What's The Difference Between Sourcing and Procurement?

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.

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In this guide, you'll learn what sourcing and procurement are, various strategies for each, how they’re different, and some real-life examples to inspire you.

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What is Sourcing?

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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.

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The following factors play a role in every company's sourcing decisions:

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• Supplier quality: Is the supplier a good fit for the organization?

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• Margin impact: Are the supplier's services or products priced appropriately?

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• Payment terms: How accommodating is the vendor's credit policy?

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Why is Sourcing so important?

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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.

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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.

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What is Procurement?

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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.

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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.

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What are the objectives of procurement?

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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.

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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.

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What is the difference between sourcing and procurement? 

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Both sourcing and procurement have similar functions: to supply goods for your business’s supply chain so you can operate effectively. Finding the differences between sourcing vs procurement does require a bit of nuance. 

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As we noted, sourcing is focused on finding a supplier of goods for your business that is cost-effective and a net-positive for your growth goals. It’s more of a starting point for building relationships with suppliers. Procurement typically operates with many more moving parts, such as issuing PO’s, negotiating contracts, and improving supplier relationships. 

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Let’s say you’re running a manufacturing company that creates computer chips. You’re just breaking into new markets and you need to start identifying suppliers to create products with healthy profit margins. Procurement begins when you begin researching and vetting vendors, negotiating contracts, creating purchase orders and requisitions and developing RFQs. Sourcing is the process of your business reaching out to vetted suppliers you’ve chosen based on your procurement strategy and steps. 

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Strategic sourcing and procurement: models for success

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Procurement and sourcing go hand-in-hand. Because they are related functions, they require strategic approaches that differ depending on your business size, objectives, goals, and even the structure of your business. 

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A key way to strategically source and procure goods is by implementing sourcing models and procurement strategies. These allow you and your team to have a common goal, a defined success target for better top-down communication, and better process tightening. 

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5 different sourcing models

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You can implement different sourcing models depending on your organization's goals. Here are some examples:

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• Low cost: Prioritizes vendors offering services and goods at the lowest prices.

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• High volume: Choose vendors with long track records that offer high volume discounts.

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• Preferred lists: Classify vendors based on their ability to offer value-added services.

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• Shared/internal services: This model is preferred by larger companies. One department acts as a supplier to another, leading to internal sourcing. This can greatly reduce supplier risk and the need for due diligence.

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• Equity: A company acquires another to mitigate supplier risk and sources products from it exclusively.

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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.

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Tips for creating strategic sourcing processes

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Here are a few tips to help you create a strategic sourcing process:

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• Review your process regularly: Over time, errors and inefficiencies creep in. Review your process periodically to keep it fresh.

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• Communicate: Communicate transparently with your vendors to set expectations. This way, no one will be in the dark about performance standards.

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• Automate: Automate as many tasks in the sourcing process as possible. Use top-notch vendor management systems to do this.

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• 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

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5 types of procurement strategies

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As with sourcing, you can choose between several procurement strategies depending on your business priorities. 

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• 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.

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• 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.

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• 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.

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• 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.

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• 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.

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Tips for creating a robust procurement strategy

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• Evaluate your current process: Review existing procurement spending via a spend analysis. Find gaps in the process.

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• Improve communication: Ensure that all stakeholders at all levels of your organization (e.g. C-suite and procurement heads) are on the same page regarding procurement policies, processes and goals. This can be done through in-office memos, emails, large team meetings or one-on-one sessions.

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• Get proper buy-in: Unless all stakeholders are on board, the best procurement strategy won’t take off. Make sure you get all stakeholders on board, from top-level executives making the big decisions, to employees ironing out the details and the ground level.

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Navigating sourcing and procurement processes

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Here are general steps for sourcing and procurement so you can successfully execute the strategies and models listed above. 

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General steps in sourcing

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1. Define your business need: Employees and stakeholders recognize a need in the business in terms of their product offering, and create specifications based around that. 
2. Analyze the market: With these specifications in hand, review the current market for suppliers that can fill this need—while also maintaining high levels of quality in the products/services. At this stage, a request for information (RFI) typically may be issued. 
3. Evaluate selected suppliers: Using the analysis and information of suppliers that could fill your market need in step 2, evaluate them to one another to determine which has the best solution to your need. Suppliers should be evaluated on financial health, lead times, product quality and environmental impact, for example. 
4. Start negotiations: At this stage, both you and the suppliers you have evaluated should have open communication channels established and started budding business relationships. With this information and short list of suppliers, start negotiations for a contract fulfilling your market need. 
5. Sign a contract: Once a clear winner appears from your supplier negotiations, get a contract in place that details their obligations, your duties and how your relationship should look as they help you fulfill your business needs. 

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General steps in procurement

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1. 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.
2. 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?
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
8. 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.

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How technology plays a role in sourcing and procurement

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When it comes to sourcing and procurement, technology is a key driver for success. From managing spending to researching suppliers, using the right software is necessary. Here’s how we can help. 

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Ramp simplifies everything from integrating expense management with popular small business finance and accounting software to eliminating maverick spend.

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Manage vendors from a single platform

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Centralize vendor management from a single dashboard. You will eliminate duplicate SaaS spending and keep track of all subscriptions in a single dashboard.

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Ramp Vendor Management is your single source of truth of all vendor data. This gives you a single, holistic view of your vendor spend, contracts, and Price Intelligence on SaaS vendors across your technology stack. 

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Compare prices against benchmarks

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Ramp’s Price Intelligence feature allows you to see how much other businesses are paying for the exact same software product. Ramp automatically extracts your contract details and benchmarks the price, providing you instant visibility into what other businesses are paying for the same software.

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Price Intelligence empowers you to buy software based on trusted data contributed by your peers. This feature is available on multiple SKUs per software with costs broken down per-user, allowing you to confidently buy and negotiate with vendors.

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Save money paying vendor bills

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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.

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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.

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Examples of effective procurement and sourcing, and their benefits

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Starbucks’ ethical approach to coffee sourcing reaps rewards

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The coffee giant Starbucks has utilized an unique ethical approach to sourcing coffee beans in their business: the C.A.F.E. Practices. The Coffee and Farmer Equity Practices, launched in 2004, outlines how coffee providers should ethically source coffee beans for their products. 

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These guidelines—made up of over 200 indicators—measure farms against economic, social and environmental criteria, to ensure that coffee makers have a sourcing process that is both ethical and sustainable in the long-term. As a result of this initiative, Starbucks has established itself as a leading coffee brand in both quality  and sustainability—a winning combination. 

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A non-profit dials in its procurement process

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The Nevada Partnership for Homeless Youth (NPHY) works hard to help youth in dire situations, helping them get into housing and build sustainable lives. To do so, they procured large amounts of critical expenditures—soap, bus passes, gift cards—using a manual process of checks and PDF POs. “Everything was on paper and over email,” Michelle Labonney, NPHY Director of Finance & Operations, told Ramp.

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In an effort to improve their business and procurement processes, they turned to Ramp to centralize their procurement information in one single place for ease of access, and shifted their purchasing models to cards rather than checks. 

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The result? NPHY saved six hours each month and increased their PO approval process by 90%. Boosting your procurement strategy means you boost your business’ time profits as well.

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Wrapping up 

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Both sourcing and procurement are key drivers for business success. While sourcing focuses more on a singular objective of finding suppliers for your business products, procurement is a catch-all, complex process that ecompasses the sourcing process, PO generation, vendor and contract management and more. 

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If both of these operations are intentionally developed using models and strategies that are time-tested, your business reaps rewards of greater cost savings, time back for revenue generation, better supplier negotiation processes and overall business health. 

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