October 18, 2022 | Purchasing
A routine task for businesses is to acquire goods and services for their operations, and quite often the terms' purchasing' and 'procurement' are interchangeably used for these acquisitions. The two activities are, in reality, different and require to be performed with vastly different approaches and intent.
Procurement is the set of processes implemented to obtain an organization's goods and services. Procurement is, therefore, the broader term that includes all actions before the issue of the purchase order.
Purchasing is the set of activities between the organization and the supplier that are undertaken in the transaction of buying goods and services. Purchasing is a subset of the procurement process spanning activities from placing the purchase order to receiving goods and services.
Depending upon its size, industry and organizational structure, every business will have its procurement process. However, the general steps in the procurement process include:
The first step in the procurement process involves identifying the business needs for the goods and services. The needs of the various business units are identified, and a vendor for each need is mapped.
In the second step of the procurement process, a set of suppliers for the identified requirements is shortlisted, the suppliers are evaluated, and a final selection of the most suitable suppliers is made. These suppliers are then evaluated on pricing, quality, reputation, after-sales services, etc. After completing the evaluation, the supplier providing the maximum value at the lowest cost is selected.
After the supplier has been selected, pricing, quality, quantity, terms of supply, etc., need to be negotiated and finalized. Efficient contracting helps ensure that all contractual obligations are met, and that the organization receives the promised value from the supplier.
Here are the steps involved in the purchasing process:
In this step, a purchase requisition is raised detailing the deliverables required from the supplier. The requisition is then evaluated and approved by the concerned stakeholders for the next steps to be initiated.
After the requisition is approved, the purchase order is released. The purchase order details all the contractual terms, such as the payment terms, quantity, and supply dates. On receipt of the purchase order, the supplier raises an invoice.
On receipt of the order, the organization verifies that all the contract terms have been fulfilled. On successful verification of order fulfillment, payment is released to the supplier.
The terms, although used interchangeably, are different. The differences include:
Procurement is a strategic function undertaken to fulfill a specific business need. It goes deeper into exploring different options and then making the most suitable choice that provides the most value to the organization. On the other hand, purchasing is a tactical function dealing with ordering and receiving goods and services.
Procurement emphasizes fostering long-term, mutually beneficial relationships with suppliers. Purchasing only works with the suppliers and does not focus on fostering supplier relationships.
Purchasing is a transactional activity and does not pay attention to risk identification and mitigation. Procurement is cognizant of the operational and financial risks of dealing with suppliers and being a part of the larger supply chain. It takes steps to mitigate the risks to eliminate any business impact.
Purchasing is more concerned with the cost of the order; the goal is to minimize the cost. Meanwhile, procurement emphasizes value creation and other factors such as the total cost of ownership, supplier relationships and contract compliance.
Because of its tactical nature, purchasing is transactional—dealing with purchasing goods and services. Procurement has strategic aims — finding the best supplier, maximizing contractual value, etc.
The similarities between purchasing and procurement lie in that both deal with obtaining goods and services. Purchasing as a function is contained within the larger function of procurement.
Are purchasing and procurement the same thing? No, they differ significantly in their objectives, processes and goals. Organizations can realize significant cost savings by optimizing their procurement versus purchasing processes and benefit from the positive impact on the bottom line.
Understanding the differences and similarities between the two can position organizations to efficiently perform purchasing and procurement management to derive maximum business value.
With businesses under pressure to deliver cost savings, understanding the difference between procurement and purchasing is the first step to unlock not only short-term benefits but also long-term value.
Both are important. They have different goals and serve separate functions, but together deliver value.
Yes, procurement is the broader function. Purchasing is a subset of procurement.
Sourcing is finding the items required to be bought, and purchasing is buying them. Purchasing is a subset of the broader procurement activity.