The term ‘source-to-contract’ is commonly used in procurement – and unsurprisingly so, as it refers to the entire set of processes undertaken by procurement teams to source and acquire products or services. But what exactly are these steps, and how can they be best approached to boost procurement value?
In this guide, DeepStream explains exactly what the source-to-contract process is and its many benefits, as well as key considerations and best practices to take on board.
Source-to-Contract is a term generally used in the strategic sourcing process. For more information about strategic sourcing, check out our detailed guide!
What Does Source-to-Contract Mean?
Source-to-contract refers to the series of functions and operations that procurement teams undertake to source products or services for a company.
For example, a company that specialises in hand-made woodwork furniture may require a steady supply of sturdy but pliable wood. The company’s procurement team therefore uses strategic sourcing practices across the source-to-contract process to identify potential reputable suppliers and agree on a deal for the timber with attractive terms.
The primary aim of the source-to-contract process is to identify the best quality suppliers for the products or services required (in the appropriate quantity), at the most attractive price.
What Is the Source-to-Contract Process?
The source-to-contract process refers to the complete set of steps undertaken ineffective procurement.
The process is broken into multiple stages, beginning with the narrowing down the list of available suppliers to a more manageable and effective size within the procurement team’s specific criteria:
Step 1 - Sourcing & Vetting
The first stage in the source-to-contract process involves market research and identifying the company's maximum budget, supply quantity needed, and supply quality required. Once a strong sourcing criterion has been outlined, a shortlist of preferred suppliers is drafted.
Step 2 – Bidding Process
The bidding process involves the issuing of RFIs, RFPs and RFQs, as well as a general bid invite, which places the onus on the supplier to offer a competitive rate for their business and compete with a pool of other prospective suppliers.
Step 3 –Contract
Once a supplier has been chosen, the procurement team must negotiate a contract with that supplier on behalf of the company, looking to get the best rates for the service, as well as outlining contract procedures. This is the final stage of negotiations, and once the contract has been accepted, the source-to-contract process is complete.
Benefits and ROIs of the Source-to-Contract Approach
The source-to-contract approach is effective in aligning aims and activities at every stage of procurement, from deciding on the products and services needed, to receiving them.
However, to reap the rewards of effective source-to-contract, there are a few key considerations. Here, we explore the best methods for tapping into the benefits of the approach, and how they can deliver value:
The Best Ways to Track Return on Investment (ROIs) from Source-to-Contract
Identify and understand the metrics for measuring supplier success. Regularly examine these metrics and use them to inform procurement strategies.
Track exactly how much money is saved per month to help inform how effective business strategies are.
Look for areas that create value but cannot be calculated in monetary terms. For example, speed and customer satisfaction.
Develop departmental trust through effective communication between stakeholders, with constructive feedback on how processes can be improved.
Additional Benefits of the Process
With an effective sourcing strategy, finding competitive supplier rates becomes simpler– cutting costs and improving the long-term financial gains for a business.
Strengthens Business Relationships
The source-to-contract process allows for greater communication and sharing of information between buyer and supplier.This improves supply chain cohesion by helping with expectation management.
The trust and communication nurtured by these successful, long-term supplier relationships also allow businesses to understand and plan for future supply chain challenges, such as supply shortages and the bullwhip effect, to mitigate any challenges and limit their effects.
Managing & Mitigating Risks During the Source-To-Contract Process
Despite the many benefits of the source-to-contract process, there are also potential risks that procurement teams must consider and take steps to avoid:
Inaccurate Needs Analysis
Either an overestimation or underestimation of quantity or price, as well as unrealistic timescales, poorly designed requirements or an inadequate budget, can impact the value of the procurement process. The key to mitigating this risk is effective market research and a long-term and accurate analysis of what the company requires measured against relevant metrics andKPIs.
Poor Vendor Selection
Many failures within the source-to-contract process can be attributed to a poor choice of vendors who, after accepting the contract, cannot uphold the terms. To mitigate this risk, it’s important to conduct diligent research on every potential supplier before sending out bid invites to those who meet a minimum quality criterion including, for example, a proven track record of meeting deadlines.
Disorganised Vendor Management
Sometimes communication can break down, leading to unrealistic or inaccurate KPIs, conflicting deadlines and slow lead times. To prevent disorganized vendor management, it’s important to prioritise regular and seamless communication.
DeepStream’s RFx software keeps all supplier communication and document exchanges in a single centralised and auditable platform, throughout the entire source-to-contract process.
KPIs & Metrics of the Source-To-Contract Process
Analysis of the source-to-contract process is key to making effective decisions and acting quickly to mitigate risks in the future. But what should this review consist of?
There are several KPIs and metrics that can assist in informing company-wide procurement decisions. Below is a list of the most common:
Number of Suppliers
This KPI tracks the evolution of how many suppliers a company works with. A lack of supply diversity creates dependency, which could potentially see companies rely on unattractive supplier contracts out of necessity, when other suppliers could provide better rates.
Purchase Order Cycle Time
This KPI covers the ordering process from end to end, starting from when the purchase order was created to approval. It only measures order processing times and not the delivery of the products themselves.
Purchase Price Variance
Tracks the difference between the actual purchase price of an item and its standard price. This helps quantify how efficient a procurement team is in securing contracts for competitive rates.
This metric measures how well suppliers are filling customer requirements, and how quickly and effectively those actions take place.
Purchase Order Coverage
This metric tracks the number of supplier invoices received that match the purchase order. This metric not only protects a company from invoice fraud but also saves money and helps build vendor relationships.
Supplier Quality Rating
This metric is a general measurement to quantify the critical evaluation of supplier relationships based on price, how well they perform and effective communication.
Technology & The Source-to-Contract Process
A comprehensive source-to-contract process requires effective communication, document management, bid platforms, data collection and reporting capabilities and much more.
Without a centralised platform to manage each of these procurement processes, businesses risk missing out on speed, key communications and even contract opportunities.
RFx platforms facilitate the collection and management of all this information in a single platform, for an effortless source-to-contract process, from needs analysis to bid invites and reporting.
DeepStream’s digital RFX platform provides everything you need for effortless source-to-contract, including eAuctions, contract management, centralized digital RFX documents and supplier discovery.
One of the biggest benefits of our software is the pulling of all information, communication and document exchanges from the RFP through into your contracts for full visibility.
Frequently Asked Questions (FAQs)
Q: What Is the Difference Between Source-to-Contract and Source-to-Pay?
A:The source-to-contract process covers the steps between sourcing suppliers and signing official contracts with them. This is different from the source-to-pay process, which starts with sourcing suppliers and continues until the exchange of money between parties. It refers more to the transactional relationship between buyer and supplier and ensures compliant buying.
Q: What is ‘Source-to-Contract Workflow’?
A:The source-to-contract workflow is an umbrella term for the chronological steps that make up the complete source-to-contract process, from finding suitable suppliers to vetting those suppliers and issuing bid invites, to finally negotiating contract terms and settling on a contract and supplier rates that are fair to all parties.