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Sourcing vs Procurement: The Key Difference Between Them

Joey Gan
2022/11/23 16:11

sourcing vs procurement


Introduction

Sourcing is identifying the best suppliers for your business needs, while procurement is a multi-step process with efficient payments and contract management!


Procurement and sourcing are relatable but different in meaning. Procurement is a step-by-step process in which you can include sourcing. You need to have basic information on both terms to differentiate them, which are used interchangeably.


Both are related to an organization's supply chain but hold different meanings. For the growth of your organization, ensure it has a robust supply chain which is only possible through appropriate sourcing and procurement.


With proper procurement operations, you can cut production costs, giving you an edge on the marketing budget. You will need suitable sourcing to keep procurement operations and supply chains healthy.


What is sourcing?

Sourcing is finding the best value goods and services for your business. To look for the best vendor/ supplier, assessment, management, and selection of the value goods is called sourcing.


What does sourcing mean?

Sourcing, as the name suggests, is the process of gathering or arranging the most suitable sources for the benefit of the businesses. Organizing the best sources, evaluating their services, and executing on their merits involve sourcing.


Sourcing Process

Strategic Sourcing is related to developing channels through which cost-efficient value supplies are obtained. This process boosts the company revenue generation, which hikes the profits and reputation that creates a particular place for your company in the market.


To practice the perfect technique of sourcing, there are a few simple steps to follow:


1- Analyze Needs

The first step is to analyze the company's or client's internal needs closely. What is required? How much quantity is required? What is the urgency of the requirement? What's the budget? These questions must be analyzed to get accurate information about purchasing traits.


2- Market Research

The second step is research. Research the targeted market to find the best vendor or suppliers for value goods or services required. It helps you evaluate the market rate, vendors working for a particular industry, Vendors your competitors are buying from, and various qualities of supplies.


3- Strategize

Now you know what is required in your company and what is available at what rate in the market. It is the right time to strategize your buying behavior. Select the best vendor to cut costs and choose the right potential supplier for future buying.


4- RFQs and RFPs

When you have found the right supplier, it's time to send out requests for quotes RFQs or requests for proposals RFPs to begin the purchasing process. Each vendor makes a bid on the projects, giving you a clear business pitch so you can get the best quotes, working details, vendor details, and professionalism of each vendor.


5- Selection and Negotiation

Then, you can select the best suppliers or manufacturers based on their bids. This step allows you to settle and decide the terms, discuss modifications and negotiable offers, and decide the payment method, milestone, etc.


6- Integration

This step deals with the signing of contracts after the selection of a supplier. The official document about the payment, milestones, proceeding methods, quality, and quantity of the product is being mentioned to avoid ambiguity.


7- Results Assessment

The final step is to assess the performance of the supplier and compare them with the KPIs after purchase, such as goods and services quality, after-sales service response speed, user feedback and other dimensions. Potential vendors always ensure the implementation of products, services, or goods works well.


What is procurement?

Procurement is the acquisition of goods and services, vetted by sourcing. It is the process of purchasing, paying, and receiving goods and services through a channel from vendors or suppliers.


Procurement Definition

Procurement is the corporate function that plays a governance role in the purchasing decisions of a company. Activities of the procurement function include strategic supplier evaluation and selection, competitive bidding, contract negotiation and purchasing. Effective procurement practices enable organizations to reduce direct and indrect costs and maximize value.


Procurement Process for purchasing goods and services

Can you list all the steps for buying a product? The company develops and implements certain processes to achieve the objectives of the procurement process by identifying products. Procurement is important because they determine the amount of money that companies can save. An enterprise can rest assured that its goals can be achieved by monitoring the procurement process on a regular basis. When the process does not run correctly or there are businesses problems, some changes should be made in the procurement cycle. Since the main goal of procurement has always been to improve efficiency, companies must ensure that they benefit the most from the process.


It is a comprehensive process of making purchase orders, requisition orders, creating authorized invoices, audit delivery, tracking GRNs, and receiving goods. It manages the inventory and deals with all orders, invoices, and receipts issuance from the department. It keeps the finance structure of the company intact and updated.


