Differentiating Sourcing and Strategic Sourcing From Purchasing and Procurement

One challenge for fleet managers interacting with procurement professionals is understanding the nuances of procurement terminology and naming conventions. Many fleet managers believe the term “procurement” is synonymous with the term “sourcing,” but there are important distinctions between the two functions. For instance, most corporations view procurement as being more tactical and near-term focused, while sourcing is viewed as a more long-term strategic function. The existence of this distinction is reinforced by the fact that KPIs (key performance indicators) for sourcing are often different from the KPIs for procurement.

These terminology differences extend to other procurement-related terms, such as “purchasing,” “strategic sourcing” (as opposed to “sourcing”), and “supply chain management.” While all these terms refer to points along the same process continuum, they shouldn’t be used interchangeably since their dynamics, strategies, and implementations differ. While each of these terms represent different processes, they are all interrelated internal corporate functions interacting with the organization’s prospective and existing supplier network.

Purchasing vs. Sourcing Terminology

The term “purchasing” is often used as a synonym for procurement, but it holds varying meanings influenced by the historical origins of corporate purchasing. As recently as the 1980s, purchasing departments (as procurement was then known) were viewed as “order placers” issuing purchase orders with little involvement in proactively implementing corporate strategic goals. Today, purchasing is defined as the transaction-oriented function of procurement and is viewed as a subset of procurement.

On the other hand, sourcing is the process of finding a “source” to procure goods and services. Like purchasing, sourcing is a subset of procurement. Specifically, sourcing finds the most cost-effective supplier for those goods, while purchasing manages the transaction process of acquiring the goods and services.

In the grand scheme of things, procurement is viewed as the corporate management function that covers the gamut of activities, ranging from determining the organization’s supply needs, selecting prospective suppliers, negotiating contracts and payment terms, enforcing corporate compliance requirements, to ultimately executing the contract. In this context, procurement is the umbrella under which purchasing and sourcing are two separate components of the acquisition process. 

Sourcing vs. Strategic Sourcing

In the 1990s, larger companies began to develop highly sophisticated procurement departments, frequently under the aegis of corporate finance. These procurement departments began initiating in-depth sourcing reviews and developed comprehensive agreements with suppliers and service providers who were identified as having the greatest impact on the company’s operation.

This type of procurement became known as “strategic sourcing,” which was highly successful and considerably different from traditional sourcing practices. One difference between the two is that strategic sourcing looks at all cost elements of a company’s operation that involve outside suppliers. Over the years, strategic sourcing has become an institutionalized procurement process that seeks to continually improve and reevaluate corporate purchasing activities in all “spend” categories, including fleet management, with help from comprehensive procurement analytics.

The general difference between traditional sourcing versus strategic sourcing is that the former focuses on supplier pricing whereas strategic sourcing has evolved into a more dynamic process with cost being only one component of a hierarchy of corporate needs, such as assurance of supply, service, quality, innovation, and regulatory compliance, none of which can be sacrificed for lower price alone.

When optimally executed, strategic sourcing can provide a fleet business with a number of key benefits, including:

• Accurate risk management that considers all relevant factors that affect risk levels
• Substantial cost savings, especially when these are calculated over the long term
• Strong, lasting relationships with wholesale suppliers, resulting in higher quality purchases and shorter lead times

Relationship with Supply Chain Management

What is the relationship between procurement and supply chain management? One distinction is that procurement is the process of getting the goods a corporation needs, while supply chain management is the supervision of the infrastructure and services needed to get those goods and services from suppliers and manufacturers. A supply chain consists of everyone involved in getting a product and service in the hands of a customer, either internal or external.

Generally speaking, the term supply chain refers to the post-contractual phase of procurement that covers shipping logistics issues and matters relating to all suppliers, ranging from Tier 1 to Tier 3. Procurement involves all pre-contractual sourcing analyses and supplier negotiations up to the actual consummation of a contract. Supply chain management involves the shipping logistics and services that occur post-contract consummation. 

However, strategic sourcing is having a growing influence on supply chain managers’ decisions by enabling them to create distinctive value and to achieve a competitive advantage. One key mission of strategic sourcing managers is to enhance and maximize the buyer-supplier relationship. The objective is to leverage supplier relationships to exploit their capabilities by integrating and complementing the core competencies with the various partners in the supply chain. The migration of major corporations to strategic sourcing has been a powerful change agent for large fleet management systems, forcing major upgrades in contract negotiations, vehicle sourcing, supplier selection, service level agreements, procurement and logistics plans, fleet supplier reviews, and fine-tuning global supply chain solutions.

The Importance of Understanding Terminology

Far too often, well-intentioned corporate professionals end up at cross-purposes. Persons involved with procurement analytics often fail to grasp the needs of supervisors specializing in day-to-day fleet logistics. Meanwhile, supply chain managers can overlook a fleet’s potentially budget-busting “soft costs” that risk management specialists are all too familiar with. Individuals who oversee an organization's overall fleet management services can "talk past" someone who deals primarily with finding viable supply chain solutions. All this can lead to confusion and wasteful spending that interferes with efficient corporate cash management and compromises the company’s fleet business operations.

One of the keys to avoiding these issues is a proper understanding of the various components of procurement. While nuanced, the functions referred to by the terms purchasing, sourcing, strategic sourcing, and supply chain management are different. All are distinct points on the fleet procurement continuum that are interrelated with one another.

Fully understanding these naming conventions will help procurement specialists and fleet management system professionals to fulfill their common goal to avoid habitual and arbitrary buying by stakeholders and field operations and to encourage the innovation needed to obtain optimal value in assets utilization.

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Originally posted on Automotive Fleet