Sourcing goods is one of the most important parts of a business. Two processes are utilized, often together, to acquire products for an organization: purchasing and procurement. Though often used interchangeably, purchasing and procurement are two different concepts, and understanding the differences is vital for businesses in order to assign teams to the processes. These processes vary in scope, workflow, and end goals. Below, we discuss the differences between purchasing and procurement processes in detail.
The contrast between purchasing and procurement is apparent right from their definitions. Let’s see what each terminology means separately:
What Is Purchasing
Purchasing refers explicitly to activities involved in buying a product or a service. It is, in fact, a subset of the procurement function that consists of placing orders, receiving the items, and fulfilling the payment.
Consider the example of ordering office supplies. If the organization’s sourcing strategy only involves purchasing, the act will simply be performed by a person in charge by estimating the number of supplies needed, placing the order after getting it approved, making payment, and receiving the goods.
What Is Procurement
Procurement, on the other hand, is the entire process that includes need identification, strategic sourcing, negotiation and vendor management system, granting approvals for purchases, and receipt of goods and services. In essence, it includes all steps that happen before, during, and after a purchase.
The procurement process begins as soon as the demand for a product or service is recognized. Multiple vendors will be compared using their pricing, location, reviews, etc., and the consolidated list will be prepared from which one vendor will be chosen and a requisition will be raised. The purchase requisition raised will have to go through approvals at multiple stages after which a contract will be made with the supplier. As the goods are delivered, their quality will be evaluated and the requisition, any notes to the supplier, and the invoice will be matched. After this, the payment will be made and recorded. The supplier’s performance will be assessed and a record of it will be maintained. Compared to the process of purchasing in our last example, here’s what the procurement process to obtain office supplies will look like:
If your organization has a dedicated procurement team, ordering office supplies will be different. The estimated numbers of supplies needed will be analyzed and may be updated to correct for under or overestimation. There may already exist a vendor your company prefers purchasing from, and the vendor list would not remain static and unchanged if better opportunities are found.
Once the good arrives, three-way matching of the purchase requisition form, any notes to the supplier, and the invoice will be performed. The supplier’s performance will be measured through KPIs like lead times, compliance, defect rate, etc., and will be recorded and assessed against others. Invoices will be forwarded to the Accounts Payable department to be paid, and a record will be maintained.
Workflows are systematic, repeatable steps involved in executing a process. The difference between purchasing and procurement processes can be understood thoroughly when their workflows are considered:
The Purchasing Process
The purchasing workflow specifically deals with acquiring a product. The steps include:
- Receiving purchase requisitions that specify the required goods and their quantities
- Evaluation of supplier quotations and selecting one which offers the most competitive price
- Raising purchase orders to the chosen supplier
- Receipt of goods
- Quality assessment
- Processing and dispatching payments
This is typically a small part of the procurement process as a whole. On their own, the purchasing processes do not use strategies. Goods are ordered as needed. So, based on its simplicity, the purchase cycle is typically concluded within a week.
The Procurement Process
The procurement process is much more than placing an order. Its workflow constitutes of the following:
- Identification of an organization’s internal needs
- Detailed market research to spot and analyze suppliers and compare products
- Shortlisting vendors
- Analyzing cost savings and marginal profits
- Sending requests for quotations
- Raising purchase orders
- Negotiating and managing terms of contracts
- Receiving goods and checking quality standards
- Evaluating supplier performance, from the delivery time to ensuring compliance.
- Receiving invoice approvals and fulfilling payments
- Keeping a record of transactions
- Maintaining supplier relationships
The steps involved in procurement are detailed and often involve more than one department. It is a production process that is a part of the internal environment that goes beyond the transactional aspect of making a purchase. The procure-to-pay cycle can go on for months, especially if a decent bid is not found.
Though acquiring quality goods at low costs is often thought to be the goal of both these processes, procurement and purchasing differ in their aims.
Goals of the Purchasing Process
Purchasing focuses on short-term goals. These include obtaining a sufficient quantity of goods of standard quality at the right cost, time, and place.