In addition, bottom line procurement is a strategic process that involves the acquisition of goods and services. Unlike purchasing, it involves a series of steps that are usually taken by businesses to meet certain needs, such as production, inventory, and sales. It often involves a series of documents like demands and


Here are a few simple steps to follow for practicing procurement preocess:


1- Purchase Requisition

The first step is to make a purchase requisition after the need recognition. The purchase requisition is the official claiming request on a specific need or requirement. The procurement makes purchase requisitions to keep the company operations going.


2- Requisition Approval

The second step is to communicate with the accounts department to check the availability of the funds to make purchases. They will give you a specific budget for your purchase. If the department approves the requisition, the procurement helps proceed further.


3- Expediting

Once the requisition gets approved, the procurement team goes for RFQs to get and compare bids from different suppliers. It allows you to estimate the expense as you get many bids with various quotes.


4- Create a Purchase Order

After selecting a suitable vendor or manufacturer who offers quality goods and services at the best price, the procurement team creates the purchase order with the committed price and amount mentioned.


5- Audit of Delivery

The department inspects the goods or services on delivery. The quantity and quality are measured with standards to prove the agreement's merits. They examine the delivery, and refunds are claimed in case of error and damage.


6- Invoice and Receipts

The team receives the invoices and receipts and keeps them safe in any case of exchange, error, damage or other. These invoices allow you to keep a record of the payments.


7- Payment

The procurement team is responsible for the payments of suppliers and receiving the legit receipts from the vendors. Depending on the procedure of receiving goods and services, you need proof that the goods are delivered per the purchase order. It will improve credibility and form the base for good supplier relationships.


8- Inventory Management

The procurement team updates the payments and keeps track of the accounts data for inventory updates. It keeps the team informed of the need for recognition. And it indicates all the immediate supplies that are needed.


9- Report KPI

The selection of key indicators of supplier management (KPI) directly affects the effectiveness of the supplier management system. According to the degree of importance, it includes five indicators: quality, delivery, cost, capacity and service. Each dimension has corresponding indicators, for example, quality is the qualified rate of incoming batches.


10- Maintain Relationaship

Through regular visits, regular communication, and equality in the process of cooperation, the corresponding procurement agreements are legal and respectful to maintain a good long-term cooperative relationship with suppliers, which can ensure the stability of the company's raw materials or supply chain.


From the figure below, you can see the difference and correlation between sourcing and procurement in workflow.

Sourcing-vs-procurement


Key Differences Between Sourcing vs Procurement

Despite various similarities between sourcing and procurement, some differences differentiate these terms. Though when comparing the two terms, you point out the significant differences between them. But these two are vital for each other. For a healthy and stable supply chain, sourcing and procurement go hand in hand.


Sourcing solely focuses on finding and vetting the suppliers by making sure the suppliers can fulfill all the requirements. It also includes RFIs, RFQs, and RFPs to analyze the supply chain risks relating to each supplier.


Procurement, on the other hand, constructs the entire procure-to-pay process. It consists of various steps like sourcing, contract management, requisitioning, payments, purchase orders, and supplier relationships. It ensures that the organization gets what it needs.


It includes RFIs, RFQs, RFPs, purchase orders, invoices, payments, and managing good relationships. Procurement includes analyzing the internal and external risks of supply chains.


Sourcing

Procurement

Responsible for finding and building relationships 

with the most suitable suppliers

Responsible for purchasing goods and 

services when the organization needs them

The objective is to reduce costs 

and build a resilient supply chain 

The objective is to fulfill internal 

needs and maintain profitability 


Why Is Procurement Called Sourcing Sometimes?

Procurement is sometimes called sourcing because sourcing is a part of procurement process. Smaller organizations use sourcing and procurement interchangeably because sourcing covers the major points like finding and identifying suppliers and analyzing all the risks.


But payments and purchase orders are not part of sourcing. Larger organizations are involved in more transactions and require better contract management. Therefore, establish relevant departments for smooth transactions and maintenance of supplier relationships.


While in smaller organizations, the transactions can be maintained with the sourcing departments. However, the sourcing departments should be adept in contract management, securing invoices, and maintaining payments.


What are E-Sourcing and E-Purchasing?

