Purchasing and procurement are often confused, and the two expressions are sometimes used synonymously. However, these two are different in terms of their purposes, the tasks they include, the individuals involved, and the results they generate.
If you question a non-specialist about the distinction between the two terms, you could receive the response that purchase and procurement are the same things. But, if you were to ask the same question to a procurement officer of an organization, you would get a substantially lengthier response as to how and why there is a world of difference between procurement and purchasing.
A layman or a person new to the business world could use the terms “procurement” and “purchasing” interchangeably. It is possible that it might not create a significant amount of contradiction for smaller firms, but if you do not realize how distinct both of these words are, it will cause your company to suffer in the long run.
Let’s cover the main difference and then jump into details.
The significant difference between procurement and purchasing is that procurement savings management focuses on overall value creation and total expenses throughout the purchasing cycle, while purchasing focuses only on order prices and how to reduce them.
“Procurement management system” is an inclusive phrase that encompasses all purchasing operations, with the ultimate goal of managing supplier relationships, reducing risk, cost reduction, and contractual compliance.
Strategy and Tactics
Based on the definitions and methods, purchasing is a tactical operation, while procurement savings management is strategic. The transactional component of buying products and services is referred to as purchasing; it begins and ends with making an order and receiving it.
On the other hand, procurement encompasses the whole range of activities that begin the minute a corporation demands the acquisition of products and services. Procurement is concerned with strategic issues such as locating the best supplier and maximizing contractual value.
It is an end-to-end function that continues even after an order is received.
Purchasing targets order cost, while procurement is concerned with growth, profitability, and total cost of ownership. The purpose of purchasing is to reduce the cost of the order, while procurement has other objectives such as risk reduction, contract compliance, cost savings, and maintaining supplier relationships.
Purchasing does not concentrate on risk mitigation because of its transactional nature. While working with suppliers, a company confronts various supply chain risks, including operational, financial, and data security risks. Procurement has a simple objective; to identify business-impacting risks and then take steps to reduce them by ensuring compliance among stakeholders.
What is Purchasing?
Systematically acquiring assets on behalf of the company making the purchase is known as “purchasing.” Purchasing activities are obligatory because they guarantee that required items will be acquired promptly and appropriately.
When massive amounts of raw materials and components are routinely purchased, a purchasing department is an essential component of a manufacturing company.
The following is a list of the primary objectives that the purchasing department strives to achieve:
- Find suppliers that can supply products and services to fulfill the buyer’s requirements
- To acquire items that meet the buyer’s standards
- Create a regular stream of supplies to the buyer’s location, reducing raw material inventories while ensuring products are accessible when required
- To reduce expenditure on inventory
Steps of Purchasing
The primary benefit of a formal purchasing method is that it eliminates waste arising from fraud, rogue spending, theft, and other financial risks associated with unrecorded, improper purchasing activities.
- Developing an effective and efficient purchasing method for direct and indirect expenditures (e.g., raw materials) (e.g., office supplies, IT services, etc.)
- Reliable supplier relationship
- Strategic sourcing and supply chain management (for cost savings)
- The procurement cycle, including all sub-processes, is being optimized
- Developing a comprehensive audit trail for internal and external inspection
- Developing a business process management model that can be used throughout the company
What is Procurement?
Procurement is a much broader concept, incorporating a procurement management system, contract negotiation, and acquiring products, raw materials, services, or work from external sources, then ensuring contracts are fulfilled under the contract terms.
The procurement function’s ultimate long-term objectives include cost reductions, expenditure management, and workflow efficiency. Whereas an essential purchasing decision may include price, delivery, and convenience, procurement plans are a business strategy that includes a detailed analysis of every component affecting purchases.
While every company has a procurement management system, it generally goes like this:
Identifying Company's Needs
First, a business necessity for products and services is identified. This stage emphasizes business unit needs—its effort to align vendors to requirements without compromising efforts and resources.
Finding Suitable Suppliers
The second phase involves finding suppliers, assessing them, and choosing the most suitable ones. Identifying suppliers helps establish a list of acceptable suppliers. Once suppliers are identified, they are assessed on cost, quality, after-sale service, industry recognition, risks, etc. After the assessment, the best-valued supplier is chosen.
After supplier selection, the company negotiates cost, quality, terms, conditions, the scope of work, etc. Effective contracting ensures all requirements are met and the supplier relationship is maintained.
Payment & Delivery
After the agreement, the payment and delivery procedure begin. Purchase requisitions act as internal authorization for acquiring products and services from vendors. The finance team issues a PO to the supplier after the authorities accept the PRs, including payment conditions, price, quantity, and supplier details. The supplier sends an invoice after receiving the PO.
The last step in the procurement management system is to audit the received delivery and confirm that the provider has complied with requirements and standards. In addition to that, it assists in determining whether a connection with a supplier has to be maintained or terminated.
Companies may enhance their performance by thoroughly understanding procurement and purchasing. Purchasing is a subset of procurement that deals with the transactional component of procuring products and services, which starts and concludes with the placement of an order.
On the other hand, procurement seeks to optimize value generation from the purchaser-supplier relationship via strategic operations. Since they have distinct objectives, purchasing is considered tactical, while procurement is considered strategic.