ARTICLE TABLE OF CONTENTS
This is about SCM (Supply Chain Management) vs. procurement vs. purchasing vs. sourcing.
You’ll learn:
- What SCM is
- What Procurement is
- What Purchasing is
- What Sourcing is
- The differences between SCM, Procurement, Purchasing, and Sourcing
- Lots more
It’s time for the first step!
What’s the Difference Between SCM, Procurement, Purchasing, and Sourcing?
With so many terms used in the SCM, it’s easy to feel overwhelmed.
Supply chain management, procurement, purchasing, sourcing.
In some cases, the terms even overlap.
This article is going to break down for you the processes and details of supply chain management, procurement, purchasing, and sourcing into easily-digestible bits to make each concept easier to understand and differentiate.
Once you have a better understanding, you’ll be better able to make reliable decisions within your field.
The Definition of Supply Chain
To better understand what SCM or Supply Chain Management is, you need to first understand what supply chain is.
Before a product lands in the hands of a customer, it must go through the supply chain.
The supply chain includes the manufacturer, suppliers, those who provide logistics, and everyone who helps in the process along the way.
What’s interesting is that the supply chain includes those who gather raw materials, and even transportation companies and wholesale warehouses.
The supply chain then includes the functions and tasks that help in moving the product once you have the product. Some of those tasks are marketing, quality control, sourcing, and procurement.
Think of the supply chain as a fully functioning computer, while sourcing and procurement are critical functions of the machine.
Now that you know what the supply chain is, you will be able to figure out what supply chain management is more smoothly.
Let’s check it out:
What Is Supply Chain Management?
Supply chain management is the dynamic management of the activities that make up the supply chain, to increase value to the customer, and to achieve sustainable competitive advantage.
The process of supply chain management depends mainly on the supply chain firms to come together to maximize and run supply chains in the most efficient, effective, and practical ways.
Activities and tasks of the supply chain include everything from procurement and sourcing to development, production, and logistics.
You’ll also need all the information systems that these activities require to coordinate the tasks.
Among Supply Chain Management, you will find two key ideas:
The first is that virtually all products that reach the end destination in a customer’s hands represent the cumulative attempt of the many organizations that go into making and delivering that product.
The supply chain refers to this collective of organizations.
Next, each organization who’s involved in the process tends to focus solely on what’s going on within their organization. It was only with considerable time and effort that companies began to understand and manage the entire chain of activities from start to finish, with the goal of customer value in mind.
There were often inefficient processes and haphazard supply chains before they became primarily managed.
Now, organizations use physical and information flows to link themselves together to better the entire supply chain.
What’s a physical flow?
When considering the physical flow, think of all the goods and materials. These things must be utilized and transformed, moved, and stored.
They’re the tangible and visible parts of the supply chain, and they’re equally as important as the information flows.
What’s an information flow?
The information flow involves the information and data needed so that all the organizations can work together.
This information allows organizations to share their plans with other parts of the supply chain, and show where the materials and goods should be, each day of the process.
Are There Best Practices in Supply Chain Management?
As the saying goes, companies are no longer in competition; their supply chains are. That means that in this day and age, supply chain managers are required to implement new and strategic ways to enhance their company’s value.
Companies are investing hardcore into their supply chains, knowing that doing so will help the company achieve a better global standing, higher efficiency, and reach new levels of innovation.
Those working in supply chain management may focus on the following tasks to ensure the smooth and efficient running supply chain:
- Automation and Technology
- Collaboration
- Distribution and Logistics
- Integration Systems
- Risk Management
- Procurement
- Regulation and Compliance
- Sustainability
What Happens If There’s a Blip in Supply Chain Management?
A lot can go wrong along the supply chain; any organization will tell you that faulty management can cost an organization more than they’re ready to lose.
In fact, in a survey among supply chain executives from the U.S. and Germany, 68% of participants rated supply chain management as a top priority.
You can sum up the importance of supply chain management with that one significant statistic.
Shown below are the top obstacles to achieving SCM goals and achievements in organizations worldwide. In 2016, the top-ranked challenge was regarding forecast accuracy and demand variability:
Consumers have high expectations, so much so that 89% of consumers will reconsider shopping with a retailer if their item is delivered just one day late.
Talk about loyalty that doesn’t leave a lot of room for error in the process!
Now, you might be wondering what procurement is and why it’s essential to supply chain management.
Below, you’ll learn the importance of procurement and the other parts of supply chain management:
The Definition of Procurement
In a nutshell, procurement is one task involved in supply chain management. Procurement is the acquisition process for goods and services, ensuring that the organization can complete its requirements.
