Sourcing and Procurement: What's the Difference?

It could be a simple question 

If your company wants to obtain supplies from a vendor, are you sourcing or procuring? 

After all, aren’t both practices related to the same goal? Getting products or services from suppliers to businesses? 

Yes…and no

While it’s certainly true that sourcing and procurement play a fundamental role for any company, there are some differences and aspects that must be considered to have a better understanding of how your supply chain works.

But to begin with, let’s start with the basics 

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What’s Sourcing? 

You might want to highlight this, sourcing is a part of the procurement process, it involves finding and evaluating suppliers for the goods or perhaps services your business needs. It’s the initial step in the supply chain where you identify potential vendors, assess their capabilities, and select the best partners. In here, you’ll determine the quality and conditions in which you get your business’s needs covered. 

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What’s Procurement?

If sourcing is just a slice, consider procurement as the whole cake, or better yet, as the whole recipe. It goes beyond the action of purchasing as it covers the entire process that follows, including ordering, receiving, and payment. These steps might sound simple but if we see them in detail we’ll find procedures like invoicing, receipt of goods and supplier management. 

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How Sourcing Works?

Depending on the size of the company, there could be some extra actions included but the following are considered the most important. 

Identify needs

The point where everything begins starts right here,  when someone a person, or a department of your company realizes that something needs to be acquired, it's time to find a way to get it. 

Search

Do you know what your business needs but do you know where are you going to get it from? No? Then it's time to search. 

Find suppliers who can provide the products or services you require. It involves market research and networking to find potential candidates.

Evaluation

Okay you found some good prospects. Now what? Now you’ll want to assess their reliability, quality, pricing, and overall reputation. You can do this by  looking at reviews, financial stability, and even visiting their facilities.

Negotiation

At this point you've narrowed down your choices,so it’s time to negotiate terms. Price is important but don't forget to include delivery timelines, and service standards This is where you can really be sure that you are securing he best deal for your business.

Relationship management

Good sourcing doesn’t end with a contract. Building and maintaining strong relationships with your suppliers is the basis of long-term success. Open communication and trust can lead to better collaboration and improved service.

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How Procurement Works?

Purchase requisition 

This point is defined by the creation of a written document, ideally an electronic document, containing relevant information about the intended purchase, this needs to be shared with the procurement team.

Reviewal

The requisition now must be approved. At this stage you'll probably find some level of hierarchy that requires to be informed and consulted so everything is within budget. Once the requisition is approved, this becomes a purchase order or PO.

RFQ

If your company has an agile approval workflow implemented the previous step can quickly be completed and the procurement department can move onto sending multiple requests for quotations to the chosen suppliers.

Evaluation and contract 

If the suppliers have sent to you the information and after careful consideration you have found the most suitable option for your business then the only thing left at this stage is to sign a contract between the supplier and you, stating all the key points agreed beforehand.

Order and invoice management 

Time to get the supplies delivered, here, what matters beyond receiving the goods is to double check what you have obtained against the PO and invoice. If everything is as expected then payment should be ready to be processed. 

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Differences between Sourcing and Procurement 

Focus 

Sourcing: Primarily focuses on finding and evaluating suppliers. It’s about building relationships and establishing conditions

Procurement: Encompasses the entire purchasing process, from creating orders to making payments.

Timeline

Sourcing: This is a process that takes place before procurement. It sets the stage for who you will work with.

Procurement: Happens right after sourcing and is more transactional in nature,starting from the moment the purchase is approved and ending when the payment is made.

Operations

Sourcing: Involves identifying suppliers, evaluating them, and negotiating contracts.

Procurement: Includes creating purchase orders, receiving goods, managing orders, and handling invoicing.

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Tips to Optimize Sourcing and Procurement 

Yes, sourcing and procurement are indeed different processes. However, that doesn’t mean they aren’t connected or that they don’t share some practices when it comes to discovering the best ways to implement them. 

Technology

It’s a constant reminder here at ControlHub, that using procurement software can simplify and automate many tasks, from supplier management to order tracking.  The ideal solution will allow you to integrate well with your existing procedures.

Have good supplier relationships

A happy supplier is the basis for a better service so don’t underestimate the power of good relationships with your suppliers. Regular communication and collaboration can lead to improved pricing and just overall increased quality. 

Training

Ensure your team understands the differences between sourcing and procurement, and provide training on best practices. This way everyone can make informed decisions that benefit your business.

Monitoring

Another old advice is to keep an eye on your KPIs for both sourcing and procurement. Metrics like supplier performance, order accuracy, and cost savings can provide valuable insights for continuous improvement.

Flexibility

The market is always changing, so be ready to adapt your strategies. Whether it’s finding new suppliers or adjusting procurement processes, staying flexible will help you build a more resilient supply chain. 

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