Let’s start with the obvious question: Is procurement and purchasing one and the same? Absolutely, not. While they’re used interchangeably, the two terms aren’t synonyms. There are concrete differences between procurement and purchasing, but ultimately both are associated with buying. How they make the purchase is the changing point for company cost and functioning.
One is about buying and the other is more about reducing risks and managing costs long-term. If you have any financial background, you could easily guess which is which. Understanding how procurement differs from purchasing can efficiently and effectively maximize the value of your company by miles.
Here’s a deep dive into the differences between procurement and purchasing, from value, tasks, and more. Acquiring goods and services for your business soon? Continue reading.
Procurement is defined as “the process by which an organization buys the products or services it needs from other organizations”. Procurement refers to the multistep, strategic process a company adopts to acquire goods and services before the establishment of a purchase order.
Purchasing is defined as “the activity of buying supplies for a company”. The purchasing process basically means buying things for your company. It covers the actual activities such as ordering, expediting, and paying suppliers. Buyers might do some research before selecting a product or service, but there is no formal process in place.
The bottom line
Procurement is the pre, during, and post-process of goods and services. Purchasing is the activity of buying goods and services. Procurement is a big umbrella term and purchasing is just one aspect of its wider function and broader process. Procurement and purchasing in a way need each other.
What is the difference between procurement and purchasing?
There’s a world of differences between procurement and purchasing, method and approach-wise. The organization has to first decide whether it's looking for short-term goals or long-term goals, buying or savings, quick or smart. It’s safe to say the two terms are on the opposite side in each of those categories.
Procurement is more of a relational, long-term, and proactive approach. It has a strategic approach and competitive advantage, taking several steps before reaching the purchasing stage to identify internal needs. The organization focuses on establishing payment terms and maintaining fruitful relationships with qualified suppliers.
Purchasing is more of a transactional, short-term, and reactive approach. It can be broken down into five rights: right quality, right quantity, right cost, right time, and right place. The organization focuses only on purchasing transactions rather than supplier relationships.
What is the procurement process?
As the antidote to haphazard spend, the procurement process makes savings for businesses and controls cost risk. This proactive procure-to-pay approach identifies, shortlists, selects, and acquires the suitable goods or services from a third-party vendor/supplier in timely delivery of the right quality and quantity.
The procurement process includes:
- Monitoring and surveying the supply market
- Identifying potential suppliers
- Creating approved supplier list
- Spotting the need of internal user departments
- Converting needs into clear specifications
- Creating purchase orders online
- Obtaining proposals and evaluating quotations
- Selecting the right suppliers and negotiating efficiently
- Receiving goods and performing quality checks
- Developing and managing contracts
- Obtaining invoice approvals and fulfilling payment terms
- Establishing a good supplier relationship
Handling the subset of the procurement process comes with a gradual momentum. One, start with an internal needs analysis and corporate strategy for the supplies your company demands. Two, research extensively on the supplier’s model in the market, including client history, client reviews, competitors, etc. Three, outline your relationship with the supplier for a smooth contract management and negotiation process.
Fourth, source suppliers strategically together in a bundle with other products if possible to reduce their individual costs and processes. Fifth, keep an eye on the supplier’s performance and make sure they’re meeting their day to day tasks or promises. Finally, conduct monthly data and analytics reports on spend to check progress and regress.
What is the purchasing process?
Purchasing is an intuitional process when it comes to spend. Since it lacks systemic controls, this method exposes businesses to unnecessary risks. Poor due diligence, accidental orders, and cash leaks are very likely if there is no cost efficiency or safeguards built. The company’s continuity, reputation, and data security could become in jeopardy. A big part of the procurement process is risk mitigation.
The purchasing process includes:
- Obtaining a purchase requisition from user department
- Requesting proposals and evaluating quotations from suppliers
- Placing official purchase orders
- Receiving products and services into stock
- Checking the quality of delivered items
- Effecting payment to the supplier selection
Any idea who suffers the most from this random spending process? The accounting department can take forever to calculate the sea of invoices and expense reports. So, not only will your company have minimal transparency and value but also chaos in the workflow.
Is procurement or purchasing better?
Now that you know the difference between procurement and purchasing, the better choice depends on your company goals, scale, and speed. The Procurement process is strategic, whereas the purchasing process is tactical.
There is no question the procurement process is an end-to-end function that covers the entire lifecycle of a company’s purchase order. The proactive approach ensures awareness before, during, and even after receiving the order, unlocking value from the supplier relationship and any functions associated. Unlike procurement, the purchasing process begins and ends with placing a purchase order.
Even though there isn’t necessarily a winner in this matchup, there’s a higher power: procurement. The procurement process secures cost savings through effective spend analysis, negotiating contractual agreements, and embracing buyer-supplier relationships that every organization requires.
The main key in this equation is that it's eventually better for your business to prioritize long-term goals that come with procurement or procure-to-pay process.
Which one is for your business?
When it comes to acquiring goods and services, every business is and should be treated individually. Most small companies prefer purchasing for quick processes. Enterprises, however, seek procurement processes to fit their corporate strategy. Before proceeding with either processes you have to zero in on your the need of your business and team.
Ask yourself some important questions:
- Does procurement or purchasing make more sense for your company?
- Is your company focussed on meeting short-term goals or thinking more long-term?
- Is your company looking for a quick-fix or a smart solution?
- Do you know your market fit?
- Do you prefer to connect with a supplier directly?
- What kind of goods and services does your company need most?
- How important is risk management?
- When it’s time to pay suppliers, what payment method do you prefer?
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