Typically, procurement includes the following tasks to carry out the function:
- Purchase Planning – identifying the needs for goods and suppliers
- Identifying standards of quality
- Determining the best suppliers
- Negotiating prices – requesting proposals and quotations (RFP/RFQ)
- Negotiating terms
- Financing purchases
- Controlling inventory
- Shipping management
- Analyzing results and margins
As if this wasn’t enough information to bite off and chew, here’s a little more: Procurement has a few essential stages in the process.
These stages include the preparation and demand processing, the end receipt, and approval of payment.
As part of the operation of the supply chain, procurement ends when the organization has acquired all necessary materials and services.
So, the primary function of procurement is to ensure that location, quantity, quality, and time are taken into consideration; the buyer is receiving the best price for the goods and services as requested.
How is Supply Chain Different from Procurement?
From here, you can understand that the supply chain includes all of the working parts, processes, and companies involved from the time a product is leaving its manufacturer to when it arrives in the hands of the, hopefully, happy customer.
Each company, organization, or management member involved in the management process collaborates to ensure the highest efficiency down the supply chain.
The management process oversees everything including sourcing the materials, when products are distributed, the quantity needed from the manufacturer, testing for quality of the product, where the product will be stored, and many more tasks.
What are Effective Practices in Supply Chain Management?
You may find it interesting to know that much of the supply chain management process is outsourced.
Rather than having a team member taking responsibility for such detailed information, organizations can outsource the work to professionals whose job it is to focus on the details and sift through them with a fine-toothed comb.
As the organization needs to manage the supply chain as a third party, you would want to ensure that all errors are planned for, minimized, or eliminated along the way.
At the same time, orders are filled with speed and efficiency. You would also be responsible for tracking and organizing data that others will have access to, to ensure that the process is running smoothly along its course.
What’s Purchasing?
In what is the most straightforward aspect of the process, purchasing is the simple act of buying goods and services that are essential to the operation of the business.
While it might be easy to understand, it accounts for as much as 70 percent of every revenue dollar.
Companies continue to search for ways to cut costs, and while purchasing was at one time a cut and dry process, businesses now take a more strategic approach to their purchasing process.
Traditional purchasing involved receiving a requisition from an employee or member of staff, putting together a purchase order, advising shipping, invoicing, and payment.
Through this process, the paperwork has touched many hands, and many days have been wasted, which slows down production.
Today, many companies use the process of procurement to anticipate and predict company needs before they happen.
This has led to strategic sourcing, which helps with the bottom line while also keeping the supply chain on pace and on schedule.
Where does Procurement Come In?
An efficiently running supply chain will ensure that the customer receives the goods or the product within an optimal amount of time.
When it comes to considering the role of procurement, it’s essential to realize that a company must have a solid plan for implementing the best procurement practices.
It’s scary to think about, but an organization could forfeit over half of its revenue with procurement if they aren’t careful.
That’s because the organization is purchasing goods and services, which must effectively keep the business going.
Purchasing and procurement need to work together in harmony so the company can not only monitor the financial aspect of their purchasing process but also maintain the speed and turnaround time necessary to complete jobs on schedule.
That leads us to our next point.
What’s the Point of the Procurement Process?
Procurement is a function that’s essential to all businesses.
When done correctly, it can help the business expand, optimize performance, and help ensure the company receives the goods and services from the supplier effectively.
Essentially, procurement is the process of spending the company’s revenue, wisely, to acquire goods and services.
One of the most critical tasks in the procurement process is to ensure that the company is implementing the most cost-effective strategies.
In fact, in a study published by Pulse of Procurement 2018, over 400 global leaders in procurement weighed in with their ideas.
The study found that procurement professionals agreed among 54% that cost savings were of the highest importance.
In addition to this finding, 55% of small organizations, 66% of mid-sized organizations, and 65 percent of larger organizations were required to adhere to enterprise-level spending.
To ensure a higher profit, implementing effective procurement systems was the best way to achieve the goal.
Shown above is the global revenue of the procurement software applications market from 2015 to 2023. It is projected that by the year 2023, the procurement software applications market will generate 6.04 billion U.S. dollars in total revenue:
What Else Does the Procurement Process Achieve?
Effective procurement not only boosts the cost-savings of an organization, but also has many more benefits, such as:
- Enhancing risk management
- Ensuring compliance
- Guaranteeing contract utilization
- Improving sourcing cycle time
- Improving the performance of the supplier
How Can I Ensure A Successful and Efficient Procurement Process?
