What’s the Difference Between Procurement & Sourcing
A business’s supply chain is its lifeblood. Without a constant supply chain of materials and manufactured goods, a business can’t provide goods or services to its customer base. This is a short path to eventual dissolution or bankruptcy.
Therefore, business executives should have a strong understanding of all aspects of their supply chain processes, including procurement and sourcing. Procurement and sourcing are two different but related processes in the greater supply chain.
Not sure what the difference is between procurement and sourcing? This guide will break down everything you need to know.
Procurement is the complete process of both:
- Finding suppliers or vendors to provide your organization with the materials or products it needs for success
- Using those suppliers and vendors in a combined supply chain to actually make good on your business’s strategic objectives
Put in other words, procurement as a concept is the end-to-end process of both figuring out how an organization will produce goods or services and actually implementing a supply chain that brings the resources to a business for later sale or use.
Procurement is a vital process in any big organization that provides goods or services to paying customers, or even to other businesses. Indeed, B2B businesses must often think about procurement as they develop supply chains and relationships with vendors to make sure that they can meet their client requests and production quotas on time.
The processes involved in business procurement include:
- Placing purchase orders with suppliers
- Connecting with suppliers to get order confirmation
- Maintaining contact with suppliers until materials are delivered and paid for
- Reaching out and forging new supply-chain connections with vendors and manufacturers (sourcing, more on that below)
- And more
Any sizable organization needs to have a solid procurement strategy in place at all times. This is important because procurement involves everything about how a business finds and receives the materials and goods it needs to do business in the first place.
If there’s a problem with the procurement strategy, the business can grind to a halt and an organization can lose customers and revenue relatively quickly.
Establishing and maintaining a good procurement process is important because:
- It allows executives to have rater control over their supply chains and lets them see how they spend their money more clearly
- It minimizes errors and any fraudulent spending that may occur, as well as lowers the likelihood of supply-chain interruption
- It allows supply chain operation to be better aligned with broader corporate strategic objectives, ensuring that a business is buying what it needs for long-term objectives
Sourcing can be thought of as a subsidiary concept to procurement. An organization’s sourcing department will focus on finding, vetting, and establishing contracts with suppliers or vendors that are used to procure different goods and manufacturing materials.
If procurement is about finding vendors, establishing relationships, buying goods and raw materials, and ensuring that those goods and raw materials arrive as designated, sourcing focuses more on finding and establishing vendor relationships.
It’s more focused than procurement but is still a vitally important department overall.
On a deeper level, sourcing processes involve:
- Finding a balance between high-quality raw materials or products and affordability
- Understanding organization pricing limitations and mandates to ensure the highest degree of profit without compromising customer trust
- Maintaining relationships with vendors, particularly during economic upheaval. The stronger relationships that an organization can maintain, the less likely its supply chain will be interrupted
- Finding new relationships with vendors when necessary, such as during expansion or for important supply-chain diversification
A good sourcing strategy must be in place in order to make sure that a business never runs out of sources for its goods or services. Losing sources for its raw materials or products necessarily means that the greater supply chain will be interrupted and consumer satisfaction will be ruined.
Consider a hypothetical example with a grocery store. The grocery store sells its own line of private label products that it purchases from a private label manufacturer — let’s say one of those products is store-branded hand soaps. The grocery store must maintain a mutually beneficial and respectful relationship with its private label manufacturer so it can continue to receive timely and quality shipments of the private label hand soaps. If those relationships are interrupted or left to wither, the grocery store will not be able to continue selling its private label hand soaps, which are not only more affordable, but have increased profit generation through in-store sales.
Or consider the example of a business that uses branded merchandise for marketing. If the supply of marketing products runs out, the entire campaign could be derailed, costing tons of time and money.
Creating and maintaining an efficient sourcing process is important because:
- It ensures that your supplier relationships will be stronger. This, in turn, ensures greater consistency, quality, and availability of your products or materials
- It allows you to create and maintain clear and concise vendor contracts and purchase orders, eliminating the potential for misunderstandings
- It allows for supply chain durability during economic upheaval. More vendor relationships mean that an organization has more places to turn to so it can get necessary products for its customers
Differences Between Procurement and Sourcing
As you can see, procurement and sourcing are two concepts that are very closely related. Sourcing can legitimately be considered a subsidiary topic underneath the broader subject of procurement.
However, there are many significant differences between procurement and sourcing. Understanding these differences can help executives form better specific strategies for both sectors, preventing unnecessary overlap and allowing their sourcing and procurement departments to be as efficient and profitable as possible.
Channel Creation vs Supply Acquisition
At a big-picture level, sourcing is primarily about creating supply chain channels. Procurement is about the broader picture of supply acquisition, including where an organization gets its raw materials for product creation or where it gets products depending on the type of business it is.
Procurement cannot exist without sourcing. Businesses can’t acquire the supplies they need to succeed without creating vendor channels and relationships. But sourcing creates those relationships specifically for the procurement process. There’s no reason to bother with sourcing new vendors and strengthening existing vendor relationships unless it’s to allow for material procurement.
Alternatively, executives can look at procurement as the concept of supply acquisition beyond just sourcing vendors and maintaining existing vendor relationships.
Procurement also involves:
- Ordering products and materials – even the strongest relationships are worthless if you don’t use them to acquire goods to sell for a profit
- Making sure that goods and materials are purchased according to budgetary guidelines or mandates
- Working with inventory departments to make sure that there’s enough room for procured goods or materials
- Tracking customer sales data and consumption data to make sure that enough materials or products are being purchased
- And more
Items vs Vendor Relations
Procurement and sourcing also differ from one another in their focus.
Procurement, due to its broad picture emphasis, focuses much more on the items being purchased and how they are used for the health of the business. This is because procurement departments must also concern themselves with how those products are being purchased, how quickly they are being consumed, and how they can leverage this information for better sourcing efficiency.
Sourcing, meanwhile, is much more focused on vendor relations. The sourcing department in an organization will be entirely concerned with finding new vendors and suppliers for existing business objectives. It’ll also be concerned with maintaining existing relationships to strengthen them in case economic upheaval arrives in the future.
The sourcing department is not concerned with the exact quantities of materials being purchased, the costs involved with purchasing those products, and so on.
What vs Who
With the above two differences in mind, executives can further narrow the difference between procurement and sourcing even more: It’s about things versus people.
For example, procurement is about the broader business low acquisition goals and operations. Sourcing is about the personal relationships that drive all business, even at high levels.
Because of these key differences, executives may want to put different department heads in charge based on their skills and qualifications. A great procurement manager may not be the same person as a good sourcing manager due to the thing vs people focus required to lead either department as efficiently as possible.
Ultimately, both procurement and sourcing are important parts of any business’s greater supply chain. While procurement revolves more around greater supply chain management and many more topics, sourcing is nonetheless a vital component of the supply chain as well. Without sourcing, a supply chain would not have any suppliers from which to secure materials or products.
Understanding what makes a supplier for a given business can be tough. That’s why Harper+Scott prides itself on being a top-tier branded and private label product supplier and design studio for a variety of businesses.
If your business needs sourcing or design assistance with private label or branded products, look no further. Contact us today and see what we can do for you.