Terms like procurement and sourcing are often used interchangeably, as they have some similar meanings, making users confused sometimes. But they do have differences.
Procurement is the business function concerned with acquiring (procuring) the goods and services that are vital to an organization, while sourcing is the process of vetting, selecting, and managing suppliers who can provide the inputs an organization needs for day-to-day running.
Sourcing creates supply channels that procurement uses to acquire supplies for an organization’s operations. Sourcing makes procurement easier, by building supply systems and relationships that are designed to aid the procurement process. Sourcing focuses on building and managing supply chains, while procurement centers on leveraging supply chains to ensure a smooth and steady flow of inputs and supplies.
Moreover, staff in procurement team can provide staff in sourcing team with data to help them manage supplier relationships and determine whether to continue or terminate supplier relationships, judging by the performances of suppliers over time.
Sourcing includes strategic sourcing and tactical sourcing. Strategic sourcing involves developing a proactive, holistic, and continuous evaluation and re-evaluation of the sourcing activities in an organization. Strategic sourcing aims to achieve the lowest Total Cost of Ownership (TCO) along with minimal supply chain risk. While tactical sourcing involves a short-term and traditionally reactive approach towards managing the sourcing activities of an organization. It aims to achieve the lowest possible cost without considering other factors like supplier relationship management, supply chain risk mitigation, etc. If you manage your company’s sourcing team, which one do you choose? Strategic sourcing or tactical sourcing.
An effective procurement strategy includes everything involved in the procuring process, from identifying which goods and services a company needs, right through to maintaining the right documentation and records.
Here’s a quick overview of how the procurement process works:
- Identify which goods and services the company needs.
- Submit a purchase request.
- Assess and select vendors.
- Negotiate price and terms.
- Create a purchase order.
- Receive and inspect the delivered goods.
- Conduct three-way matching.
- Approve the invoice and arrange payment.
- Conduct record keeping.