For a business to stay on top, it needs to acquire its products and services effectively, preferably from favored suppliers.
Your business may differ from others but may factor in the quality of products, profit margins, and delivery times as primary considerations.
The procurement department’s role largely depends on attaining the best suppliers and negotiating terms to achieve the best possible purchase price.
As your business identifies the specific product or service needed, it then initiates the request for proposals (RFP) and can negotiate directly, or through head-to-head auction.
What’s the Difference Between Procurement and Purchasing?
When a company is acquiring goods and services, two processes are at play: procurement and processing.
Each is a different process related to the acquisition of the necessary products and services.
In procurement, the business must identify within the market where to get goods and services, and negotiate with those suppliers to obtain the best purchase price possible.
The actual purchasing is the step that includes purchase orders, invoicing for the product/service, tracking the shipping process, receiving the goods, and receipt and payment.
Here’s a comparison of procurement versus purchasing:
Procurement: Using Strategy
- Identify the need for goods or services
- Source, the most relevant supplier
- Negotiate a contract and terms
- Build rapport and maintain a relationship with suppliers
- Analyze profits and margins
Purchasing: Monitoring Transactions
- Receive requisitions for purchases
- Obtain and evaluate supplier quotes
- Raise the PO, or Purchase Order
- Receive the goods or services
- Complete payment to the supplier
Are there Effective Ways to Manage Procurement?
We’ve heard a lot about procurement and what’s involved in the process. Honestly, there’s much more to learn.
Procurement management is how an organization takes the necessary steps to ensure that they are identifying, sourcing, and managing the suppliers in a way that aligns with their vision and business goals.
During this process, the business must be innovative and strategic, building relationships, rapport, and loyalty amongst suppliers so that optimal service levels are reached, and the company can benefit the most from the profit margins achieved.
A well-structured procurement team and management can help the business achieve goals and ensure that service levels from suppliers are efficient and that the supplier meets expectations.
Earlier, you learned the steps in the procurement process, but here’s a quick run-down of what you can expect from each stage.
Purchase Planning
When it comes time to plan your purchasing, you’ll need to identify the needs for goods, services, and suppliers.
If you need raw materials, you may need to identify completely different suppliers than if you need a function instead.
If your company doesn’t already have relationships with the type of supplier you need, you may have some additional work to do.
Identifying Standards of Quality
Quality is vast when it comes to the supply chain and procurement.
You may be considering the research and guidance given to you by other departments such as manufacturing or product development.
Ensure the quality of the products before purchase. Identifying requirements for size, weight, and dimension, as well as providing physical descriptions, or other product specifications are a must.
Determining the Best Suppliers
Many suppliers have built themselves a reputation, as your organization has likely done for itself.
Going with the cheapest or quickest supplier may not be the best call, and could leave you disappointed. Perform due diligence before deciding.
Negotiating Prices
When it comes to purchasing the necessary goods and services, you’ll send out a request for quotations that don’t vary widely. They’re straightforward and ask for relevant information.
You may send out a request for a proposal if the necessary goods or services require it, mainly for larger projects, products, or services.
The RFP requires that suppliers come back with much more detailed information rather than the RFQ.
Negotiating Terms
Terms can be negotiated between the buyer and the supplier from the first onset of communication right up until the parties sign the final contract.
A professional in this department must ensure their negotiation skills are up to par to provide the best purchasing price for the company, creating more substantial profit margins and the minimal risk involved.
Remember that it’s essential here to walk away from the cheapest or quickest in favor of negotiating with fewer suppliers to attain lower prices with the best conditions and quality.
Financing Purchases
You must set spending limits for the purchasing department to know how and where to spend the allocated dollars.
They will ensure both cost avoidance and cost savings measures to remain aligned with the goal or guidance will be given.
Controlling Inventory
Controlling inventory as part of the procurement process means that all stock must be managed and maintained until the items will be.
The inventory needs to be accounted for, stored, secured, and protected through various inventory control processes with utmost care.
Shipping Management
Earlier, you learned that all the organizations involved in the supply chain work collaboratively to ensure the best possible outcome.
Here, your company will be working collaboratively with others to ensure you get the goods and services you paid for promptly, therefore ensuring that your final product leaves and arrives to customers on time.
Analyzing Results and Margins
You may use reports from the previously mentioned finance department to analyze your business’s profit margins.
You might find out what you’re doing well, where your weak points or what’s costing you money, and what’s making you the most money.
It’s essential to take the necessary time in this step to ensure the success of the process and your business.
