No matter a huge enterprise or a small store, supply chains are literally everywhere. Every store has one. That being said, the primary factor that differentiates a small store from a huge enterprise is the nature of purchasing. Earlier, it was called purchasing. Slowly, with time, the conventional act of purchasing turned into strategic sourcing and supply chain management.
A decade ago or two, people weren’t able to see strategic sourcing as a value-generating action and the primary reason was it looked more like a conventional purchasing act. However, the value add it brings to the table can only be weighed when compared to how different strategic sourcing is from purchasing in terms of cost, value, supplier relationships, and quality vs. quantity. Honestly, traditional sourcing’s major motive was to find the low cost suppliers but on the other hand, strategic sourcing focuses more on building a long-term relationship with suppliers who can meet the quality and quantity requirements.
To understand the difference between the two, let’s take a look at what purchasing and strategic sourcing individually mean.
What is Purchasing?
The purchasing process is an organized acquisition of goods and services an employee or the purchasing department in the enterprise takes care of on behalf of the company. Regardless of what the company is purchasing, purchasing activities are required to ensure that necessary products and services are acquired on time and at cost-effective prices.
When it comes to enterprises that are in the manufacturing industry, a purchasing department is a must as the enterprise will be acquiring copious amounts of raw materials and components on a frequent basis.
A typical purchasing department’s direct goals are:
- Identify qualified suppliers who can provide goods and services according to the buyer’s needs.
- Purchase goods and services that meet the quality criteria.
- Minimize the raw material inventory investment while ensuring that goods are still available as per the demand.
- Reduce the amount of cash investment in inventory.
To help you understand better, below are some of the common purchasing activities.
- Receive and double-check purchase requisitions across the enterprise.
- Find suppliers who can meet the buyer’s requirements and quality standards.
- Create and send RFP (Request for Proposal) to qualified suppliers.
- Assess suppliers’ responses to RFPs, pick the narrowed down supplier, and prepare a contract.
- Send purchase orders to suppliers who can authorize those purchases. For example, if you have too many deliveries, you can issue one master purchase order.
- Manage contracts that have a longer duration.
- Check open purchase orders if you need to close any.
No matter what the purchase is for or what goods you are buying, purchasing activity tends to give you a ton of paperwork most of which is bidding procedures and issuance of purchase orders. However, the purchasing process can be automated and streamlined by replacing bidding with a sole-source process for most purchases. In addition, using procurement cards, enterprises can minimize their cost purchases and therefore avoid the utilization of purchase orders.
What is Strategic Sourcing?
Strategic sourcing is a method to supply chain management that standardizes the process information is collected and utilized so that the enterprise can leverage its consolidated purchasing power to identify the organizational values and align its purchasing strategy to meet enterprise goals.
In the last few years, strategic sourcing has grown drastically as the latest digital technologies are making the procurement and supply chain processes evolve. It needs a robust analysis of what enterprise purchases, from whom, at what cost, and what quantity.
When compared to the traditional purchasing process, strategic sourcing focuses more on the initial purchase price to define the total cost of ownership and optimize the sourcing process via efficient ongoing market analysis and developing long-term relationships with vendors and suppliers.
Steps of Strategic Sourcing
- Analyze and review product categories utilized by the enterprise, purchasing and spending patterns, and the departments that participate.
- Create an efficient sourcing strategy that aligns with business goals.
- Research the vendor market and build a supplier portfolio.
- Create RFP criteria and suitable templates.
- Negotiate with suppliers and narrow down the list.
- Onboard new suppliers and vendors and integrate them into the current processes.
- Keep a track of suppliers’ performance metrics and customize the sourcing strategy as required.
Strategic sourcing can assist enterprises in achieving their business goals. Let’s take a look at some of the examples.
- It helps manage environmental conditions and logistics by sourcing products in the regions that are easily available or have a better transportation system.
- Leveraging supplier’s brand image to stand out from the competition.
- Lets you meet compliance and regulatory guidelines by selecting certified components.
- Encourages business sustainability by choosing fair trade or other sustainably grown or manufactured products.
- Minimizes risk by engaging all vendors and monitors any changes in factors such as quality, local tax rates, product availability, etc.
Key differences between purchasing and strategic sourcing
- Price: Price is one of the essential factors in purchasing activity as it often includes purchasing only at the price value. On the other hand, strategic sourcing considers the total cost of doing business with a vendor or supplier. Strategic sourcing officers try to understand the market dynamics by looking beyond the product or service’s cost to include shipping, purchasing administration, and inventory.
- Value: Enterprises take leverage of strategic sourcing to acquire additional value from vendors. Such vendors or suppliers who provide goods and services that let them enhance their own products are picked as it can help improve the relationship between the enterprise and supplier as well as increase its competitive advantage.
- Quality & Quantity: Purchasing often deals with creating more quantity for a cheaper price whereas strategic sourcing also minimizes price by integrating the enterprise’s quality requirements with vendors who can meet them. Acquiring goods and services to a pre-agreed quality and quantity results in fewer testing and inspections and far less waste on the production line.
- Supplier Relationship: Purchasing may get lower costs but the department always has to find new suppliers who can meet the company’s requirements each procurement season. On the other hand, strategic sourcing deals with selected suppliers with long-term goals which may minimize the costs in the longer run.
- Collaboration: When it comes to purchasing, in order to meet the ever-changing needs of market demands, clients would have to cancel orders or find new vendors and suppliers who can meet the requirements. But in strategic sourcing, the enterprise builds collaborative relationships with suppliers as they discuss future plans and requirements which lets suppliers modify their productivity and quality levels.
Now that you have understood the key differences between purchasing and strategic sourcing, you need to identify what suits best for your enterprise. Of course, not to forget the fact that the decision depends on multiple factors, even if customer demand is a powerful parameter in both situations.
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