Goals of the Procurement Process
Procurement processes have long-term goals. In addition to the identification of needs, the procurement further aims to fulfill them efficiently. The aim is to derive maximum value from the goods and services obtained. An efficient procurement strategy can achieve numerous objectives: It can save organizations money by identifying the costs that can be avoided and negotiating favorable terms of contact and pricing. It aims to ascertain supplier quality, efficiency, and timeliness.
Supporting and fulfilling operational requirements to source products at the right prices from the right suppliers is the first goal. It aims to develop sourcing strategies that support organizational strategy. Developing sourcing techniques that let the organization gain a competitive advantage in the market is one of the main goals of the process.
One of the most prominent aspects of procurement is the focus on supplier management. Maintaining healthy, long-term, mutually profitable partnerships with suppliers is among the significant goals of the process.
The supply chain is plagued by risks that range from delayed deliveries to vulnerability to cybersecurity threats when connecting to suppliers. Risk mitigation is another primary aim of the procurement process, along with the quest for resilience. Procurement officials need to ensure they can predict their responses to challenges that can arise within a supply chain, including delays, non-compliance, reputational concerns, problematic quality, etc.
4. Approach and Focus
Purchasing is purely financial in nature whereas procurement is a strategic activity. The teams involved in these processes have different approaches toward sourcing:
Purchasing is a transactional process, and the teams in charge of it have a reactive approach. They react to need identification and the process begins. The focus is to obtain goods at competitive prices, mostly from vendors within an existing base.
In contrast, procurement is a strategic process; the teams in charge need a very proactive approach to handle procurement activities. The main focus is to identify and develop processes to fulfill an organization’s needs. The procurement process focuses as much on engaging with stakeholders across the company as it does on building relations outside it. The vendor base that is used to choose a supplier in the purchasing process is created through the procurement process.
The procurement teams need to stay on top of market research and economic aspects to make sure the supply chains do not face the risk of disruption. Though investing in long-term relationships with vendors is a critical part of procurement, the procurement teams cannot show complacency and need to keep an eye on both existing and potential vendors.
The processes also vary in the resources an organization has to allocate to manage them.
The purchasing process occurs after a decision has been made. Therefore, the purchasing workflow and goals are fairly straightforward: only a small number of people are required to manage and execute it. The responsibilities are clerical in nature and they just encompass a transactional interaction between the company’s procurement department and the supplier.
Procurement is vast in its scope and affects a company’s bottom line in a number of ways. Therefore, it needs collaboration across multiple departments for accurate identification and spending management. As numerous people contribute to the procurement process, efficient networking is critical for smooth operation.
A number of steps are involved in the process: they begin as the request is initiated, sent to the supervisor and department heads approvals, and then to the procurement department and the finance team. Management of the process entails every aspect from shortlisting suppliers to approving purchase requisitions.
The procurement process needs to be managed in a way that value creation, cost savings, and cost avoidance are evidenced. It further needs to ensure that procurement strategies fall in line with business ethics like environmental protection, refusing to deal with suppliers who exploit labor, etc. Thus, procurement has to reflect the company’s values.
Regulatory laws also need to be tracked by procurement teams to ensure the company does not face any liabilities. Contract creation, management, and renewal also fall under the responsibility of procurement teams. Budget management and tracking spending patterns are other crucial aspects of the process.
Efficient sourcing strategies are vital to an organization’s smooth operations. Small businesses typically use simple purchasing software processes while dedicated procurement teams exist in large, complex companies. The difference between procurement and purchasing is critical to understand for organizations so that they can allot resources likewise. Knowing the differences can further enhance one’s knowledge of the scope of the procurement process and its importance to organizations.
Now tech-enabled tools have made procuring goods and services more feasible and transparent than ever before, so there remains no excuse to delay streamlining sourcing processes. If you feel like your organization is facing losses because of a lack of control over sourcing processes leading to dark spending, rogue purchasing, and being prone to fraud, it may be time to invest in strengthening your procurement strategies rather than letting decentralized purchases go on.
Prasanna Rajendran is the Vice President at Kissflow, where he heads the business operations of Kissflow Procurement Cloud, a flexible purchasing software for procurement teams to streamline all their purchasing processes in a single place. He has over 20 years of experience in technology and has helped Fortune 500 companies with custom solutions in the sourcing and procurement space.