Sourcing and procurement get used interchangeably. While this isn’t totally accurate—in many respects, they’re not that different.
Larger organizations break these processes into separate departments, with procurement and sourcing functioning as linked activities. At smaller organizations, where these disciplines may not have dedicated departments, stakeholders often consider sourcing and procurement as one. Sourcing is seen as a subset of procurement.
While the similarity between these activities is often blurred, the principles of sourcing and procurement are both essential to minimizing costs and risks in purchasing. Both allow businesses to maximize teir ROI.
Instead of focusing only on how the two activities differ, it’s valuable to understand how they should be used in tandem to maximize their mutual benefits.
This article will cover the differences and similarities between procurement and sourcing by:
- Defining procurement, sourcing, and purchasing
- Exploring the difference between sourcing vs. procurement
- Explaining the fundamental value of these processes
- Revealing how technology enhances sourcing and procurement
What is the difference between sourcing and procurement?
The terms procurement, sourcing, and purchasing are often confusing for stakeholders. While interconnected, these three terms refer to distinct activities and stages within the overall process.
What is procurement?
Procurement is the overarching set of processes and activities a company undertakes to find, purchase, and pay for goods and services. It follows the procurement cycle of a purchase from the point of needs identification through supplier selection, negotiation, purchase, three-way matching, payment, vendor management, and reporting.
What is sourcing?
Sourcing is a component of the total procurement process. It begins after needs identification and intake and before the purchasing stage of procurement. It refers to selecting potential vendors to meet company needs when buying a product or service. Sourcing involves examining a list of potential vendors, conducting due diligence on each, and selecting the best vendor for your business based on a criteria list.
What is purchasing?
Purchasing is the portion of procurement that occurs after sourcing activities are completed. It entails ordering, receiving, and meeting payment terms for procured goods and services. Sourcing and purchasing are two main stages of the procurement process.
Does the distinction between sourcing vs. procurement matter?
Ultimately, the goal of the sourcing process is to improve risk management, reduce cash leaks, and enhance the purchasing process so businesses can maximize their procurement goals to maximize ROI.
The logistical differences between sourcing and procurement aren’t as important as their combined potential. Both are strategic.
Unlike the purchasing process (a tactical approach to acquiring and paying for goods), sourcing includes a formal process for identifying and vetting potential vendors. It offers the strategic outcome of reducing risk for the business through:
- Development of search criteria and sourcing policy
- Vendor shortlisting and vetting potential suppliers
- Producing RFP/RFQ documentation
- Implementing sustainability and diversity standards
- Risk matrix assessment and security questionnaires
- Improving resilience and supply chain management
Procurement represents the broader methodology for sourcing and acquiring goods, including:
- Establishing purchase request and purchase order approval
- Setting procurement policy and budget guidelines
- Implementing technology for procurement processing
- Conducting spending analysis and data reporting
- Creating procurement project roadmaps
- Negotiating pricing and contract terms
- Conducting supplier performance analysis
Thus, even if 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 and risk directly affects the procurement department’s goal of maximizing ROI and vice versa.
Using sourcing best practices to improve procurement
Ultimately, sourcing is only effective when conducted within a strong procurement function. For instance, you require a buyer or organization needs analysis before sourcing begins. That way, you aren’t duplicating resources across the business or investing in products with low ROI.
You need effective purchasing and contract management after sourcing ends so your business receives the products it set out to acquire—on time and without errors.
Conversely, a successful procurement process relies on a strategic sourcing process. Strategic sourcing is the foundation of the procurement operation. It’s how companies can identify opportunities for cost savings and mitigate potential risk.
How sourcing improves procurement and maximizes ROI
Strong sourcing practices greatly improve a company’s ability to achieve its goals and return better results. These results are further enhanced when companies take a sustainable approach to their sourcing.
In the years to come, sustainable sourcing will become imperative for procurement teams. According to McKinsey, the fashion industry already considers this discipline a “must-have,” 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 a top 10 priority on the CEO agenda today.”
Ethical and sustainable sourcing is easier than it sounds. Sourcing teams should look at the business practices of first-tier suppliers and downstream suppliers, Verónica H. Villena and Dennis A. Gioia, professors at the Smeal College of Business, wrote in Harvard Business Review. These best practices lead to overall better and more impactful sourcing.
How Order.co makes sourcing and procurement work for your business
Sourcing is an essential component of a procurement strategy. That’s why Order.co’s procurement software offers vendor relationship features and strategic sourcing tools that help finance and procurement professionals optimize their procurement and sourcing strategy. It helps procurement implement good budgetary controls and maintain total visibility into the process.
Here are a few Order.co features that make sourcing and procurement easy:
- Purchasing through preferred vendor lists
- Real-time visibility into spending
- Procure-to-pay and single-click payment features
Our platform allows each customer to identify strategic savings opportunities across more than 3,000 vendors. At the same time, Order.co helps streamline many 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.
Schedule a demo to see how Order.co can simplify buying for your business.
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