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What is the Difference Between Procurement and Sourcing?

Stephanie Dula7 Apr 2017      

The terms ‘procurement’ and ‘sourcing’ are often used in close association. This isn’t surprising, since the two functions share a strong interrelationship with an organization’s suppliers. PayStream Advisors’ analysts view sourcing and procurement as separate, albeit related, points along the entire Source-to-Settle continuum. As PayStream’s analysts consult with organizations considering financial process automation software, they work to clearly delineate each step in an organization’s current Source-to-Settle process. This makes streamlining and optimizing existing systems possible. So where does sourcing end and procurement begin?

Sourcing, or the identification and vetting of suppliers, is a function that occurs prior to procurement. An effective sourcing process will put reliable, affordable suppliers in place for the procurement of goods from those suppliers, and will make procurement more successful overall. The term ‘procurement’ is often used quite broadly, and some of the responsibilities that technically qualify as ‘sourcing’ responsibilities can get swept under the procurement umbrella. This may make sense for some smaller organizations, but typically these two functions are best examined as distinct systems with their own challenges, goals, and KPIs.

For example, sourcing would first be tasked with assessing purchasing needs, building sourcing plans, conducting market research, identifying and evaluating suppliers, and selecting the most suitable supplier or suppliers for the need. The procurement department would then be responsible for budgeting, ordering, verifying product details, communicating with suppliers, monitoring order activity, maintaining proper receipt methods and reconciliation, and sending all transactional information to accounting and payments. Procurement metrics might include things like cycle time, quality, and cost per purchase order.

It is important to note that sourcing and procurement teams do not always work together for all purchasing needs. Sourcing teams are not always needed to find and vet suppliers—often, the procurement team can handle the order management of indirect goods and services specifically without sourcing involvement. On the other hand, procurement teams are not typically required to be involved in all direct goods ordering. These purchases can often go directly from a sourcing-led bid or reverse auction in which many suppliers have participated, to a long-term contract that is maintained by a separate contract management and/or legal team. In a nutshell, sourcing teams tend to handle direct goods and services, while procurement teams manage indirect goods and services. However, this is not set in stone for any organization, and the size, industry, and business structure of a company can play a large role in determining how the different processes are handled.

Both sourcing and procurement maintain high levels of interaction with suppliers, but may use different tools to do so. Each generates its own actionable data that can be used to continually refine its process. Sourcing department staff may use dedicated tools to help speed up the process of combing through purchasing activity, transaction history, supplier lists and performance, and spend analytics to identify both weak points and areas of hidden potential. They will be looking far deeper into each supplier’s history and risk potential than will procurement staff. These staff members will be concerned primarily with acquiring the product that best meets a business’s needs of quality, time, quantity, and location—all at the best possible price.

How does your organization define sourcing and procurement? How are sourcing KPIs different from procurement KPIs? Leave a comment and let us know.

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