Source-to-Contract — Definition and Process Example

What is Source-to-Contract?

Source-to-contract refers to the set of procurement activities adopted when sourcing products or services for the company. It usually begins with analyzing the product or service requirement and creating a sourcing strategy. 

After the creation of the sourcing strategy, it advances to the request for quotation and contract negotiation stage before finally awarding the contract to the most suitable supplier for the company. 

In short, the source-to-contract encompasses the whole procurement cycle that contributes to the acquisition and final delivery of goods and services of a company. 

Digital platforms can help the source-to-contract process to be more manageable as it allows for automated bidding, digital purchase orders, online payments, and supplier collaboration. 

Steps in the Source-to-Contract Process

The source-to-contract process varies from different companies. However, there are key steps that are constant in every source-to-contract process:

1. Sourcing and vetting

Commonly, the source-to-contract process starts with sourcing. Sourcing processes include everything up until the actual buying of goods and services. 

Sourcing starts by knowing the need of the organization for its daily operation. Then, once you identify the goods or services that the organization needs, it is time for you to make a shortlist of qualified suppliers who can meet your requirements. 

In this sourcing phase, you will need to gather all the information regarding the budget, lead times, and order quantities. 

In strategic sourcing, you will have to dedicate time and effort to researching suppliers who can deliver quality products, at the right time and quantity. 

Sourcing becomes more valuable when it becomes efficient and cost-effective by finding the right goods or services from suppliers that prove to be reliable in the long run. 

2. Hosting a bidding process

From the shortlist of pre-approved suppliers created in step one, you will need to host an RFx process to get what you need. In this stage, you will need to issue a Request for Quotation (RFQ) or a Request for Proposal (RFP) if you are sure to make a purchase and you know the specifics of what you want to buy. 

If you have issued a similar bid before, then you may be able to shorten the bidding process while staying compliant. There are many procurement platforms that can automate many parts of sourcing and the bidding process.

3. Awarding the contract

Once you have chosen a supplier, you will need to negotiate the terms and award the contract. In this stage, you will create a purchase order that will finalize the acquisition of goods and services. 

The purchase order contains the final contract negotiation, including the total costs, description of the goods or services, quantities of the products ordered, and the approval workflow. 

Once the contract is completed and you have paid for all your purchases, then the source-to-contract process is also complete. 

Source to Contract in Digital Platform

As we said earlier, there are many procurement platforms out there, such as GEP, that can make your life easy by digitizing the sourcing process. Here is an example of how it may look when digitized:

• On the buyer’s side, someone logs into the digital platform and issues a purchase request. This request is then received and reviewed by the procurement department or team. 
• The procurement department will select a supplier from its database or pre-approved suppliers or initiate an RFx process. The procurement department finalized the digital purchase order which is routed for approval and sent to the preferred suppliers. 
• The supplier completes the purchase order and will send the goods to the buyer. After this, the supplier will send a digital invoice that states the amount to be paid by the buyer. The buyer will confirm that the orders are received and send a digital receipt. 
• The buyer’s procurement department team receives the voice and transmits the payment electronically according to the supplier’s request or to their agreement. 
• Invoices and payments are now reconciled by both parties through an automated approval workflow. The signatures are collected and the transaction is now finished. 

Automation will allow your team to do their job effectively by taking on many of the time-consuming steps required by the source-to-contract process. Thus, it will greatly help you if you will integrate one into your sourcing-to-contract process. 

Tips on Managing the Source-To-Contract Process When Disruptions Occur

Disruptions are inevitable in every industry. However, there are some ways in which you can mitigate its effects, especially when a calamity strikes.

1. Collaborative sourcing

When suppliers, sourcing specialists, and procurement professionals come together, they make sourcing more collaborative. 

Collaborative sourcing does not put a low value on traditional sourcing but puts more emphasis on robust category strategies to enable stronger supplier relationships. 

It helps create long-term beneficial relationships between parties and ensures a competitive advantage for the buying organizations. 

You must take note that the industry you operate in and your organizational maturity establish your approach to collaborative sourcing. 

2. Strong contract risk management

Many procurement professionals give more attention to identifying the right suppliers and negotiating the terms and conditions of the contract. However, to have robust contract risk management, you must know the risk posed by the contract. 

This helps you to protect the company from the impending threat of huge losses. Contract risk management has become more relevant in today’s pandemic era as many companies struggle with force majeure clauses. 

3. Artificial intelligence

Artificial intelligence can give additional insight to procurement experts by showing the analysis of large sets of data to solve traditional problems. 

The key to managing your source-to-contract process lies in leveraging AI by allowing it to help you align your procurement and suppliers to achieve operational excellence. 

Conclusion

Understanding source-to-contract is crucial for effective procurement management. The process involves strategic sourcing, bidding, and contract award, with digitization and automation playing pivotal roles in enhancing efficiency. Collaboration, robust contract risk management, and leveraging artificial intelligence are key strategies to navigate disruptions effectively.