While acquiring goods and services for business operations, you may come across people who use the terms ‘purchasing’ and ‘procurement’ interchangeably. Since both of them are used when a firm obtains goods and external services, most people think they mean the same. In reality, they are different in terms of processes, objectives, and the goals they want to achieve. The methods that an organization uses to source goods and services hugely impact its cost-saving objectives. Thus, knowing the difference between procurement and purchasing will enable them to work with procurement companies properly and execute purchasing decisions better.
Understanding the Procurement Process
Procurement involves executing a series of steps to obtain goods and services for an organization. It is an umbrella term with a subset of several processes that help fulfill a company’s requirement of goods and services. Procurement is a critical function as it directly impacts a firm’s profit margin. For better revenues, the cost of procuring goods must be less than the amount they are sold for, minus the processing and selling costs. Now, check out a general framework of the procurement process below.
● Identifying Business Requirements
It is the first step of the procurement process. It showcases the requirements of an organization’s different business units and helps map the relevant vendor to every need without duplicating resources and efforts.
● Evaluating and Selecting Relevant Suppliers
This step involves identifying the suppliers, assessing them, and then choosing the most capable ones as per the requirements. The evaluation work can be done based on quality, price, risks, industrial recognition, after-sale service, and more.
● Negotiating Contracts With Selected Suppliers
After selecting the suppliers, the organization focuses on the contracting phase to negotiate the quality and pricing, scope of work, terms and conditions, etc. Through effective contracting, a firm can extract maximum value from its relationship with the suppliers.
● Initiating Payment and Receiving Delivery
Organizations generally initiate payments by releasing Purchase Requisitions (PR). They act like internal approvals for getting goods and services from the suppliers. The finance team soon after releases the Purchase Order (PO), which helps release the payment.
● Auditing Delivery
The last step involves auditing the delivery received. Also, the organization ensures vendor compliance which is vital for evaluating supplier performance. Professional procurement companies greatly aid a firm throughout the whole process.
In short, the process usually involves making buying decisions under conditions of scarcity. Now, take a look at what purchasing is all about.
Learning More About the Purchasing Process
Think of the purchasing process as a subset of procurement. It begins and ends with placing and obtaining an order.
● Placing an Order
It involves ordering goods and services as needed by the different business units. After the supplier gets the PO, it releases an invoice requesting payment for the order. A company has specific payment terms with its suppliers. Hence, the payment release occurs either before or after receiving the request.
● Receiving and Auditing the Order
It means the delivery of the order as per the predetermined terms and conditions. After receiving it, the firm does an audit to ensure that the vendor complied with every term and condition of the order.
Now that you know about both these processes, check out the differences between them.
Key Differentiating Factors Between Purchasing and Procurement
● Goals and Objectives
Purchasing focuses on the cost of the order, but procurement concentrates on value creation. The purchasing process aims to minimize an order’s cost. However, procurement aims at contract compliance, risk mitigation, ongoing supplier relationships, cost savings, and more.
● Strategic Vs. Tactical
Purchasing is a tactical function, while procurement is a strategic move. The former involves the transactional part of acquiring goods and services, as it begins and concludes with placing an order and getting it. But, procurement involves processes that commence in case of any business requirement of obtaining goods and services. It is about strategic aspects like getting the best supplier, maximizing contractual value, etc. Procurement is an end-to-end function that goes on even after obtaining an order and is a vital part of an organization’s corporate strategy.
● Risk Assessment and Mitigation
Purchasing does not focus on evaluating and mitigating risks because of its transactional nature. An organization faces numerous supply chain risks while functioning with vendors like financial risk, operational risk, data security risks, etc. Procurement’s goal is to identify the major risks that may have a severe business impact and alleviate them by enforcing compliance amongst all the stakeholders.
Professional and experienced procurement companies understand the two concepts in-depth. When you work with these experts, they guide and help you handle the two related processes effectively.
● Focus on Supplier Relationships
The purchasing process does not focus on developing supplier relationships as it just works with the existing supplier base. But, procurement emphasizes creating collaborative and long-term relationships with preferred vendors. The process allows them to be an organization’s important strategic partners. It further enhances a supplier-organization relationship’s value.
Usually, people treat purchasing and procurement interchangeably. But, if you look closely, there are vast differences between the two. The different objectives and goals render purchasing as tactical while procurement as strategic.
Procurement covers the whole cycle of fulfilling a firm’s requirements of goods and services, even after getting an order. Procurement includes strategic activities that aim to maximize value creation from the supplier-organization relationship. It highly emphasizes the non-transactional aspects of receiving goods and services. For example, procurement focuses on unlocking the biggest value of contractual agreements and cost savings through effective spend analysis. It also aims to enhance the buyer-supplier relationship.
Purchasing, on the other hand, is a subset of procurement. The process is associated with the transactional features of acquiring goods and services. It focuses on placing orders, timely payments, and delivery.
When you fully understand the two different processes, you can manage your business operations more efficiently. Get in touch with prominent procurement companies who will aid you further through their experience, knowledge, and skills.