Sourcing and procurement are essential functions in any growing small business. Both tasks are closely related, which might cause you to think they're the same. Understanding the differences between sourcing and procurement will help you create more efficient processes in your organization.
In this guide, you'll learn what sourcing and procurement are, along with the following:
What is sourcing?
Sourcing is finding a supplier of goods and services that maintains or boosts your company's net profit margins. Sourcing is an essential part of your purchase process. Most companies source via a tender or RFP process that invites potential suppliers to submit bids for their services.
The following factors play a role in every company's sourcing decisions:
- Supplier quality: Is the supplier a good fit for the organization?
- Margin impact: Are the supplier's services or products priced appropriately?
- Payment terms: How accommodating is the vendor's credit policy?
Why is sourcing so important?
Sourcing is essential to ensuring your supply chain's quality remains high. Your supply chain encompasses everything from sourcing to delivering products to consumers. As one of the first steps to execute in the supply chain, getting sourcing wrong will throw downstream processes into disarray.
Good sourcing also keeps the finished product's prices low, giving you an edge in the marketplace over your competitors. Because of this, sourcing is essential to leaving a positive impression on your customers and boosting your profits.
5 different sourcing models
You can implement different sourcing models depending on your organization's goals.
- Low cost: Prioritizes vendors offering services and goods at the lowest prices.
- High volume: Choose vendors with long track records that offer high volume discounts.
- Preferred lists: Classify vendors based on their ability to offer value-added services.
- Shared/internal services: This model is preferred by larger companies. One department acts as a supplier to another, leading to internal sourcing.
- Equity: A company acquires another to mitigate supplier risk and sources products from it exclusively.
Note that you can combine these models as part of a broader strategic sourcing strategy. For instance, you can adopt the low-cost model for non-critical parts and a preferred list for essential supplies.
4 tips for creating a strategic sourcing processes
Given its critical position in your supply chain, you should strive to create an efficient sourcing process. Here are a few tips to help you achieve this goal:
- Review your process regularly: Over time, errors and inefficiencies creep in. Review your process periodically to keep it fresh.
- Communicate: Communicate transparently with your vendors to set expectations. This way, no one will be in the dark about performance standards.
- Automate: Automate as many tasks in the sourcing process as possible. Use top-notch vendor management systems to do this.
- Focus on relationship building: Build the best relationship possible with your suppliers. They'll stand by you when times are tough, and you'll experience minimal disruption.
What is procurement?
Procurement is a critical supply chain process where your company sources, orders, and tracks important raw materials or services. Sourcing is a sub-process within material procurement.
Since the procurement function has many moving parts, it is more complex than sourcing. It involves everything from issuing a purchase order (PO), evaluating vendor sustainability, contract management, evaluating and RFQ, to cost management. In short, procurement management is a critical supply chain task in every company.
What are the objectives of procurement?
Procurement defines a set of processes that reflect your company's goals and vision. A good procurement strategy ensures optimal resource use while striking a balance between supply quality and costs. This balance can be achieved with a procurement team that uses data to create a competitive advantage.
Vendor risk management also plays a key role in efficient procurement and broader supply chain management. This process defines a set of best practices to ensure you receive the products and services you need, at the right time and for the right price.
5 types of procurement strategies
As with sourcing, you can choose between several procurement strategies depending on your business priorities. Here are the most popular strategies that procurement departments at small businesses follow.
- Cost minimization: Cost minimization in procurement aligns with overall cost reduction processes. Companies prioritize cost reduction while maintaining a threshold for vendor performance. For example, process automation via procurement software providers can deliver huge cost savings.
- Risk minimization: This strategy reduces exposure to unforeseen events or disruptions. For instance, a company might opt to source from multiple vendors and use varied logistics channels to receive goods, even if it increases costs.
- Relationship-based: This strategy builds healthy, long-term supplier relationships. It prioritizes a cultural fit above price. For instance, a company will scrutinize its vendors' sourcing practices more.
- Vendor nurturing: In this strategy, a company invests and nurtures a vendor's capabilities. For example, a vendor that supplies a rare or tough-to-source product might receive investment from their clients to boost production.
- Total Quality Management (TQM): This strategy focuses on all functions within an organization, beyond procurement. A company will optimize all processes within procurement, such as logistics handling, supplier relationship management, to invoicing.
Again, you can choose to implement a mixture of these processes within your organization after vetting your needs.
9 steps for creating a robust procurement strategy
Here are the steps to create an efficient procurement strategy:
- Evaluate your current process: Review existing procurement spending via a spend analysis. Find gaps in the process.
- Define business goals: What are your company's long-term goals? Quantify them. Also, note any qualitative goals. For instance, establishing better supplier and customer relationships.
- Identify market opportunities: Research the current market landscape to spot potential gaps and opportunities related to procurement. Are some goods in demand? Are there cheaper substitutes?
- Get stakeholder buy-in: Review the outcome of previous steps with all stakeholders to receive buy-in. Without key stakeholder support, your procurement strategy will fall apart quickly.
- Define procurement policies: Define your procurement goals and craft policies that will help you achieve them. Consider transforming existing policies instead of creating new ones from scratch.
- Define procurement metrics: Create data-driven KPIs to measure your progress towards procurement goals. Some examples include supplier defect rates, PO cycle times, on-time deliveries, and vendor ratings that take several KPIs into account.
- Choose the right software: Automate clerical tasks in your procurement workflows by choosing a software platform. You'll leave more time for value-added work.
- Train: Train your employees in your new processes until they get it right. You'll deal with inertia in this step, but communicate the importance of your new process at all times.
- Execute and monitor: Put your strategy into action and monitor your processes. Refine the ones that need adjustment, and you'll create a process that helps you achieve your goals.
The differences between sourcing and procurement
How Ramp simplifies procurement management
Here's how you can streamline SaaS procurement management and sourcing with Ramp.
Manage vendors from a single platform
Centralize vendor management from a single dashboard. You will eliminate duplicate SaaS spending and keep track of all subscriptions in a single dashboard.
Compare prices against benchmarks
How do you know if you've negotiated the best price on your SaaS contracts? Ramp helps you compare prices to benchmarks, helping you negotiate better rates. You can use one of our savings experts to help you during price negotiations.
Use our negotiation services
Negotiating procurement contracts can be tough for a small business. Leverage Ramp's negotiation services by letting us review your pricing terms, licenses, and fees to save you money. We'll even work to reduce your rates and negotiate the best terms for you while maintaining vendor relationships.
Save money paying vendor bills
Ramp helps you upload your vendor contracts and pay bills quickly, avoiding costly fees and late payment penalties. You can pay your bills in under a minute.
SaaS sourcing and procurement can seem intimidating for a small business. However, Ramp helps you manage your procurement process and simplifies vendor negotiation. The result is better vendor relationships and cost savings.
Learn how Ramp simplifies sourcing and procurement management for rapidly growing small businesses.