Supplier Management Terms Defined

Different authors apply different meaning to the terms Purchasing, Procurement, Sourcing. To avoid potential misunderstanding here are the definitions used by Professor Philippart. Those definitions do not have the ambition to become industry references but merely to clarify our discussion. By extension, the names sometimes also define the organizations that perform the processes.

Sourcing

Sourcing is the proactive management of a supply market to ensure access to adequate resources required for the long term needs of the firm: understand market characteristics, identify relevant potential suppliers, define a strategy for the firm, and set the objectives for any market shaping effort. Sourcing frames the agreement with the suppliers involved in the strategy, without necessarily going into the details of the contract. Sourcing teams include elements internal and external to the firm to reach their objectives, to include the eventual optimization of specifications in coordination with engineering, marketing, and / or research. Sourcing is the strategic management of external resources.

Procurement

For some, Procurement does not include Sourcing but deals with the short and medium term issues of supplier management. On the other hand, many firms use the term Procurement to refer to all activities of supplier management, as in “Chief Procurement Officer” the highest level responsible for the management of external resources, and the supplier interface.  The trend is to use the term Procurement to cover all supplier management activities, starting with the Sourcing and extending to include the transaction and the optimization of supply. In American English, Procurement is more often used generically to name the supplier management function.

Purchasing

At the other end of the external resource management activities is Purchasing.  Purchasing, is sometimes used with the same meaning as procurement, but usually more narrowly to define the transaction resulting in the acquisition of a good or service.  In European English, Purchasing is more often used generically to name the supplier management function.

Collaboration

To collaborate is “to work jointly with others or together especially in an intellectual endeavor”. Not all Sourcing processes are collaborative in this sense.  Reverse auctions for example are legitimate but not collaborative: the interest of one party, the one running the auction, is to commoditize the resource required, treat all suppliers equally and force them to fight to win the orders.

Equally, not all collaborative processes are Sourcing, for instance “Collaborative Planning, Forecasting & Replenishment (CPFR®)”.  Although CPFR is collaborative and involves suppliers, it is not a strategic process; it optimizes industry wide transaction frameworks.  The CPFR committee is made up of retailers, manufacturers, and solution providers. This group has developed a set of business processes that entities in a supply chain can use for collaboration on a number of buyer/seller functions, towards overall efficiency in the supply chain.  In essence, being an industry wide initiative, it will not have a strategic impact.  All participants can benefit from the results of its work. It is an essential tactical improvement that cannot be ignored but it is not differentiating and therefore not contributing to sustainable competitive advantages.

Collaborative Sourcing

Collaborative Sourcing is the joint pursuit of competitive advantages for the parties involved.  Therefore, the term “Collaborative Sourcing” is used to define the strategic Sourcing activities done with providers of resources external to the firm, when all the parties involved work together to maximize the benefit for all rather than in an adversarial way to allocate value between involved parties.  Collaborative Sourcing is the alignment of the extended enterprise to better compete versus other extended enterprises, and capture a superior position to dominate a segment of the market.

Some enterprises acquire a taste for Collaborative Sourcing by improving the relationship between business units of the same group. The same principles apply but the cultural bias against an internal supplier is usually lower.

Extended Enterprise

CPO

The CPO is the executive acting on behalf of the CEO to provide the right external resources to allow the firm to protect and create value.  This role can go significantly beyond the traditional activities associated with Procurement. For instance, in a life science company, the CPO is leading an effort to secure the supply of a product not available today in sufficient quantity, but that is essential to produce the goods that will triple the revenues of the firm. To be rigorous, the title CPO should only apply to executives reporting directly to the CEO, alongside other officers of the firm such as the CEO, the CFO, the COO, etc.

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