What’s Sourcing?
At this point, you should understand what Supply Chain Management is; you know how procurement and purchasing relate to each other and how they need each other to function correctly.
Now let’s talk about sourcing.
Many of these terms are used interchangeably, but they’re all part of an overall process. While procurement is the full process of developing a purchasing strategy, managing the finances, and purchasing items.
There is a step that needs to take place before any of this can happen, and that’s sourcing. Sourcing is the process of locating and vetting suppliers for the products and services the business needs to operate.
Companies are always looking for ways to cut costs, but if you cut the cost too much, you’ll end up with a supplier that might not carry the high-quality product you’re used to receiving.
That might be fine for the procurement department, but once the product ends up at the customer, they might notice the change in quality.
Effective sourcing is about finding that happy middle ground of quality and affordability.
Another factor not to overlook about sourcing is the reliability of the supplier.
When the company calls last minute and says they need an overnight shipment of raw material, who will they call?
They might be more willing to pay the supplier charging a few extra bucks if they’re reliable, and they always pull you out of the hole when you need it.
What’s the Difference Between Procurement and Sourcing?
Both of these processes are essential to every supply chain, and one could not operate without the other.
Sourcing helps to make the overall process easier by locating and vetting suppliers, so the procurement department doesn’t have to do it themselves.
While this doesn’t always have to happen, in large supply chains, it helps speed up the process. It also ensures that the company always has access to the raw materials and services they need to operate.
A simple way to think about this is that sourcing is a part of procurement, just like call resolution could be a part of customer service.
There doesn’t always need to be a dedicated team resolving complaints, but there could be, and it would help improve the overall workflow of the business.
SCM vs. Procurement vs. Purchasing vs. Sourcing
Now let’s go over everything we’ve covered in this article.
You learned many terms with slight variations and differences to each.
Sometimes the best way to understand the application of a business term is to acknowledge how it differs from others.
At the core, all of these terms are business processes. They’re all essential to the Supply Chain, and without each of them, the business would not operate.
SCM
At the top of the pyramid, you have supply chain management.
SCM is not necessarily “responsible” for the other three, but they have a strong vested interest in whether or not they operate properly.
If procurement, purchasing, and sourcing aren’t operating efficiently, it will slow down the entire supply chain, which will result in slower production and ultimately angry customers.
The supply chain cannot make the products or operate in the manner it’s used to without proper sourcing and procurement.
Procurement
The next step down in the pyramid is procurement.
As you know, it involves the strategic process of maintaining proper purchasing, sourcing, spending, and monitoring habits. It differs from purchasing because it doesn’t involve the act of actually drawing up purchase orders, organizing shipping, and paying invoices.
That said, you couldn’t have procurement if you didn’t have purchasing. It wouldn’t make any sense.
Just like you wouldn’t have procurement or purchasing if you didn’t have sourcing. You wouldn’t have any customers to purchase from in the first place.
Purchasing
Purchasing differs from the other three because it’s the physical act of purchasing something from a supplier. It differs from sourcing because purchasers don’t usually have much of a say regarding “who” they purchase from, they’re given a list of approved suppliers.
Here is when all the planning, strategizing, and negotiating comes to life.
Without purchasing, the company wouldn’t have any products or services to operate.
Sourcing
At the very beginning of the process is sourcing.
Sourcing specialists will locate and vet suppliers so that purchasers and procurement departments have a readily available list of companies to buy something from if they need it.
They don’t negotiate with suppliers, purchase anything, or manage any part of the supply chain process.
These people simply find the best suppliers with the highest quality product and the lowest price and pass them off to the procurement department to seal the deal.
Shown above are the results of a study conducted by IDG Research Services:
More than 50 percent of the surveyed IT leaders stated that they rely on strategic vendors as an evaluation method in making technology-related purchases for their organization.
Understand SCM VS. ERP & SCM vs. CRM & SCM vs. SRM & SCM VS. PLM
The business community has a serious love affair with acronyms.
Sometimes, it’s virtually impossible to wade through the industry speak to decide if your business needs to focus on ERP vs. CRM or CRM vs. SCM, SRM vs. PLM, or any other configuration of systems for that matter.
Whether you’re an IT professional, barebones startup, a small or midsize business, or a global corporation, it’s incredibly crucial that you can parse through all this industry speak in order to make the most informed decisions for your business and its customers.
This article helps you out and provides you with all you need to know about how SCM exactly differs to other important systems: complete guide to ERP vs. CRM vs. SRM vs. SCM vs. PLM.
