These two phrases could mean a wider array of concepts, however in the business world, even though both are related to each other and play a key part in most organizations supply chain, there are some key differences to them. This article dives into this topic, helping you to understand which one you have a need for, or whether both can benefit your organization.
Lets first take a look at what each one is.
What Sourcing Is
This is the first stage in most companies, and comes before purchasing anything, such as materials from suppliers. When a company screens or vets, selects and manages suppliers who can provide assistance in the day to day running of a business it is known as sourcing. It may entail a few different aspects such as creating and executing strategies within the business, doing extensive research, defining the terms surrounding quantity and quality metrics and all this information is put together, to result in choosing the best supplier for the job.
As an on-going process, when new needs are identified, new suppliers must be sourced. It involves finding a balance between affordability and materials. It will affect the bottom line of any critical business functionality and performance, especially in supply chain.
If any business is serious about gaining a profit, then the idea is to try and spend less on raw resources, as cost savings is an important part. However, there is a thin line between buying quality items to make quality products and buying cheaper ones which render you with low-quality products.
In the greater scheme of things, It involves requesting of quotes and costs, acquiring vendor information, gathering information regarding lead times for each supplier and pricing information, for instance.
What Procurement Is
When you acquire services or goods for your business needs, to help run its operations, it is known as procuring or procurement. It works hand in hand with the locating capabilities and also includes gathering the right information that covers everything from the planning of an entity, right up to the purchasing of inventory.
An example would be, when suppliers place purchase orders of goods or materials and pay for them. Businesses typically have a procurement process to aid in this, as it is usually implemented on a regular basis. Also known as a procure-to-pay concept, and further explanation can be found on this website
A robust strategy needs to be in place before anything gets obtained, which is essential to avoid hindering any operations.
Direct VS Indirect
Anything that is related to the costs of selling goods such as finished products falls under the direct category. Included in this is raw materials, parts and components of products. Other companies such as those that deal with merchandising, purchase their items from wholesalers.
Those non-production related purchases, fall under the indirect category. It can include a wider range of costs such as purchases of marketing material, computer and IT services, supplies, advertising and more. These involve a different budget allocated to them.
Goods vs Services
As part of the expense process, procurement is on the list for most companies. However, the goods and services industries calculate them differently. Their components are dealt with as inventory.
In relation to supply chain activities, as described here: https://en.wikipedia.org/wiki/Supply_chain_management , the service-based organizations handle things slightly differently and for them their service is their primary revenue generator, and they would not necessarily need to purchase goods or supplies.
Their costs are primarily based on hourly labor costs of those who are providing the provisions, such as their employees.
There are a few differences and similarities between the two, as mentioned below.
Similarities and Focus: In terms of their similarities, they both offer a solution to various materials needed for a business’s operations, and sourcing makes procurement easier. The focus of sourcing is directly related to goods and services, and the latter focuses on the indirect. This does depend on individual aspects however, things such as the industry, size of the company and its structure all play a part.
Using Both Together: in both cases, you do not necessarily need a team to do one or the other, however as they work hand in hand, when it comes to any organizations purchasing needs it is always a better solution to utilize both together.
Their Functions: the difference between the two functions is that with the former, it happens before the latter takes place. So, sourcing services is done first and then procurement. In smaller businesses, the two may be combined. When treating them as two separate entities, departments can gauge their KPIs (key performance indicators), along with their challenges and goals, to promote a streamlined experience within the entire establishment.
There are typically two kinds of ways companies can manage their costs under these two aspects, namely direct versus indirect and goods versus services.