Sourcing and Procurement: The Complete Guide

Sourcing and procurement are often used interchangeably when talking about purchasing. These two terms are essential processes in the procure-to-pay cycle. Strategic sourcing and procurement can often make or break a company's financial health. In this blog, we'll discuss the difference between sourcing and procurement and the importance of both. 

What is procurement?

Procurement is the first part of the procure-to-pay cycle, which includes accounts payable and procurement. Plainly speaking, procurement is the process of purchasing goods from a company's suppliers for business operations. Procurement covers steps involved in buying, such as identifying requirements, managing purchase requisitions, sourcing, contract negotiation, generating and sending purchase orders, inventory management and vendor management. 

A procurement or purchasing team within the organization usually buys goods and services within the company. Often, departments requiring the goods would make the purchase themselves and pass on the invoice to the accounts payable department, along with approvals from their business heads. 

What is sourcing?

Sourcing is a process within the procure-to-pay cycle which focuses on carefully selecting and monitoring vendors and setting up vendor contracts. Sourcing involves thorough market research related to pricing, demand and payment terms. It also often includes vendor onboarding and management. 

Sourcing is the first step in the procure-to-pay process. Companies often have set vendors for making a specific purchase with whom contracts have already been set. The purpose of the sourcing team is to set up and find these vendors before a purchase is made. 

Defining vendors within your company helps get better deals and discounts and reduce maverick spend. Thus, strategic sourcing is of the utmost importance in financial management. 

Is procurement the same as sourcing?

Although often confused for each other, sourcing and procurement are different. Sourcing is the first step in the procurement function. 

The procurement process consists of two halves: sourcing and purchasing. While the sourcing half of the procurement process takes care of duties such as market research, vendor selection, negotiation, onboarding and relationship management, purchasing involves managing purchase requisitions, generating purchase orders, managing delivery and inspection and inventory control. 

Here are some of the critical differences between sourcing and procurement: 

Scope

• Sourcing focuses on strategically selecting vendors and negotiating prices from them. It is an important function to improve cost-control and budgets for the company. 
• Procurement focuses on the overall process of purchasing goods and services for the company. It is an essential function for smooth operation of business. 

Objective

• Sourcing is important to select the correct suppliers and get the best deals for future or present purchases.
• Procurement is important for managing costs, supply chain, and inventory of a company. 

When are they performed

• Sourcing is the first step of the procurement process within the procure-to-pay cycle
• Procurement is the first step of the procure-to-pay cycle including sourcing and purchasing. 

Responsible entities

• Sourcing is generally between the procurement or sourcing team and the suppliers. 
• Procurement involves the collaboration between multiple departments of the company such as procurement, accounts payable and legal departments. 

Importance of sourcing and procurement functions

Procurement is an essential function within a company. As such, strategic sourcing and procurement need to be handled with care. Here’s why procurement and sourcing are important:

Manage and reduce costs 

Negotiating better payment terms or prices from vendors and setting up long term contracts or contract purchase orders can prove highly beneficial for cost control within the company. Having flexible payment terms or early-payment discounts can also be a great incentive in lowering your accounts payable dues in time without letting them carry forward to yearly financial statements. 

Ensure vendor compliance

Selecting and carefully vetting vendors before making purchases also helps avoid any compliance issues. It is important to regularly conduct TIN matching and monitor the performance of vendors, and consider alternate vendors in case of overdependence on a single one. 

Ensure supply chain management

The procurement function is also essential for managing the supply chain of the company. Purchasing goods according to appropriate delivery times might sometimes take precedence over better prices and payment terms. It is the responsibility of the procurement team to assess company needs before making a decision. 

Better budgeting of finances

Having long-term contracts or giving contract or blanket purchase orders to vendors can also help in budgeting better for your company. This avoids any surprise expenses in the company. 

Importance of AP automation in procurement

AP automation can greatly benefit the procurement and sourcing function of a company, while integrating with your accounting and procurement softwares. Most AP automation vendors allow you to store purchase orders along with other important vendor documents like contracts, invoices and GRNs on a single platform, cutting down on paper documents. Software like ClearTech’s AP automation solution go the extra mile by providing you important spend saving insights such as alternate vendors and better payment terms in the form of interactive dashboards. With ClearTech, you can easily see the best deals while reducing the hassle of managing documents. 

Conclusion

Sourcing and procurement are commonly mistaken terms when talking about the procure-to-pay cycle. While procurement entails the entire process of securing goods and services for a company, sourcing involves selecting vendors and negotiating contracts with them along with vendor onboarding and performance monitoring. Both strategic sourcing and procurement are important functions within a company as they help with cost control, compliant processes, supply chain management and planning funds better. Adopting AP automation can help in procurement by serving as a platform for storing vendor information and documents such as contracts, purchase orders and invoices while providing you real-time visibility over your spends. 

FAQs

• What is an example of sourcing and procurement?

If a company needs to purchase raw materials for manufacturing products, the sourcing department takes care of analyzing markets, selecting a vendor and negotiating prices The procurement team then uses the contracts and information provided to create and send purchase orders, acquire goods and inspect the delivery. 

• Is sourcing different from procurement?

Sourcing is a part of the procurement function focusing on selecting and onboarding a vendor along with contract negotiations and vendor performance monitoring. 

• Which comes first sourcing or procurement?

Sourcing is the first process in the procurement function. 

• What are the 3 main types of procurement?

The three types of procurement are direct procurement, indirect procurement and services procurement.