Sourcing is a critical element of the procurement process, directly impacting costs, quality, and supply chain efficiency. In the SAP Supplier Relationship Management (SAP-SRM) context, understanding the distinction between internal and external sourcing helps organizations optimize their procurement strategies. Both sourcing approaches serve different purposes and involve unique processes, risks, and benefits. This article explores the key differences between internal and external sourcing, their relevance in SAP-SRM, and how organizations can leverage both for strategic advantage.
Internal sourcing refers to the procurement of goods, services, or components from within the organization or its subsidiaries. It involves utilizing internal resources such as manufacturing units, warehouses, or internal service providers rather than engaging third-party suppliers.
- Transfers goods or services between departments or business units.
- Does not involve external suppliers.
- Often managed through intercompany agreements or internal cost centers.
- Focuses on maximizing internal resource utilization and reducing external dependency.
- A manufacturing plant sourcing raw materials from the company’s own warehouse.
- IT services provided by the internal IT department to other business units.
External sourcing involves procuring goods or services from external suppliers or vendors outside the organization. This is the more traditional form of sourcing where organizations engage suppliers in the open market to meet their procurement needs.
- Involves contracts, negotiations, and supplier management with third-party vendors.
- Subject to supplier qualification, risk assessment, and market analysis.
- Requires managing supplier relationships and compliance.
- Focused on leveraging external expertise, competitive pricing, and innovation.
- Purchasing raw materials from an external steel supplier.
- Contracting a logistics company for transportation services.
SAP-SRM supports both internal and external sourcing processes, enabling organizations to manage their supplier relationships and procurement activities efficiently.
- Intercompany Procurement: SAP-SRM facilitates procurement between different company codes or divisions within the same enterprise.
- Internal Catalogs: Enables internal departments to source from company-managed catalogs.
- Cost Center Charging: Integration with SAP FI ensures that internal sourcing costs are allocated to the appropriate cost centers.
- Supplier Registration & Prequalification: Ensures that only qualified external suppliers participate in sourcing.
- Request for Quotation (RFQ) and Auctions: Supports competitive bidding among external suppliers.
- Contract Management: Manages formal agreements with external vendors.
- Supplier Performance Management: Tracks and evaluates supplier compliance and performance metrics.
- Cost Efficiency: Reduces procurement costs by utilizing existing resources.
- Simplified Processes: Fewer compliance and regulatory requirements.
- Better Control: Enhances control over quality and delivery timelines.
- Faster Turnaround: Internal transfers often involve shorter lead times.
- Access to Innovation: External suppliers may offer advanced technologies and services.
- Market Competitiveness: Enables access to competitive pricing through bidding.
- Scalability: Facilitates procurement of large volumes and diverse materials.
- Risk Diversification: Reduces dependency on internal capabilities.
¶ Challenges and Considerations
| Aspect |
Internal Sourcing |
External Sourcing |
| Dependency |
Relies on internal capacity and resources |
Dependent on supplier reliability and market factors |
| Flexibility |
Limited by internal capabilities and geography |
Greater flexibility through multiple suppliers |
| Cost Control |
Easier to control internal costs |
Requires negotiation and risk of price fluctuations |
| Compliance |
Fewer external compliance requirements |
Subject to supplier audits and regulatory checks |
¶ Strategic Approach: Combining Internal and External Sourcing
A balanced procurement strategy often involves leveraging both internal and external sourcing to optimize cost, quality, and risk:
- Use internal sourcing for standardized or high-volume items where internal capabilities exist.
- Use external sourcing for specialized products, innovation-driven purchases, or capacity overflow.
- SAP-SRM’s flexible framework supports hybrid sourcing strategies, enabling seamless coordination across sourcing channels.
Understanding the nuances between internal and external sourcing is vital for effective supplier relationship management. SAP-SRM equips organizations with the tools to manage both sourcing types efficiently, enabling streamlined procurement processes, enhanced supplier collaboration, and strategic decision-making. By leveraging internal strengths and external market opportunities, companies can achieve greater agility, cost savings, and competitive advantage in their procurement operations.