Procurement vs. purchasing is a common comparison, given how the two terms are used interchangeably. They are similar, but they do have their differences. Purchasing signifies transactional services, while procurement signifies the strategic process of product or service sourcing like researching, negotiation, and planning. Many times, you can see these terms used interchangeably.
What is Procurement?
Procurement is the process of sourcing and acquiring goods and services your company needs from an external source, like a third-party vendor or supplier, through direct purchase, competitive bidding, or RFI and RFQ process while ensuring timely delivery of the right quality and quantity to fulfill its business objectives.
This includes identifying the requirement for a specific product or service, finding new or existing suppliers, building supplier relationships, measuring cost savings, minimizing risk, and is predominantly focused on value and return on investment. Through this, it can be inferred that procurement is an umbrella term with numerous subsets.
Understanding procurement through an example
If you’re going to buy a new car, you usually decide what you want before you step out of your house. You consider the color of the vehicle, the engine power you are looking for, the number of seats you want, and whether you want a 4-wheeler, a sedan, or an SUV. Then comes the manufacturers and what they have to offer.
It’s only after these considerations that you start pondering over the prices. The part where you research the industry is called procurement. It is understanding and deciding how much you want to spend on the car and what kind of features you are looking for while you analyze different manufacturers and suppliers.
Need for procurement strategies
Often, procurement managers procure goods and services with reduced capabilities and limited resources. Meaning that it’s crucial to adopt effective procurement strategies as it can even save a company a huge amount of money while also ensuring supplier quality, efficiency, and timeliness.
While shaping your company’s procurement strategy, it’s important to keep in mind its market placement, capabilities, and management issues. To accomplish this, procurement managers must adhere to certain duties and responsibilities.
Role of procurement managers
Procurement managers, typically, have the authority, on behalf of the company, to engage with suppliers to make deals. Their duties and responsibilities include:
- Creating and implementing local, regional, and national procurement strategies that are innovative, cost-effective, and incorporating the growing complexities and challenges within the industry.
- Building long-term relationships with vendors in the industry
- Comparing proposals for price and specifications
- Negotiating with vendors to reduce costs and define service level agreements
- Reviewing contract specifications on behalf of the company
- Communicating with vendors to make sure that the merchandise arrives in a timely fashion
- Building and maintaining long-term relationships with critical suppliers
- Managing technological systems that track the shipment, inventory, and providing of materials
- Preparing daily, weekly, and monthly procurement reports
- Ensuring adherence to all and any safety, health, and environmental rules and regulations
- Keeping abreast of changing industry trends
Steps of procurement
Procurement is not just finding the correct goods, paying and receiving the goods, and just washing your hands of them. There is a lot more to it. A company’s internal procurement process influences factors like the size of your company, industry, human resources available at hand, and organizational structure.
Importance of procurement
By now, it must be evident that procurement highly affects your company’s profit margin. For maximum profit, procurement costs should be lower than the selling price of the products minus whatever expenses they are associated with while processing and selling them. Following the best procurement strategies can aid in this endeavor, helping embellish your company’s corporate strategy.
That is why it’s important to note how beneficial a well-structured procurement strategy can be for your company as it adds value to your business on many levels by reducing costs, increasing efficiency, and contributing to innovation.
Best procurement practices
Some essential practices need to be followed to attain a higher level of success in your business and stay in the marketplace. These are:
- Boosting employee capability with specialized procurement training
- Organizing and analyzing a detailed spending map which is updated every quarter
- Corroborating all members of your organization to take part in sustainable savings
- Engaging focus on reducing costs across the value chain
- Assuring value through contract and supplier relationship management frameworks
- Connecting commercial and technical competence through the appropriate procurement operating model
Therefore, one could say that procurement generally involves making purchasing decisions under conditions of scarcity.
Careers in procurement
For those dreaming of a career in procurement, being a procurement manager is not the only option. Some jobs available in procurement include:
- Chief Procurement Officer
The Chief Procurement Officer or CPO is responsible for the purchasing of components and equipment and all procurement contracts. The team led by the CPO is responsible for negotiating the prices, terms of delivery, and technical specifications of the contracts.
- Procurement Analyst
The Procurement Analyst is responsible for forecasting future costs of materials based on historical purchasing costs. They are to keep tabs on how much is spent, what materials are bought, and who is supplying these materials. In simple words, if sitting at a desk and analyzing data is your dream job, go for it.
