STRATEGIC SOURCING VS. PURCHASING – 7 KEY DIFFERENCES

November 6, 2016 muddassirismProcurement, Supply Chain Strategy

Procuring materials for the intention of production, sales and service fulfilment is indispensable for every single business. However, the approaches, strategies and implementations differ immensely. We use lot of terms like strategic sourcing, procurement and/or purchasing. In this blog we tried to explain the difference between Strategic Sourcing vs. Purchasing.

Strategic Sourcing refers to making Supply Chain Management decisions with the intent to create distinctive value and to achieve a competitive advantage. Sollish & Semanik, (2011) claim that it is an old function and has had its roots from the commencement of purchasing philosophy, whereby traditional buying dealt with locating and hiring suppliers, instead of identifying the best value-creating party to the SC. Generally, the organizations mainly focused on cost-per-unit, resulting from the decisive determinant of voluminous amounts that generated mass-discount. This method, however, evoked competitive adversarial failure for many firms as the scale of service-quality and supply chain collaboration elevated (Beaty, 2013).

Strategic Sourcing vs. Purchasing

One of the key difference of Strategic Sourcing in contrast to conventional purchasing is that it extends beyond purchasing and focuses on converging and sustaining the buyer-supplier-relationships (Skjøtt-Larsen & Schary, 2001). The objective is to leverage them, exploit their capabilities, integrate and complement the core competencies of the various partners in the supply chain (interdependence) in order to provide value and cost efficiencies and uniqueness for the customer.

As Strategic Sourcing incorporate strategic dimensions and capabilities of suppliers such as emphasis on quality management practices, process capabilities, design and development, and cost reduction capabilities into the decision-making process it is possible for firms to achieve accurate information and best-in class market results (Beaty, 2013). In contrast to traditional purchasing, such practices were not followed which consequently led to a lack of visibility, opportunities for collaboration and cost synergies were misled.

Tanskanen & Aminoff, (2015) suggests a general difference between strategic sourcing vs. purchasing, by pointing out that purchasing is merely the transaction between buyers and suppliers, whereas sourcing is the integration and coordination of all local and global domains and resources, being monetary, human, material, informational, etc. Nonetheless, they affirm that the businesses normally initiate with the basic concept of domestic purchasing, before proceeding to internationalization and merge to progressive global sourcing.

The reasons for these progressions are, on the one hand, regionally non-existing suppliers and resources, cooperate-growth, customer and supplier-base expansion, and on the other hand, the attempt to cut costs and, if applicable, overcome domestic SC disruptions or statutory restrictions.

In the past, the Management did not believe that strategic sourcing is a value generating activity at all, and therefore, this area was entirely underinvested, omitted and not in the sphere of interests in some companies. Presently, strategic sourcing functionaries are seen as decision-makers and gained recently more and more on prominence specially in multinational corporation. Since they reduce costs and ensure resource input availability for all departments within the companies (Ketchen Jr., et al., 2014).

7 Key Difference –  Strategic Sourcing vs. Purchasing

 

Conculsion – Modern or traditional sourcing approach

Having pointed out the key differences and methods of Strategic Sourcing and traditional purchasing, it is pivotal to identify when does it make sense to implement them for who. Thus, it can be stated that the decision depends on several factors, even if customer demand is the decisive determinant in both cases. Furthermore, the goods and materials, as well as product segment that can be obtained locally, should be preferred thus logistical costs can be saved.

Strategic Sourcing entails high qualitative products and services, which is comparatively expensive. Therefore, when the size and capacity of a business is small, it does not make sense to source strategically, since the costs will exceed the turnover. In such a case, depending on the products, the traditional purchasing method of economy of scale should be preferred.

On the other hand, it is reasonable to source strategically, when the organisation is placed in multiple locations and requires goods and materials that are not available from the nearest supplier. Therefore, the choice between Strategic Sourcing vs. Purchasing depends a lot on size and geographic locations of your business.