Procurement, Purchasing and Sourcing are all distinct activities though the terms are often interchanged in usage.
Every business or organisation that provides goods or services, needs to buy or procure various things – machinery, spare parts and consumables – or even services. Procurement is a word used here for the entire process of obtaining these goods or services, and an important part of the business activity. Not all companies agree on this broad description of procurement, and some consider it as a simple matter of raising a purchase order to buy something. But the consensus today is, procurement is a process incorporating the best purchasing practices and covers all the stages like sourcing suppliers, shortlisting them after necessary scrutiny in terms of the credibility of the potential supplier, quality aspects, pricing, terms of delivery, etc., and then wrapping up the transaction by proper documentation of payment and delivery schedules, thus completing the buying process.
Purchasing Processes and Procedures
Having established that purchasing is a part of the overall procurement process, one must have a procedure in place in terms of a purchasing process flow chart leading up to the final purchasing decision. While the process may vary from company to company in minor details, there are three broad stages in the purchasing process – a Sourcing stage, a Purchasing stage and a Payment stage. Each of these three stages have three sub processes. The Sourcing stage comprises: i. Identifying the need of what is required; ii. Creating a purchase requisition; and iii. Selecting a vendor after assessment. The Purchasing stage comprises: i. Request for Quotation; ii. Negotiating the terms, raising the Purchase Order (PO); and iii. Shipping and Receiving the Goods. Finally the Payment stage involves: i. Three-way matching – PO, received goods and invoice; ii. Invoice approval and payment; and iii. Updating or records for audit and future reference. Following such a flow chart in the purchasing process makes for the right sourcing strategy, which may be defined as identifying the buyer’s needs and aligning them with that of the suppliers’ capability to fulfil the requirements in a fair and transparent manner with proper documentation.
Sourcing Strategies for Different Situations
There is no one-size-fits-all in some situations in real life and sourcing is no different. A successful business is the one that finds the sweet spot of a vendor base with the right product sourcing strategies. Companies do not have the luxury of relying on the same set of vendors at a time when the market is highly cost competitive and pressure for cost reduction is immense. In order to sell at a price and make profits, it is necessary to work with the vendors to obtain the best price, and where it is not possible, to look for alternatives. This is not possible in all the cases. There are suppliers who are strategic partners and invested in providing value added services like design and development and these may not be easy to replace in a hurry. In such cases direct negotiations for a better price may bring better outcomes than looking for another vendor. It is also important to work with formal, binding contracts with suppliers even if the process is time consuming as working without such a contract often leads to trouble. Vendor development is a dynamic process and the quest for alternative suppliers must continue to avoid disruption in case a point of no return is reached with a particular vendor. A good business thrives on continuous analysis of the procurement process, constantly evolving best sourcing practices.
Outsourcing or handing over certain tasks to professional third-party service providers is a growing trend in business in recent years as companies concentrate on their core competencies. While Procurement and Sourcing is an important activity, it calls for knowledge and expertise and for many companies, it becomes prohibitively expensive to maintain all these skills in-house. Professional service providers have experts across various engineering disciplines as well as those well versed in supplier selection, contract negotiation, specification management and other skills to provide highly cost effective services. For a supplier management company, Procurement and Sourcing is the core activity and as they service many clients, they have a vast pool of resources to leverage and provide the best of services at a comparative cost. They also have a huge vendor database to tap into, providing both, non-core as well as strategic sourcing services.
Procurement, Purchasing and Sourcing are all distinct activities though the terms are often interchanged in usage. It is important to understand the difference in order establish the proper sequence of operation in the procurement process, of which comprises of purchasing and sourcing. Today many companies are outsourcing these activities, partly or totally to professional service providers, in what is increasingly considered a win-win situation.
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