What's the Difference Between Sourcing, Purchasing, and Procurement?
While people use these terms interchangeably, they’re not the same thing. Sourcing, purchasing, and procurement all focus on how your supply chain works.
However, each term covers a specific aspect of how your organization secures the materials and services it needs to deliver on customer expectations.
Knowing the difference will help you manage your procurement process much more effectively.
Let’s start at the beginning.
What Is Sourcing?
Sourcing is the process of selecting and managing vendors who provide materials or services to an organization. Sourcing is a strategic process that involves establishing quality metrics, vetting vendors, and setting up partnerships with suppliers to source the supply chain.
It starts with understanding the customer needs and then figuring out which vendor relationships can get the customer what they need in the best way possible for the best price possible. This involves sending requests for information (RFIs), requests for proposals (RFQs), and evaluating the true cost of the partnership. Finally, they’ll send over contracts for signing.
Sourcing should also meet procurement and organizational guidelines. Social responsibility and ethical sourcing cannot be ignored. Customers care more now than ever about working with businesses that fulfill their role in making the world a better place.
When sourcing is done right, organizations gain a strategic partner who works hard to help support their organizations. And they’re held accountable to established standards throughout their relationship.
If a vendor’s performance weakens, you can reevaluate the vendor against other suppliers and find a better option.
Without proper sourcing, organizations may end up paying too much for poor-quality products. They may also have more instability in their supply chains. Plus, they miss out on vendor discounts or leveraging relationships for faster deliveries.
What Is Purchasing?
Purchasing is the part of the procurement process that focuses on buying products and services from vendors. Purchasing manages the transactional element of the procurement process, including the approval and payment process. It also involves contract negotiation.
And this is where things get murky...
Both purchasing and sourcing are subsets of the procurement process. But, they’re not necessarily subsets of procurement. Instead, it depends on the size of the organization and how they manage procurement.
In large businesses, you can have a sourcing department, a purchasing department, and a procurement department. All are part of the procurement process, but they’re not the same process.
In smaller organizations, you can combine sourcing and purchasing into one department. Or, you can combine them into the procurement department. This all depends on how the organization is set up and what are its sourcing needs.
Still, sourcing and purchasing are two different processes.
What Is Procurement?
Procurement is the process of acquiring the goods and services an organization needs for its operations.
This process involves multiple steps to ensure a business can effectively acquire the materials needed to operate in a way that is both affordable and in alignment with the company’s short- and long-term goals.
Procurement has multiple steps, including sourcing and purchasing. But, it goes beyond these two processes. Here’s a basic overview of what procurement covers:
- Establish Procurement Management Framework
- Identify needs in the organization
- Submit and Approve Purchase Requests (PO)
- Research, Evaluate, and Approve Vendors
- Negotiate Price and Terms
- Create Contracts
- Process Purchase Order
- Manage Delivery
- Conduct QA and Three-Way Matching
- Submit Invoice for Payment
- Manage Contracts and Ensure Consistent Results
- Manage Vendor Relationships
- Store and Track Supply Chain Data
- Ensure Purchases Align with Organizational KPIs
- Analyze Procurement Data Reduce Cost and Risk
Effective procurement also involves looking for ways to reduce risks to your supply chain. And it also includes actively lowering your procurement costs and training new employees on technology and processes.
At the lowest level, procurement is all about ensuring your company doesn’t run out of the goods and services it needs to make the products your customers want.
But it doesn’t end there.
As organizations become more advanced and get better data insights, you can also leverage procurement to help businesses get the edge.
Strategic procurement uses real-time data insights and automation to transform your procurement process into a strategic, agile asset that gives you an edge over your supply chain and other competitors.
Sourcing vs. Purchasing vs. Procurement
In short, procurement is the overall process, while sourcing and purchasing are subsets of that process. While it’s technically incorrect to use the terms interchangeably, many companies do. Still, that’s not going to derail your organization.
Instead, inefficiencies in your procurement process and a lack of understanding of just how vital strategic procurement is to growing your business will.
That is why it is crucial to set up efficient procurement, purchasing, and sourcing processes in your organization. These should be clearly defined based on your needs and capacity. And you should always be looking for ways to improve these processes to keep costs low and results high.
In the end, the terminology is not as important as the systems in place behind these processes to ensure that data moves from one process to the next seamlessly.
E-Procurement vs. E-Sourcing vs. E-Purchasing
If you’re looking for a way to streamline procurement in your business and get the data insights you need to stay competitive, then you need to look at software solutions. These can vary based on your budget and needs. In other words, there’s no one-size-fits-all approach here.
For example, if you’re looking to optimize purchasing in your organization, there are both custom and out-of-the-box e-purchasing solutions available. Custom purchasing software can automate invoice processing, saving you time and money.
On the other hand, if you need help with sourcing, you can choose to build a custom e-sourcing solution in low code that makes it easier to manage vendor relationships and get better deals.
And if you’re a larger organization, there are full e-procurement options you can deploy that automate the entire procurement process.
These solutions work to save you time and money while giving you more transparency into your supply chain. But again, the right one depends on your specific organizational needs and your budget.
See how we've helped our clients improve their businesses and get insane ROIs by checking out our case studies below.