chain to function. However, you don’t need both sourcing and procurement teams to succeed.
Instead of having a sourcing team find suppliers, procurement teams can step up and indirectly order goods and services as needed. In the same vein, sourcing teams can make purchases through supplies that they are in long-term contracts with.
One of the main differences between the two is that sourcing takes place before any procuring can start. It is possible for less complex businesses to combine the two, but having them as separate entities often smooths out both processes and reduces errors.
In the end, sourcing focuses more on supplier relationships and mitigating the risks of taking on new suppliers. Procurement teams handle purchasing and acquiring the materials needed to manufacture goods for sale.
The Future of Sourcing and Procurement
It’s likely that over the next ten or twenty years, sourcing and procurement will become a very extensive part of most businesses. The hope is that these changes will increase transparency, support the need for better risk avoidance, and guide companies through some of their biggest challenges. We’re going to take a look at some of these challenges and how they might shape the future of these two processes.
The expectation is that procurement will begin to move away from its narrow emphasis on compliance and start to take on a more comprehensive perspective. This broader approach will need to accommodate total risk exposure, risk transfer pricing, and investment in demonstrable risk mitigation.
In order to achieve these objectives, companies are going to have to rethink their strategies for supplier risk management. It will be necessary to adopt new metrics as a way to streamline major sourcing and supply decisions. This will help to minimize waste and ensure that maximum value is extracted from every purchase.
It’s important not to underestimate the impact of a rapidly changing market. Right now, millennials are a purchasing powerhouse. They rule the roost and are set to gain even more of economic dominance. So, procurement functions will have to develop supply chains that satisfy them.
The best way to do this is to think beyond basic cost-cutting measures. The reality is that younger buyers are less fixated on price. Compared to previous generations, they are much more likely to prioritize sustainability and CSR over knockdown deals. In time, this could see businesses swapping traditional linear supply chains for circular ones.
The influence of once sidelined economies will come to shape and define sourcing and procurement in the years to come. In fact, these emerging markets will transform the supply and demand trends that we have come to depend upon. The hot spots to watch are, unsurprisingly, China and South America, both of which are developing at a rapid rate.
Experts are predicting that big businesses will start to construct expertise in this region, as well as in countries like Russia and India. There may be a need for “on location” managers spread across a number of emerging nations.
Let’s move on to how you can track down a system that fits your needs.
Finding the Perfect Procurement System
At the end of the day, leveraging a procurement system streamlines, optimizes and improves the accuracy of your procurement processes. So, how do you go about finding the perfect system for your business?
One of the best things you can do is start by asking yourself some simple questions about your company:
What size is your firm?
Unsurprisingly, the size of a business determines which type of system would be the best fit. Larger enterprises benefit from more complex systems that include a variety of advanced features tailored to the needs of large scale operations. Smaller companies should stay away from platforms meant for these large enterprises, as the added complexity would only add confusion. There are, of course, exceptions, especially when a small company operates like a large one (multicountry, large revenue, etc.).
Is there room in the budget?
First and foremost, can your firm afford a newsystem? Don’t spend needlessly, identify the unique requirements of your business and look for a program that supports them while also growing with you. Having successful sourcing and procurement processes does not require buying the most expensive system on the market.
What type of deployment strategy do you need?
Cloud-based platforms are rising in popularity due to the host of advantages they bring along with them. On-premise strategies still have their pluses, but the final deciding factor should be which one works best for you and your teams.
Sourcing and procurement are similar processes that enable each other to succeed. Adopting the right system can take the complexity out of sourcing suppliers and procuring the materials you need to keep your supply chain competitive.
How has a procurement system optimized your tasks? Let us know with a comment below.