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Sourcing and Procurement
Sourcing and Procurement
The concept of procurement evolved from purchasing, or the function by which a company acquires the inputs for its business operations. This includes identifying the business needs for products and services and managing the process for fulfilling them. Sourcing is the part of procurement concerned with identifying and negotiating with providers, or sources, of those business inputs, which might be manufacturers, service providers, or other suppliers. As the business environment for every company becomes more complex and more globalised, sourcing and procurement emerge as a key concern for effective management.
Sourcing and procurement fall under the larger discipline of supply chain management, which is becoming increasingly specialized, and frequently practiced by consultants who apply their narrow expertise within a number of companies. There are many opportunities for cost savings and efficiency increases within a typical company's sourcing and procurement processes, and those opportunities are often identified more easily by external experts. However, this function can and usually is managed internally, by companies who understand the importance of optimizing their sourcing and procurement, and devote significant resources to strategy and execution.
The major considerations of a procurement organisation are the company's needs, present and future, resources for fulfilling them, options available, and risk. Sourcing in particular is concerned with maximizing the return on investment while minimizing risk, and even smaller firms might keep information on hundreds or more of suppliers on file, for the purposes of comparison and risk management. Country by country, the costs of capital and labor, speed of transportation, regulatory environments and political stability are all variables that have an impact on the final cost and degree of risk to the company. When doing business in even a small number of geographical areas, companies are thus subject to sourcing and procurement decisions of great complexity.
Procurement is concerned with the company's broader needs, and how to fulfill them, so analyzing a procurement process is a project involving inputs from all departments. More than just a matter of reviewing managers' satisfaction with existing suppliers, effective procurement planning aims to extract the needs of each part of the company, without regard to how they are currently being fulfilled. This requires information gathering at a variety of levels, followed by an analysis of the needs assessment and the options for meeting them.
Sourcing, then, focuses on the specific process of managing suppliers to meet those needs, and ensuring that good and services are acquired cost-effectively. Sourcing optimization is an ongoing process, wherein all of a company's suppliers are regularly evaluated, and potentially replaced with better options. A sourcing analysis begins with an audit for the current suppliers for cost and reliability, research into new potential suppliers, and finally, decisions on which relationships to continue or start. Cost is far from the only consideration when choosing suppliers; sourcing professionals also consider the ease with which suppliers can be incorporated into the existing supply chain, the stability of the supplier, and external risk factors such as potential for political or regulatory changes. Another factor for consideration in sourcing and procurement is the negotiating power of the company in each market relative to its suppliers.
Sourcing and procurement is a challenge for companies of every size. Whether a company handles all procurement-related matters internally, brings in consultants, or employs a combination of in-house and external expertise, it's safe to say that there is usually room for improvement. With global, technology-enabled markets changing on a daily and hourly basis, the winners are the companies that stay on top of their sourcing and procurement strategy.
