A company’s supply chain consists of all entities involved in completing a customer sale, including suppliers, manufacturers, distributors, logistics providers, retailers, and customers. Supply chain functions include product development, marketing, distribution, procurement, and sourcing. Although people may use the terms interchangeably, procurement usually refers to the operational aspects of a company’s strategic sourcing of components and raw materials.
Basics
According to a March 2003 article by Scott Frahm of the North Carolina State University Supply Chain Resource Cooperative, sourcing emphasizes improving quality, lowering prices, and achieving efficiencies on a regional or global basis. Global sourcing can be complex for large companies because managers have to coordinate low-cost opportunities with worldwide suppliers. Procurement refers to the mechanics of purchasing, such as filling out order forms and making timely payments.
Role
The role of both procurement and sourcing is to obtain supplies at the lowest possible price, but sourcing strives to add value to the supply chain. Although large multinationals can use their global presence and sourcing strategies to offer value to their customers, small businesses can pool resources with their peers and form partnerships to lower their procurement costs. Companies may use single sourcing or multiple sourcing for their supplies. The advantages of a single-sourcing strategy include stronger integration between suppliers and customers and the possibility of receiving volume discounts. The advantages of a multiple-sourcing strategy include lower costs due to competition and uninterrupted supplies when there is a problem with one of the suppliers.
Success Factors
According to consultants 3Q Strategies, the success factors for procurement include finding multiple capable suppliers who also have category expertise. Multiple sources lead to increased competition, which drives down prices. Small businesses can pool their resources to increase their collective buying power and negotiating position with suppliers. The keys for succeeding in sourcing strategies include mastering traditional procurement practices, understanding the impact on the profitability of long-term, low-cost supply arrangements, and strong negotiation skills.
Considerations
In a December 2006 Forbes article, author and retired executive Robert Malone cite research from The Hackett Group, a Miami-based business process consulting company, to suggest that companies can improve their procurement performance by forming strategic partnerships, reducing complexity, and using information technology. Partnerships can occur within business units in a large company or between small businesses in a geographic area. Reducing the number of suppliers reduces complexity and increases collaboration. Information technology reduces errors and improves decision-making and data management.