Sourcing vs Procurement
The terms Sourcing and Procurement are often used interchangeably, but they are two distinct (though inextricably linked) processes. Sourcing is all about supplier relationships and mitigating risk; procurement is all about purchasing and acquisition.
In the most basic terms, sourcing is the process of identifying, vetting, negotiating, and securing contracts with suppliers. The sourcing process precedes procurement and makes it possible. Nothing can be procured without first sourcing suppliers.
A sourcing manager must first identify their customers’ needs, assess market offerings, develop material specifications, and define winning supplier qualities. From there, an RFI or RFQ is submitted to get a clear picture of what the partnership would look like. Finally, negotiations are conducted, and contracts put in place.
In some companies, these two processes are run from the same department. A procurement team might take on the job of sourcing or vice versa. If your company is large enough, however, relegating these processes to their distinct departments can streamline operations and reduce errors.
Like many industries, sourcing and procurement have undergone enormous changes with the rise of digital solutions. 2018 saw companies starting to adopt cognitive procurement technologies such as Big Data Analytics, Machine Learning, Natural Language Processing, Artificial Intelligence, and Robotic Process Automation. 2020 and beyond will see more and more companies implementing these types of cognitive procurement technologies as they become more reliable, more accessible, and more advanced.
“Starting” is the key word in that paragraph. While a Hackett report showed that 85 percent of companies recognize that “digital transformation will fundamentally change the way they deliver services over the next three to five years,” only 32 percent of executives have implemented a digital strategy.
“From automating redundant procurement tasks to empowering C-Suite in decision making, from better market visibility through product innovation to increased profitability, the benefits of digital technologies are enormous.” – Zycus – 7 Key Procurement Trends
In order to succeed moving into the next decade, organizations will need to make the switch from manual to digital processes. For that, they will need the right digital strategy in place. They must also invest in the proper infrastructure, processes, and resources so that their objectives align with their modes of operation.
Looking to the Future
The future of advanced sourcing and optimization is enmeshed with cognitive procurement tech, but must also focus on alignment, risk avoidance, sustainability, and globalization.
Advanced Software Solutions
Cognitive procurement software uses algorithms that allow us to complete sourcing exercises that were once literally impossible or required massive mainframes to work for hours or days, in a matter of minutes. This opens the doors to begin solving incredibly complex sourcing problems. These algorithms will completely change the way sourcing is done. For example, complex algorithms will “enable the platform to define further options in terms of conditions or constraints that it believes might drive a successful outcome.” The platform might offer various suggested alternatives to explore, based on experience, or present a whole range of options where the outcomes have already been calculated.
While sourcing is the lifeblood of procurement processes, it is often seen as a rather opaque process by the rest of the business. Properly managed, however, the sourcing process can be a key driver of competitive advantage. As new technologies are implemented, budget holders will be able to explore the pros and cons of potential suppliers and make sure that the final sourcing decisions are well aligned with the organization’s ultimate goals.
“Making trade-offs between price and other benefits more visible; allowing suppliers to put forward their own options in terms of alternative proposals; allowing a greater number of suppliers to be considered as part of the process; all these outcomes, driven by technology, will drive better business alignment.” – Spend Matters – The Future of Sourcing – Business Alignment and Cognitive Procurement
SelectHub predicts that sourcing and procurement will start moving away from a narrow focus on compliance and moving toward taking on a more comprehensive role. They believe, “This broader approach will need to accommodate total risk exposure, risk transfer pricing, and investment in demonstrable risk mitigation.” To be successful in these endeavors, organizations will need to adopt new metrics to streamline sourcing and supply decisions as well as minimizing waste and extracting maximum value from every purchase.
Millennials are the target market right now, and their economic dominance in terms of marketing is only going to grow. Compared to previous generations, millennials are much more aware of the supply chain in terms of environmental impact and economic disparity. They are also significantly more likely to prioritize sustainability and corporate social responsibility for low prices. To satisfy this critical market, businesses will need to develop supply chains that align with their values.
China and South America are developing at a staggering rate. Experts predict that growth in these regions, as well as Russia and India, will be a major factor in the years to come. These once side-lined economies are set to take center stage, shaping sourcing and procurement into the next decade. These markets will likely transform supply and demand trends as we know them.
Solutions for Success
Every business is different, and every software platform/business management solution offers varying degrees of service, features, and customization. The important thing when selecting a software platform or comprehensive solution is to take into consideration your organization’s size, culture, budget, and unique needs.
Identify the needs of your organization and seek out a platform and/or program that meets your unique needs. For smaller businesses, it’s important to find one that can grow with you as your business grows. If you’re already an enterprise-level business, it’s critical to find a program that can scale and is built for your company’s size and complexity.
The future of sourcing is bright and exciting. Advanced software solutions are poised to make things possible that we couldn’t have imagined even ten years ago. C-level executives must make use of these ground-breaking new technologies to squeeze maximum benefit from every dollar.
The bottom line is that leveraging efficient and well-executed sourcing and procurement systems will streamline your processes, improve accuracy, reduce errors, and optimize your resources. With the right system, policies, and procedures, your sourcing team can propel your business to new heights.