What’s the difference between strategic sourcing and procurement?
From the August 2014 print edition
When companies discuss the acquisition of goods and services, sourcing and procurement are two terms that are often used interchangeably. While they’re related, they are in fact two different concepts.
Procurement is more transactional—think purchase order, fulfillment and payment. It essentially involves steps that are carried out with the focus on one item at a time. Other than knowledge of, perhaps, the last price paid or how many units were purchased previously, there is a limited historical view. While there’s much effort made to streamline the processes involved and identify any possible efficiencies, procurement still falls squarely beneath the operations umbrella. If you were to think of procurement using football terms, its activities can be likened to the set plays that are carried out during the course of a game.
Sourcing, on the other hand, is more strategic. Again compared with football, you can think of it as the overall game plan. There’s a lot of behind-the-scenes work that has to be done, both on and off the field, to ensure that all the necessary components are in place (people, training, equipment and so on) so those set plays can first be created and then run successfully.
Considering that, for the most part, a company’s purchasing activities account for the largest capital expenditure, devising a strategy to achieve the ultimate return on investment makes sense. This is where strategic sourcing comes in. It involves a more holistic viewpoint where other considerations besides just price point come into play. It requires the consideration of many factors that when combined can provide sustained cost savings, stability and optimization of how goods and services are obtained. Its evolution is fluid and constantly improving.
Sourcing strategies don’t develop in isolation but rather are the result of collaboration and coordination between various areas within a business such as sales, marketing, operations and technology, finance and HR. The discussions revolve around an awareness of and alignment to corporate objectives.
Data analysis—past, current and projected—is a key component of strategic sourcing. It’s not enough to base decisions on what the point of purchase cost is, but rather the total cost. For example, perhaps it makes more sense to buy in greater volume, which in turn can lead to better transportation optimization. Drilling down further, how will more inventory affect-warehousing costs? By looking at pricing trends companies may decide to change when they do their buying to increase their purchasing power. To further optimize the process, it may make sense to develop partnerships with other companies.
Vendor selection and management is also an integral part of sourcing. Again, it’s not just about the lowest price point but which vendor provides the greatest overall value and consistent performance.
Clearly, much can be gained from having a sourcing strategy. It not only provides a positive trickledown effect for the company but the potential for customers to benefit as well. For example, cost containment alone allows companies to keep product prices from rising, which is good for consumers, which may lead to increased demand and additional revenue.
While larger companies are more likely to have adopted strategic sourcing practices, there’s no reason why smaller companies should think that the size of their operation limits what they can do. Step beyond procurement and consider a sourcing strategy. You don’t need to make a huge change—even small, incremental changes over time can provide value. Start by broadening the focus beyond individual transactions and start seeing the forest for the trees. An easy place to start might be by examining vendor agreements. Based on day-to-day, week-to-week transactions that take place, there’s already a lot vendor interaction. Why not take the opportunity to leverage the relationship to the next level and maximize the potential?
Procurement Professional Tip: Go beyond the point of purchase cost and think about them in terms of end-to-ends. From identification of the need for the product through to receipt, are there any additional, associated costs that haven’t been considered?
Management Insight: Even if your company has a strategic sourcing strategy, when was the last time it was actively revisited and re-evaluated? While the plan you have in place may be working well, don’t become too complacent. As economic, political and environmental forces tend to change, continue to evaluate and measure your sourcing strategy to ensure you’re not missing improvements that could be made.
Take some time to look at the way your company approaches strategic sourcing and make it a goal to achieve the best value game plan.
Linda Craig CSCMP, CCLP, CHRP, MBA, is the managing partner of RSVP (Retention Strategy Value Partners), a strategic supply change innovation organization. Reach her at Linda@retention.ca.