- Supplier Relationship Manager
It is the responsibility of the Supplier Relationship Manager to ensure that the supplier is performing according to the requirements of the contract. In contrast with the procurement analyst, this job involves a lot of human interaction and bringing the best out of them. So, if you are an extrovert, this might be a great occupation for you to consider.
- Supply Chain Manager
The responsibilities of a supply chain manager include a combination of operation, distribution, logistics, and warehousing. They manage depots and make sure that the goods come in on time. This position is an integral part of a company as it is essential to the smooth running of any organization.
What is Purchasing?
Let us go back to our car example. Once you know what you are looking for, the expedition starts. Say, the last time you went to buy a car, was your decision influenced only by its price and features? Probably not. Most of the time, our decisions are influenced by the service (pre-purchase or post-purchase) of the dealership available too. This service belongs to the purchasing part of things.
Purchasing is a set of mechanical tasks involved in buying goods and services that an organization requires. These tasks can be ordered, raising purchase orders, receiving, and arranging payment. It starts with placing an order and ends with receiving the order and is also called the procure-to-pay (P2P) process. It’s a very basic process mirroring a simple transaction. The procurement team uses the purchasing process to requisition goods and services through the supply chain.
Relevance of the purchasing process
The purchasing process is quite crucial to a company. A formal purchasing process avoids excessive waste due to fraud, rogue spending, theft, and other financial pitfalls accompanying undocumented and unoptimized buying habits. Moreover, since procurement sits at the heart of the value creation process of any company, formalizing and optimizing your purchasing process is also crucial to:
- Create an efficient and effective buying process to minimize not just direct spending (e.g., raw materials) but also indirect spending (e.g., office supplies, IT services, etc.)
- Successfully manage the supplier relationship.
- Optimize supply chain management and strategic sourcing (for both cost savings and value)
- Streamline the procurement cycle and all its sub-processes
- Provide a solid audit trail for internal and external review
- Establish a model for business process management that can be applied across your entire organization
- Control inventory, thereby improving total quality management.
Steps of purchasing
Purchasing is generally a subset of procurement. This does not mean that the steps of purchasing should be tailored to each vendor like in procurement. Rather the best routine practices should be employed across all vendors. This will help ensure that you extract maximum value from every penny you spend and be competent in the modern marketplace.
The purchasing process is typically conducted by the purchasing manager or the purchasing officer. In contrast, depending on the industry, the decision-making part of the purchasing process may be carried out by, for instance, an operations team.
Though the steps of the purchasing process are a lot similar to procurement, it is still important to understand and judiciously apply them. These steps are:
- Analyzing the needs of your company
- Requisition of the purchase order (PO)
- Reviewing and approving the official purchase order
- Requesting for proposals and evaluating quotations
- Negotiating and approving the contract
- Shipping and tracking the order
- Receiving and checking the quality of the delivered items and warehouse management
- Comparing and matching the shipping documents/packing slips with the original purchase order and the invoice issued by the supplier
- Approving the invoice and organizing payment
- Updating the accounting records
Steps to improve purchasing
Taking a handful of simple steps can make the purchasing process more efficient and take the pain out of paying for things. Consider the following reminders:
- Establish a supplier directory
- Simplify payment authorization
- Automate purchasing process
- Make the process as intuitive as possible
- Track payments as part of the overall budget
Following these steps may be quite a hassle for most organizations. In that case, using an integrated expense management tool would aid in taking care of many of these improvements all together.
Automating Procurement and Purchasing
Not just the terms, there is often an interchange of functions between procurement and purchasing. Be it either, numerous stakeholders from internal parties like employees in different departments to external people like vendors and contract negotiators are involved.
Both of these processes require meticulous documentation as they both are intricately interwoven and involve a complex set of procedures. This can cause process bottlenecks, slow down the decision-making process, and increase the complexity of the procurement process.
Though a purchasing cycle may only stretch for a matter of weeks, it is a different story with a whole procurement cycle that may even go on for months. Unfortunately, the story does not end there. What if a suitable bid could not be found? The only option is to start again. This already very cumbersome process can be detrimentally affected by human errors.
Moreover, the delay occurring in such cases due to unavoidable revision to documents and reviewing of invoices can lead to a huge loss of capital. In such a scenario, it is paramount to understand that manual workflows and paper-based record-keeping are no longer sufficient for companies that want an optimal return on their purchasing investment or a healthy, strategic supply chain.
That is why, in the contemporary world, e-procurement is a flexible and convenient method that can help maintain supplier management, have an overview of negotiations and projects, in addition to many other benefits.
What is e-Procurement and why is it needed?
