Steps Involved in Sourcing Process
There are several steps in the sourcing process. They are as follows:
- 1. The first step is to outline the souring category, including the volumes, spend amounts, current prices, suppliers, and specification details. In addition to this, the type of users, departments involved in the supply chain, and users’ locations are analyzed.
- 2. In this step, it is necessary to do supply market research and understand the buying power based on the sourcing strategy. Many of the companies use Kraljic’s matrix for segmenting vendor bases. The sourcing strategy is devised by mapping the supply chain using two critical dimensions: risk and profitability.
- 3. The third step is to develop the sourcing strategy. In this step, the sourcing team decides from whom to buy with reduced cost and with minimal risks. Here, the strategy is discussed with stakeholders to choose alternative suppliers based on the market competition.
- 4. Upon developing the strategy, the business now decides on bids and requests proposals from potential vendors. The product specifications and service requirements should comply with the company’s needs. This should include price breakdowns, legal and financial terms, and conditions.
- 5. In this step, the sourcing team begins negotiation to place valid bids to the chosen supplier. It is necessary to shortlist a handful of vendors and conduct multiple rounds of negotiation before approving them.
- 6. In this step, the suppliers are notified of their confirmation, and the implementation process begins. Any improvements and changes in the service requirements will also be made.
- 7. This is the final step of the sourcing process, where the continuous cycle of benchmarking the status of the products and monitoring the results is done. When the target is achieved, the business then goes back to step 1 and restarts the sourcing process again.
What is Procurement?
Procurement can be defined as the process that involves every activity from obtaining the necessary goods and services from the suppliers needed for a company’s day-to-day activities. The process includes sourcing, negotiation, purchasing, inspecting, and maintaining records. Example of the procurement: when a company needs a new service such as an email security solution, the procurement process helps to pick the best supplier for providing this service at a reasonable price. Another example of procurement includes purchasing raw materials, machinery parts, and items for a manufacturing company.
The procurement process is unique to each organization, and it generally starts with identifying the requirement. The creation of a purchase order follows this as per the business specifics. Upon selecting the approved vendors, the purchase order will be sent for further approval to the finance or the procurement team. If approved, the purchase order becomes a purchase requisition. If rejected, it will be sent back to the respective team with the reason for rejection. Once the purchase items are received, the items are checked for quality, and the finance department accounts for payment.
With this said, the procurement process can also be thought of as a three-stage process.
- The first stage is the sourcing stage, where the initial steps of identifying a company’s needs, creating purchase requests, and sending them to potential vendors are completed. This stage is the foundation for the procurement process as it helps to establish grounds with the suppliers and develop trust in the vendor relationship.
- The second stage is the purchasing stage. In this stage, the procurement team begins the negotiation process and does the quality check for the purchased items from the vendor.
- The third stage is the payment stage. This is the final stage where all the financial transactions are monitored.
The accounts payable is generally done as a three-way process to ensure safety as well as invoice accuracy. Upon approving the invoice, the concerned departments make the payments, and records of invoices and payments are maintained carefully.
The Key Differences Between Sourcing and Procurement
|The total cost of ownership can be made at the best possible price
||The cost per unit can be done at the lowest possible value
|The highest possible quality products can be obtained at the lowest possible cost
||Mass discounts are obtained for generating products at high volumes
|Global supplier network location
||Local supplier base location
|The relationship between the vendor and the organization is sustainable and intense.
||The relationship between the vendor and organization is developed based on acquaintanceship
|The performance of the supplier is lean and efficient as it focuses mainly on achieving effectual output from minimum input
||The version of the supplier is effective as it focuses primarily on completing the specified activities and achieving goals
|The skills needed for effective sourcing include cross-functional skills, collaborating, mutual respect, problem-solving and self-negotiating, and making compromises whenever necessary
||The skills required for an effective procurement process has analytical and negotiation skills.
|The process involves requesting and comparing the best quality and cost-effective services.
||The process involves what and from whom to buy the necessary products.
|Any failure happens handled using proactive approaches
||Any loss occurring in the process is dealt with using reactive strategies
Where do Sourcing and Procurement Meet?
Both sourcing and procurement are crucial for business, and the shared data is their rendezvous point. Together they ensure that the business stays away from risks to attain stability and sustainability over time. They work together to enhance the company’s profit. The sourcing team helps maintain and analyze the generated data; the procurement team uses this data to provide products within the stipulated budget.
Upon completion of the process cycle, the procurement team generates data and sends it to the sourcing team for managing supplier relationships. This process includes assessing the supplier’s performance, which helps the company make strategic decisions. This informed decision helps in maximizing the company’s value.
Moreover, the automation provides access to the data across different platforms and supplier bases, reducing lags and delays. The collaboration between sourcing and procurement can enhance the supply chain by enabling uninterrupted supply and effective long-term planning.
Importance of learning the difference
Why is it vital to know the difference between sourcing and procurement? Some Procurement managers think that sourcing and procurement are the same. This makes them fail in incorporating sourcing in procurement successfully. So, when you learn the difference, having a proper sourcing strategy can save your company both time and money. An appropriate sourcing strategy helps you identify potential suppliers before beginning the procurement process.
In places where there is a need for automation and the procurement manager fails to recognize the differences, it will limit the full use of your company’s automated procurement program. This has a considerable impact on the company’s procurement and sourcing activities.
Furthermore, knowing the difference is a basic knowledge that a procurement manager should possess. Understanding this difference will also help the procurement managers with the vendors and suppliers during the negotiation phase. This makes them help pick the best suppliers at the best prices.
Use of Extensive Procurement/Sourcing Software
The use of procurement/sourcing software is gaining momentum as more and more companies are utilizing it. Statistical reports show that the market for procurement software is expected to increase by 10.2% by 2026. A report from ResearchandMarkets.com predicts that the global procurement software market to have a revenue of $9.65 billion by 2026. The sourcing software market is expected to increase by 7.4% by 2026.
The need for strong procurement software is increasing with the increase in workflow automation. Especially with the integration of artificial intelligence, procurement software creates new opportunities to work with. Likewise, the demand for good sourcing software has increased with the changes in consumers’ buying patterns in the last few years. Businesses need to adopt sourcing software and tools to implement procurement efficiently using new cloud computing technologies, artificial intelligence, and the Internet of Things (IoT).
With the growing need for these tools, they should offer the businesses certain features such as vendor database with rankings, budgeting, automated request for quotes (RFQs), collaborative data access, security checks, cross-referenced storage in the database, generation and management of purchase requisitions and purchase orders, transactional procure-to-pay processes.
The collaboration between sourcing and procurement, along with technological automation, can drastically improve the effectiveness of the company. When they work together from the pooled data, the benefits are innumerable as it helps improve supplier relationships and enables strategies to maximize value. Therefore, every business needs powerful workflow automation software like Cflow.