Wondering About The Difference Between Sourcing & Procurement? You’re Asking The Wrong Question

Instead of focusing on how sourcing and procurement differ, you need to understand how they should be used in tandem to maximize each other's benefits.



The terms “sourcing” and “procurement” really aren’t that different, if we’re being honest.

 

While the two disciplines are often broken into separate departments within large organizations, they are very closely linked. In fact, one is arguably just a component of the other.

The principles of sourcing and procurement are both essential to minimizing costs and risks in purchasing, allowing businesses to maximize their ROI. Instead of focusing on how the two activities differ, you need to understand how they should be used in tandem to maximize each other's benefits.


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Sourcing versus procurement: this is the difference

 

 

The main difference between sourcing and procurement is simply that procurement covers a broader range of processes.

Procurement refers to “an all-encompassing strategic array of processes that includes both purchasing and sourcing,” according to Thomasnet.com, a sourcing platform for industrial buyers.

 

sourcing + purchasing = procurement

 

Sourcing, on the other hand, is just one component of procurement and refers to the process of selecting a supplier or vendor.

In some cases, sourcing can also refer to identifying and recruiting talent, especially in the context of human resources. For the purposes of this article, however, we’ll focus on sourcing as it relates to suppliers and vendors.

 

Procurement Sourcing
Objective Maximize ROI Minimize risk and purchasing costs
Processes Needs analysis
Market analysis
Supplier due diligence
Contract development
Supplier selection
Contract negotiation
Order placement
Order and delivery tracking
Supplier or vendor management
Spend data and analytics
Market analysis
Supplier due diligence
Contract development
Supplier selection
Contract negotiation
Disciplines Sourcing and purchasing Sourcing

 

 

Ultimately, the goal of sourcing is to minimize risk and purchasing costs so that businesses can maximize their procurement goals—to maximize ROI.

 

Does this distinction really matter?

 

 

The logistical differences between sourcing and the broader procurement process don’t really matter, as long as businesses are carrying out the processes that occur within both disciplines.

That’s because both activities are strategic in nature. Unlike purchasing, which is largely a tactical approach to spend, sourcing includes a formal process for identifying and vetting potential vendors, with the strategic aim of reducing risk to, and costs for, the business.

Procurement just takes the principles of sourcing a few steps further by encompassing all the processes that occur after a contract is signed—order placement and tracking, vendor management, spend data and analytics, etc.

Thus, where sourcing and procurement are performed across separate departments, the two teams should work closely together. After all, a sourcing department’s goal of reducing costs directly affects the procurement department's goal of maximizing ROI, and vice versa.

At smaller organizations, where these disciplines may not have dedicated departments, it’s safe to think of sourcing and procurement as one.

 

Procurement just takes the principles of sourcing a few steps further by encompassing all the processes that occur after a contract is signed—order placement and tracking, vendor management, spend data and analytics, etc.

 

 

The sourcing and procurement question you should ask instead

 

 

Instead of focusing on what makes sourcing and procurement different, ask yourself: How can I employ the principles of good sourcing to improve procurement and maximize ROI?

Ultimately, sourcing is only so effective without a strong procurement function. You need a strong needs analysis before sourcing begins so you aren’t duplicating resources across the business or investing in products with low ROI. And you need effective purchasing and contract management after sourcing ends so that your business actually gets the products it set out to procure, on time and without errors.

At the same time, a successful procurement operation relies on strategic sourcing. Strategic sourcing is the heart and soul of the procurement operation. It’s where companies can identify opportunities for cost savings, and where it can mitigate potential risk, be it to the business’s business continuity or reputation.

 

Ask yourself: How can I employ the principles of good sourcing to improve procurement and maximize ROI?

 

If sourcing teams can successfully mitigate risk, they eliminate the need to find replacement suppliers, which saves additional operational costs long term.

Take, for example, the increasing risk of reputational damage a brand faces in an age when consumers are more focused than ever on promoting diversity and protecting the environment.

Sourcing can reduce risk in the procurement process—not to mention boost brand loyalty among consumers—by identifying suppliers and vendors who comply with a business’s ethical and sustainable guidelines.

In the years to come, sustainable sourcing will become an imperative for procurement teams. Already, the fashion industry considers this discipline a “must-have,” according to McKinsey, as consumers show increasing allegiance to clothing brands that are committed to social and environmental causes.

In fact, 56% of CPOs in McKinsey’s Apparel CPO Survey 2019 agreed that “responsible and sustainable sourcing is considered a key strategic part of doing business, as is apparent from its position as top 10 priority on the CEO agenda today.”

Ethical and sustainable sourcing is easier than it sounds, however. Sourcing teams must look not only at the business practices of first-tier suppliers, but at suppliers’ suppliers, too, Verónica H. Villena and Dennis A. Gioia, professors at the Smeal College of Business wrote in Harvard Business Review. This is the only way to effectively mitigate reputational damage.

 

Make sourcing and procurement work for your business

 

 

Sourcing is an essential component of a procurement strategy. That’s why Negotiatus’s vendor management system includes a strategic sourcing feature that helps finance and operations professionals optimize their procurement strategy.

Our platform allows each customer to identify strategic savings opportunities across more than 3,000 vendors. At the same time, Negotiatus automates many of the logistical aspects of purchasing, such as submitting orders, bundling like purchases, and tracking deliveries.

To learn more, schedule a demo with a member of our sales team.


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