E-procurement is a pay-to-process (P2P) mechanism by which business transactions like the acquisition and selling of products and services are carried out over the Internet. Like in email, the ‘e’ in e-procurement is electronic. It helps hold and manage critical information.
e-Procurement helps you control your money. Modern pay-to-process platforms can improve your purchasing process by:
- Helping your company keep up with increasing market volatility and sustain it over its competitors.
- Eliminating waste and expense from manual, paper-based workflows, records, and storage
- Automating tedious, time-consuming, and high-volume tasks, enabling employees to concentrate on core activities to add further value to the business
- Adding accuracy, speed, and consistency while removing human error and delays
- Automating the three-way matching process and optimizing process flows helping capture more early payment discounts and eliminating duplicate payments and late fees.
- Automating contingency-based approval workflows, thus, helping in shortening the workflow
- Maintaining utmost data transparency combined with improved collaboration and communication for stronger, real-time data analysis and more strategic decision-making.
- Matching automatic strategic sourcing as buyers with the best vendor for a given good or service automatically through a closed system that also prevents rogue spending, invoice fraud, and dark purchasing
- Streamlining vendor management as new suppliers are automatically identified as onboard with contract information instantly available on the central server and enhancing report generation
- Speeding up underperforming suppliers and/or tackling poor supplier performance
- Improving supply chain management and supplier relationship management through integration with vendor systems and transparency into vendor performance, compliance, and contract information
- Empowering your suppliers with self-service
Additionally, it provides direct support for other practices, including:
- Focusing on vendor collaboration and communication
- Shifting your perspective to the Total Cost of Ownership (TCO)
- Integrating social responsibility into your purchasing process
Most e-procurement services include:
- Procurement software integration with accounting, Enterprise Resource Planning (ERP), and Warehouse Management System (WMS)
- Automating Request for Quotations (RFQ) when stock levels reach reorder points
- Automated stock reorder notifications via email or SMS
- Automatic creation and distribution of purchase orders
- Automated order confirmation emails
- Electronic Data Interchange (EDI) integration
Thus, e-Procurement can eliminate overspending and yield huge savings (both time and money), regardless of the size of your organization.
Difference Between Purchasing and Procurement
A company goes for procurement and purchasing when it needs to acquire certain goods and services. A purchasing manager or purchasing officer usually won’t buy anything unless the contract has been set up by procurement which is a more deliberate process. In that sense, procurement and purchasing are interlinked.
Even then, both procurement and purchasing have significantly different objectives and use vastly different methods and approaches to meet their end goals. So, the differences between both the processes are:
- Procurement is a proactive strategic process, while purchasing is a reactive one.
- The former focuses on the value of the goods and services, while the latter focuses on the cost.
- Procurement is deployed in the whole end-to-end activities required to be performed to acquire the respective goods or services, while purchasing comes into play only when it is time to buy them.
- Procurement is used in a production environment (internal process), while purchasing comes into play in a wholesale environment (external process).
- Procurement involves everything from need recognition to sourcing, cost savings, contract closure, ongoing supplier relationships, and record-keeping while purchasing only includes ordering, expediting, and payment.
- Procurement leans towards a more relational point of view, focusing on creating long-term vendor relationships, while purchasing has a more transactional point of view, focusing on transactions than vendor relationships as it tends to only work with the existing supplier base.
- Given the transactional nature of purchasing, it doesn’t focus on identifying and mitigating risks, while procurement does just that by enforcing compliance amongst all the stakeholders.
- Procurement management focuses on strategic, long-term goals like gaining a competitive advantage or aligning itself with corporate strategy or goals, whereas purchasing focuses on short-term goals such as fulfilling the five crucial parameters of a successful transaction (good quality, right quantity, right cost, timeliness and right place).
Therefore, procurement refers to the overall framework, while purchasing is the tactical act of acquiring goods and services. As for which of the two is the best option, the answer is very subjective. Each company should pick an approach that is in alignment with its needs and objectives.
For instance, a small company may go for purchasing to keep the process smooth, clean, and simple. This is probably because, in small companies, most employees are required to be jack-of-all-arts. This is different from a large enterprise where, generally, you can find a professional for each area of expertise. Consequently, an enterprise may choose a full-fledged procurement process to make it a core part of its corporate strategy.
Although often used interchangeably, procurement is analyzing the market while purchasing is to go out there, negotiate and seal the deal. Even in business, using similar terminologies has become routine. An in-depth understanding of these integral concepts can help improve your company’s performance.