What is Sourcing in Procurement?
Sourcing is a critical component of procurement that involves the identification, evaluation, selection, and negotiation of suppliers and contracts to meet the needs of an organization. In other words, sourcing refers to the process of finding and selecting the best possible suppliers who can provide goods or services at the most favorable terms and conditions.
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The procurement management function has taken a broader role that goes beyond purchasing to strategic sourcing. Purchasing is a general term that refers to a transactional function meant to ensure the fulfilment of material needs of the organisation.
The term ‘procurement’ is a wider one that signifies the cross-functional nature of purchasing and the importance of developing supplier partnerships. Strategic sourcing goes still further, being handled at the corporate level.
It takes into account the whole supply network, its linkages and their impact on the procurement management practices. Traditional sourcing activities that happen in procurement management can be termed ‘tactical’ as they focus on current and planned material needs.
In contrast, strategic sourcing is based on strategic supply chain goals of the organisation and takes a wider look that spans the entire supply chain network in the industry. However, it is important to remember that not every item procured in the organisation is fit for strategic sourcing activities. Some items will be continued to be managed in a traditional automated purchasing mechanism.
Few other items would require proactive and tactical management with a focus on the long-term supplier base. However, the strategic goals of the organisation would require a few specific items to be given much more attention requiring corporate-wide strategy.
Procurement Functions Categorization
The different procurement functions, which form part of procurement and supply management, can be better understood through the following categorization (Parniangtong, 2016):
For less complex and non-vital items that can be handled through an automated purchase ordering mechanism.
For item categories that require efficient material management to reduce inventory and maximize cost savings (less complex, highly critical).
For complex items of strategic importance (less critical but the complexity involved in the supply chain is high).
For highly critical and complex items that require strategic partnerships.
Sourcing Strategies in Procurement
The process of strategic sourcing will be applicable for all types of items but the focus will be more on the third and fourth categories listed above.
Fred Sollish defines strategic sourcing as an organizational procurement and supply management process used to locate, develop, qualify, and employ suppliers for adding maximum value to the buyer’s products and services (Sollish, 2011).
The steps involved in the strategic sourcing process are mentioned below:
- Conduct Spend Analysis
With regard to other processes of strategic sourcing, we have already discussed the spend analysis process which is the initial step for strategic sourcing. In addition, to spend analysis, the strategic approach to sourcing and procurement management requires good supplier market research.
A thorough understanding of the supplier market is necessary while contracting with suppliers for long-term partnerships, as it can give the key leverage in negotiations.
Some factors to be considered in the supplier market evaluation are:
- Supply industry size and growth analysis
- Supplier analysis
- Substitution analysis
- Supply industry profitability analysis
- Market fragmentation and consolidation analysis
- Industry technology analysis
Supplier analysis involves assessing individual suppliers in order to gauge their suitability with the strategic objectives of the organization. Based on the supply market evaluation and supplier analysis, the procurement department should devise an appropriate strategy for sourcing.
Organizations need to develop a supplier database and shortlist those to whom invitations for standard competitive bids are to be sent when procurement requirements arise. This database can be generated based on the supplier market evaluation and also from the supplier registration process.
Supplier market information can also be gathered from sales market intelligence, information databases, trade journals, trade directories, and trade shows.
Since an in-depth analysis of all suppliers may neither be required nor feasible, a shortlisting of suppliers is done, and the supplier analysis proceeds as follows:
- Identify all possible suppliers
- Gather information about the identified suppliers
- Apply a screening criterion to shortlist eligible suppliers
- Conduct a detailed analysis of shortlisted suppliers
Traditionally, since most standard items are procured through competitive bidding, the practice is to invite eligible suppliers in the market to register with the buying organization. This may not be either the practice or requirement for companies that follow the ‘Vertical Keiretsu model’ where manufacturers tend to knit a close supplier family through whom all procurement needs are met.
However, in competitive markets and for government procurement, free market competition requires giving every supplier an opportunity to bid for procurement contracts. Hence, organizations tend to keep a list of suppliers who are pre-registered and who can be considered for sending tender invitations.
Many organizations have a supplier registration procedure that starts with suppliers filling out a form with all the relevant particulars about their organization, financial position, technical strength, experience in executing contracts in the past, etc.
The supplier registration form may be available with a supplier portal on the company’s website. These forms may be required to be filled out either for getting listed as a supplier of the organization or for bidding for any specific project. All suppliers who fill out the supplier registration form may not necessarily be impaneled for future procurement requirements of the organization.
An organization may have a screening mechanism that involves the following criteria to judge a supplier’s eligibility for being enlisted as the organization’s supplier:
- Financial strength
- Management quality
- Technical expertise
- Past experience
The aforementioned criteria have different weightage based on which the supplier scorecard is generated for shortlisting him/her.
A sample supplier scorecard for the shortlisting process is shown in Table:
|Supplier Name Criteria
|ABC Suppliers Ltd.
The buying organization might also have several other parameters and sub-parameters, and a final minimal cut-off score for shortlisting suppliers. The suppliers obtaining the registration need to provide various important information like RTGS details, TIN and PAN, etc. Such information would help in establishing the identities of the suppliers as well as conducting due diligence for processing payments.