If you work in business operations or supply chain management, you're surely familiar with the terms "procurement" and "purchasing." Many people confuse the two and use them synonymously. However, although they are similar enough to be confused with one another, they are distinct functions (in a nuanced sense).
So, what exactly do these terms mean, and how do they differ? What makes people confuse the two terms? On the surface, purchasing and procurement seem very similar. It can be difficult to understand procurement vs. purchasing. So, let’s dissect these concepts and shed light on their subtle differences to eliminate any confusion.
What is Procurement?
Let's start with procurement – a comprehensive process within an organization's strategic framework that most companies heavily rely on. Procurement involves many things, including identifying business needs, sourcing potential suppliers, and negotiating prices and contracts.
Procurement teams also ensure the quality of goods and services is high while fostering long-term relationships with suppliers. It's a strategic process focused on driving maximum value from vendor relationships, rather than just buying goods and services.
The Procurement Lifecycle: A Closer Look
To truly understand procurement, it's helpful to break down the procurement lifecycle, which typically includes the following stages:
- Identifying Needs: The procurement process begins when a need arises within an organization. This could be anything from office supplies to new software solutions. It’s ultimately procurement’s job to acquire the goods and services a company needs to operate. This includes internal supplies and product manufacturing inputs (to learn more about the difference there, check out this blog on indirect vs. direct procurement).
- Supplier Research and Selection: Next, the organization identifies potential suppliers who can meet their needs. This involves evaluating potential vendors based on price, quality, reliability, and other vital factors. Procurement software with supplier evaluation tools can help with this stage.
- Contract Negotiation: The negotiation process begins once potential suppliers have been identified. This involves negotiating prices, delivery schedules, payment terms, other contract details, and everything else you likely already know about negotiation.
- Purchasing: The actual purchasing stage is when the organization places an order with the chosen supplier. This whole process starts with a purchase requisition.
- Delivery and Audit: Upon receiving the goods or services, the organization verifies that the order is correct and meets the agreed-upon standards.
- Supplier Evaluation and Management: The final stage of the procurement process involves evaluating supplier performance and managing ongoing relationships with vendors.
What is Purchasing?
Purchasing, in contrast, is one component of the broader procurement process. It's the actual transactional phase of procuring goods or services. This includes raising purchase orders, receiving goods, and making payments to vendors. In essence, purchasing is the execution of the procurement strategy.
Key Distinctions: Procurement vs. Purchasing
Now that we've defined these terms let's dive deeper into the difference between purchasing and procurement.
1. Strategic Planning vs. Transactional Process
Procurement involves strategic planning. It's about market research, supplier management, price negotiation, contract development, and order fulfillment. Purchasing, on the other hand, is a transactional process that executes the strategies and decisions made in the procurement phase.
2. Value-Oriented vs. Price-Oriented
Procurement aims to extract the maximum value from supplier relationships. It takes into account factors like quality, reliability, and supplier performance, not just cost. Conversely, purchasing is primarily about cost efficiency, focusing on the price of goods and services.
3. Long-Term vs. Short-Term Focus
Procurement takes a long-term approach, aiming to build strong, lasting relationships with suppliers. Purchasing, however, is more short-term, dealing with individual transactions.
4. The Different Skill Sets Required
Purchasing and procurement require complementary, yet distinct skill sets. For example, supplier management is a crucial aspect of procurement. It involves evaluating suppliers, negotiating contracts, and managing relationships.
Purchasing, being more operational, does not generally require the same people skills as procurement. Instead, you might find a purchasing specialist charged with invoice management or expense report processing.
The Role of Technology in Procurement and Purchasing
As the business world evolves, technology plays an increasingly vital role in both procurement and purchasing. Modern procurement software allows businesses to automate many procurement tasks, enhancing efficiency, reducing errors, and providing valuable data that helps to optimize the procurement process.
On the purchasing side, technology can simplify the ordering process, improve record-keeping, and help businesses better manage inventory levels, for example. In general, digital procurement management solutions facilitate the adoption of agile procurement processes, which is increasingly important.
The pressure to adopt flexibility and agility in procurement is rising, and teams are starting to feel it. A recent survey suggests that four out of five (81%) of procurement teams feel pressured to respond quickly and effectively to challenges, such as inflation, disruptions, and shortages. And that pressure is coming from executive teams.
Frequently Asked Questions
Can one person handle procurement and purchasing in a small business?
Yes, in smaller businesses, it's not uncommon for the same person or team to handle both procurement and purchasing duties due to resource constraints. However, they must understand the key differences between the two processes and the unique demands of each role.
How does e-procurement differ from traditional procurement?
E-procurement tools (or procurement management software) automate and streamline the procurement process. It allows businesses to eliminate manual, paper-based tasks, improve data accuracy, boost efficiency, and reduce costs. They also provide greater transparency and control over the procurement process compared to traditional, time-consuming manual methods.
What are some key skills needed for effective procurement and purchasing?
For procurement, skills like strategic planning, negotiation, risk management, and relationship building are crucial. For purchasing, skills such as attention to detail, numerical competence, and knowledge of inventory management and order processing systems are essential.
How does a procurement team choose between different suppliers?
During the procurement process, businesses assess suppliers based on various criteria such as price, quality, reliability, delivery speed, sustainable sourcing practices, and overall reputation. The goal is to select a supplier that offers the best overall value, not just the lowest price.
How can procurement and purchasing contribute to a company's sustainability goals?
Procurement and purchasing can significantly contribute to a company's sustainability goals. For instance, during the procurement process, a company can choose suppliers who use sustainable sourcing methods. Similarly, purchasing decisions can prioritize goods and services with a lower environmental impact. Both functions, therefore, have a significant role in a company's sustainability efforts.
The Final Word
Procurement and purchasing, while interconnected, have distinct roles in business operations. By understanding the differences between them, you can optimize each process, driving efficiency, and maximizing value. And in today's competitive business world, that's an advantage you can't afford to overlook.
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Suggested Additional Reading
For additional insights and in-depth knowledge on specific aspects of procurement, consider exploring the following resources:
Procurement category management, when done correctly, can drive significant value for your organization. Check out our guide to learn the benefits it produces, common and complementary strategies, and actionable insights you can implement today.
Explore the significance of spend visibility in procurement and its impact on cost management, supplier relationships, and decision-making.