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Difference Between Sourcing and Procurement

By Athena Rebello

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Updated on: Dec 11th, 2023

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10 min read

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In business operations, the terms sourcing and procurement might appear synonymous at first glance, but they hold distinct roles in the supply chain ecosystem. This article clarifies these roles and underscores the key differences between sourcing and procurement, along with the importance of both sourcing and procurement in achieving organisational success.

What is Procurement? 

Procurement is the multifaceted process that organisations employ to acquire the goods and services essential for their operations. This intricate operation is not merely transactional; it's a series of strategic activities designed to optimise cost, efficiency, and quality. At its core, procurement spans the lifecycle from the initial recognition of a requirement through to the final acknowledgment of receipt of goods/services and the settlement of the corresponding payments.

Example: Consider the journey of a typical consumer electronics company. To produce the latest smartphone, they must secure various components: from glass screens to microchips. The procurement team's mission is critical; they must establish a steady inflow of these components. Their role extends beyond mere purchasing; it encompasses a thorough evaluation of suppliers, thoughtful negotiation of contracts, punctual scheduling of deliveries, and managing payments. This team also nurtures supplier relationships to guarantee a reliable supply of components, ensuring the company's production line remains uninterrupted.

What is Sourcing? 

Sourcing is a vital step in procurement, focusing on the careful choice of suppliers. It involves a detailed examination to determine which suppliers can deliver the requisite goods and services, balancing cost, quality, and reliability. The goal of sourcing is to create a dependable supply chain framework from which procurement operations can draw resources efficiently and effectively.

Example: Imagine a company that specialises in manufacturing smartphones. The sourcing team at this company plays a crucial role in identifying and partnering with suppliers of high-quality components such as memory chips, camera modules, and touchscreens. They must find suppliers whose advanced technology, production capacity, and reliability in delivery schedules meet the rigorous demands of the smartphone market. The team must investigate the technological capabilities of potential suppliers, engage in deep market analysis, and negotiate terms that will ensure a balance between cost-efficiency and high-quality standards.

Key Differences Between Procurement and Sourcing

Though intertwined, procurement and sourcing are distinct functions within an organisation, each with its specific roles and objectives. Here are the fundamental differences:

 Procurement Sourcing
ScopeProcurement is the comprehensive process encompassing all stages of securing goods and services, from the genesis of the need to the concluding payment. Sourcing is a focused segment of procurement dedicated to the identification and qualification of suppliers.
ObjectiveProcurement's main aim is to fulfil the company's needs for goods and services efficiently and cost-effectively, adhering to company policies and quality benchmarks. Conversely, sourcing is about establishing and nurturing a supplier pool that aligns with the company's quality and financial criteria.
ActivitiesProcurement's domain includes tasks like managing requisitions, processing purchase orders, receiving goods, handling invoices, and executing payments.Sourcing involves market research, assessing suppliers, and negotiating contracts.
NatureProcurement, while having strategic elements, primarily handles the operational side, focusing on the routine acquisition of materials and services needed for day-to-day operations.Sourcing is a strategic endeavour, concentrating on developing supply chain networks and strategic partnerships.

Steps in the Strategic Sourcing Process

Strategic sourcing is a methodical approach designed to get the best quality goods and services, while curtailing costs. The steps typically include:

  1. Assessing Current Needs: Pinpointing the organisation's immediate and future supply needs.
  2. Market Analysis: Investigating potential suppliers and market dynamics to uncover opportunities for cost reduction and supply chain enhancements.
  3. Sourcing Strategy Development: Defining supplier selection benchmarks with respect to quality, cost, reliability, and service.
  4. Supplier Identification and Outreach: Finding and initiating dialogue with prospective suppliers to gauge their capabilities and willingness.
  5. Bid and Proposal Solicitation: Requesting comprehensive proposals and quotations from potential suppliers.
  6. Supplier Evaluation and Selection: Analysing proposals against set benchmarks and choosing the most suitable supplier(s) for the company's requirements.
  7. Contract Negotiation: Discussing terms and conditions to secure advantageous deals.
  8. Implementation and Integration: Onboarding the chosen suppliers into the existing procurement processes of the company.
  9. Performance Monitoring: Setting up metrics and procedures for ongoing supervision and management of supplier performance.

How Can Technology Help in the Procurement and Sourcing Process?

Technology plays a pivotal role in refining procurement and sourcing processes by enhancing efficiency and precision, and providing immediate data for smarter decision-making:

  • Automation: It minimises manual errors and liberates personnel to focus on more strategic tasks.
  • E-Procurement Systems: They streamline the entire procurement cycle, boosting speed and transparency.
  • Supplier Management Tools: These platforms aid in more effective supplier relationship management and performance evaluation.
  • Data Analytics: They render insights into expenditure trends and supplier performance, highlighting potential cost-saving opportunities.
  • Cloud-Based Collaboration: This enables better communication and document exchange among team members and suppliers, aligning efforts and accelerating responses.
  • Integration: These technologies integrate flawlessly with other business systems (such as ERP or CRM), ensuring data consistency and reliability across the organisation.

Key Takeaways

  • Procurement and sourcing, while closely related, fulfil unique roles within the supply chain, each carrying significant strategic weight.
  • Grasping the distinctions between procurement and sourcing is essential for managing the supply chain with expertise. 
  • Strategic sourcing unfolds across several meticulous stages, necessitating deliberate preparation, implementation, and continuous oversight to guarantee that the organisation procures the highest value from its supplier partnerships.
  • The integration of technology into procurement and sourcing processes can catalyse enhanced efficiency, economic savings, and fortified supplier connections, thereby setting the stage for sustained operational triumph and adaptability.

Frequently Asked Questions

Which comes first, sourcing or procurement?

Sourcing is part of the procurement process and typically comes before other procurement functions. It focuses on identifying and selecting suppliers at the beginning of the procurement process of purchasing and acquiring goods.

What is the main difference between sourcing and procurement?

The main difference is scope: sourcing is about selecting suppliers, while procurement encompasses the entire process of acquiring goods and services, including payment and supplier management.

What are the key objectives of sourcing?

The key objectives of sourcing include finding quality suppliers, negotiating favourable terms, and ensuring a reliable and cost-effective supply chain.

What are the key objectives of procurement?

Procurement aims to efficiently acquire goods and services needed for business operations while managing costs, maintaining quality, and ensuring timely delivery.

What are the benefits of effective sourcing and procurement?

Effective sourcing and procurement lead to cost savings, improved quality of goods and services, stronger supplier relationships, and overall operational efficiency.

About the Author

A Chartered Accountant by profession and a writer by passion, my expertise extends to creating insightful content on topics such as GST, accounts payable, and invoice discounting.. Read more

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