E-sourcing is referred to as doing sourcing electronically. Today almost everything has been digitalized. All the transactions, supplier identification, businesses requirements, and inventory management are mostly made online. The following are the platforms and service providers related to E-sourcing in China that we Ruizhi Sourcing collected for you.

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Every business has most of its parts digitalized which makes it more efficient and secure. Therefore, E-sourcing and E-purchasing are essential to an organization's supply chain management.


Through E-sourcing, you can compare various suppliers online and identify which best suits your business's requirements. You can visit multiple digital or wholesale platforms and look for the most effective and efficient services.


Also, E-purchasing has its perks. You can digitally pay and receive your products and services. This rules out the heavy bank transactions and the cost of keeping the money secure. Just tap and pay the money online to the respective supplier.


How to Improve Sourcing and Procurement?

Even though sourcing and procurement are different, these work sideways to increase the organization's productivity. They keep the operations stable, and customers satisfied. A comprehensive procurement software makes it easier for you.


You can easily access all the essentials on your laptop and look after your business on your phone. Make all transactions and get invoices digitally over the phone.


1- Procure Faster

With automation, you can digitally control workflows, requisitions, purchase orders, sourcing, and various other options. To get them approved faster, you can also direct them to their relatives.


2- Efficient Budget

Track your organization's spending using digitalized software and ensure accurate budget calculations. Evaluation of the revenue and payments is essential for the organization's growth. With automation, you can evaluate them better and make them error-free.


You can also make an efficient budget that covers all your business requirements and takes care of all payments effectively.


3- Accurate data-based decisions

A database with access to multiple partners can lead to better decisions. A single source of data will give everyone the same information and help them to make the best decision that will increase the growth of the organization.


It will help them identify better opportunities and discover new methods to lower costs.


4- Compliance

With E-sourcing and E-procurement, you can guarantee compliance at every step of the process. The respective software ensures it and checks all the requirements. You can easily show proof of compliance if audited.


The system will automatically update and build checks as per regulatory requirements. You won't have to stress about any of it. All will be generated and done automatically.


5- Lower risks

A descriptive overview of all the spending and revenue of the organization will help you identify any theft or fraud. You will be immediately informed so you can take action accordingly.


Additionally, the overview will give you a better understanding. You can look for more suppliers in case your business requires more services and to cover any disruptions.


Conclusion

Thus, procurement and sourcing work hand in hand. Procurement, a larger process including sourcing, is essential to maintain a healthy supply chain.


Sourcing ensures you find the best supplier that meets your business's needs and includes RFIs, RFQs, and RFPs. But it does not deal with payments and contracts.


At the same time, the procurement process handles all sourcing, payments, purchase orders, contract management, and managing good supplier relationships. Make sure you focus on the sourcing and procurement of your organization to lead them towards heights of success.


FAQs Sourcing vs Procurement


Is sourcing a part of procurement?

Yes, sourcing is an essential part of procurement process. It maintains the supply chain and ensures that the organization has all the tools to achieve its objectives.


It maintains a healthy supply chain and finds the best suppliers that meet your business requirements.


What is the difference between strategic sourcing and procurement?

Strategic sourcing is significant for the organization as it helps you negotiate the best prices and costs and ensure greater profit for term procurement. Strategic sourcing covers the company's overall needs.

While procurement deals with the entire procure-to-pay process, it has multiple steps, including purchase orders and invoices.


What is the importance of the procurement process in the supply chain?

Procurement is of grave importance in the supply chain. Through appropriate procurement, you will be able to identify the best suppliers and negotiate the prices.


Moreover, RFIs, RFQs, and RFPs can be maintained through proper procurement. With procurement operations, you can cut costs, improving your budget.


What's the difference between a purchase order and a requisition?

There is a fundamental difference between requisition and purchase order. Getting permission to buy goods and services internally from the stakeholders and executives of the company is termed a requisition. While buying goods and services from suppliers is termed a purchase order.



Article by:
Joey Gan
The Co-founder of Ruizhi Sourcing. With 10 years of experience in the field of sourcing in China, we help 1k+ clients import from China to Amazon FBA or shopify.
Contact with me at Linkedin
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