Sourcing and procurement are two closely related, but altogether different, processes responsible for acquiring goods and services for an organization. Both are crucial in building and maintaining an effective supply chain to enable a business to consistently deliver goods and services to its customers.
Considering the significant disruption faced by supply chains in the last couple of years, it is more important than ever to have a solid sourcing and procurement strategy. This will keep costs in check and ensure there are no gaps in supply.
“Sourcing seeks to find, evaluate and engage suppliers to achieve cost savings and best value for goods and services”, according to the Chartered Institute of Procurement and Supply. Sourcing is the stage prior to procurement.
The sourcing process consists of the following steps:
- Define business’ purchasing needs
The first step in the sourcing process involves determining what the business needs to operate. This includes evaluating how much the business is currently spending, what it is spending it on against budgets, and identifying any opportunities to make savings.
- Assess the market
This step involves researching cost drivers including raw material, labor, and transportation costs. It is also the point to assess current market trends, the competitive landscape, who the key suppliers are, and the risks and opportunities present in the marketplace.
- Identify and review potential suppliers
The next step is to find suitable suppliers capable of meeting any specifications set when the business’ purchasing needs were defined. Factors considered at this stage include price, quality, delivery time, capacity, payment terms and CSR credentials. It is worth identifying more than one viable supplier at this stage so there is a back-up option should the chosen supplier fail to supply for any reason.
- Supplier selection
Selecting a supplier includes evaluating any RFIs (Request for Information), RFPs (Request for Proposal) or RFQs (Request for Quote) submitted, shortlisting the most suitable suppliers and negotiating with shortlisted suppliers for lower prices, better payment terms and other benefits. Once the best supplier has been selected, contracts are drawn up, reviewed and signed by representatives from both organizations.
- Supplier onboarding and relationship management
Once a supplier has been selected, they need to be onboarded. Once a relationship has been established, it is important to ensure that the selected supplier is continuing to meet the needs of the organization and analyze their performance based on a set of KPIs. Tracking saving will identify when and where the supplier is adding value.
The procurement process begins when supplier contracts have been signed. “Procurement and supply management involves buying the goods and services that enable an organisation to operate in a profitable and ethical manner,” according to the Chartered Institute of Procurement and Supply.
The procurement process consists of the following steps:
- Review purchase requisition
A purchase requisition is an internal document from an employee asking to make a purchase. The role of the procurement department is to check that this document contains sufficient information and a valid business reason for approval.
- Send purchase order
Once the purchase requisition has been approved, a purchase order is created and sent to the supplier outlining what goods/services are needed and in what quantities and prices, previously agreed in the sourcing process.
- Expediting
This step involves communicating with the supplier about production schedules, quality, and compliance to ensure they are on track to meet the agreed delivery deadline.
- Receiving goods
Once an order is received, it is checked to ensure that it meets the quantity and quality standards specified in the purchase order.
- Process invoice
Upon receiving an invoice from a supplier, three-way matching is carried out to make sure that purchase orders, order receipts, and invoices display the same quantities and values. This confirms that everything ordered was received and prevents any overspending.
- Payments
The final step in the procurement process is ensuring the accounts payable team pays suppliers according to their payment terms.
Although related, sourcing and procurement do two different jobs for the organization. They both are equally important in keeping operations running and customer orders fulfilled.
Faster approval - By automating workflows, supplier information, purchase requisitions and purchase orders can automatically be directed to the right people and be reviewed and approved faster.
Improved budget visibility - Tracking spending in a central repository allows organizations to ensure up-to-date and accurate budget calculations and surfaces any maverick spending.
Data-based decisions - Having a single source of information allows multiple stakeholders access to data that can be used to make better-informed decisions and identify opportunities to increase efficiency and reduce costs.
Guaranteed compliance - Automating sourcing and procurement enables the organization to guarantee compliance at every step of the process as checks can be built into the process and automatically updated as regulatory requirements change. It also allows the business to easily demonstrate proof of compliance if subjected to an audit.
Reduced risk - An accurate overview of spending allows organizations to identify any fraudulent activity or theft. It also provides an insight into the number of suppliers and so that additional suppliers can be sourced if there are too few to cover any potential disruptions.
Sourcing and procurement software helps teams to manage operations. There are numerous categories of software for sourcing and procurement and many vendors offer solutions to different pieces of the puzzle. ERPs such as SAP are often part of the solution, but they are not an effective tool for managing very customized operations or that need to change often. Heavily customizing SAP over the years has created huge headaches for organizations particularly now that they must move to using cloud ERP solutions such as SAP 4HANA.
The result of these limitations is that sourcing and procurement teams often face digital gaps in their procurement operations. Procurement processes are often complex, long-running, and iterative, requiring back-and-forth interactions and collaboration across internal and external groups with many decision points along the way. This complexity cannot be removed, so it must be orchestrated.
An increasingly popular solution for orchestrating end-to-end procurement processes and solving gaps in operations is by implementing low-code platforms such as Bizagi. Such tools enable organizations to create custom applications that integrate with all the necessary technologies to complete the sourcing and procurement puzzle.
Discover how Bizagi's low-code platform can accelerate your sourcing and procurement processes.
