The phrases procurement and purchasing are frequently used interchangeably and are sometimes confused with one another. But these two roles are quite different from one another in terms of their goals, the tasks they handle, and most importantly, the results they produce. A layperson might respond that purchase and procurement are the same if you inquire about their differences. However, if you ask a procurement officer of an organization the same question, you will get a much longer explanation of how and why there are so many distinctions between purchasing and procurement. Some businesses indeed prefer to use one term over the other, but failing to understand the essential distinctions between purchasing and procurement can cause a business to ignore crucial elements that could seriously harm its bottom line.
Purchasing vs. Procurement
When sourcing and acquiring goods and services, procurement and purchasing differ in that the former is a strategic process and the latter is a transactional one. While the purchasing process focuses on how goods and services are acquired and ordered, such as issuing purchase orders and making payment arrangements, procurement focuses on the strategic process of product or service sourcing, such as researching, negotiating, and planning. Purchasing and procurement are two distinct business operations that have to do with locating and acquiring goods and services. They are frequently considered to be a part of the procurement department. One might conclude that purchasing is a tactical function while procurement is a strategic one after looking at the definitions and methods. The act of placing an order and receiving it marks the beginning and finish of the transactional products and services. However, procurement encompasses the entire range of procedures that start as soon as a business needs to acquire goods and services. The strategic elements of procurement, such as choosing the best supplier and maximizing contractual value, are the main focus. It is an integral component of any corporate strategy of an organization because it is an end-to-end process that continues even after receiving an order.
Difference Between Purchasing and Procurement (In Tabular Form)
|Meaning||Refers to the process of receiving goods and services from an external supplier.||Activities related to the buying of goods and services from an external supplier.|
|Involves||Covers a wide range of activities ranging from needs analysis to invoicing.||A straightforward process that covers the act of buying.|
|Focus||Focuses on value creation, total cost of ownership, risk mitigation, cost savings, and ongoing supplier relationship.||Most often, purchasing focuses on minimizing the cost of an order and ensuring the quality of the product/service purchased.|
|Nature||A strategic process that seeks to obtain the best possible price and terms for the buyer.||Transactional in nature and focuses on simply acquiring goods or services as needed.|
|Requirement of Planning||It requires planning and foresight to get the best possible deal.||it can be done on an as-needed basis without any advanced planning.|
|Reliability||A data-driven process that takes into account all available information before making a purchase decision.||It relies more on intuition and gut feeling than actual data when making decisions.|
What is Procurement?
The strategic sourcing of a good or service is done through the procurement process flow. This compromises recognizing a specific need for a product or service and the activities a firm takes to find new or existing suppliers, develop relationships with suppliers, quantify cost savings, reduce risk, and be primarily focused on value and return on investment.
This definition leads one to the conclusion that procurement is an umbrella term that includes a collection of procedures that assist in meeting organizational needs for products and services. Every organization has its procurement process, but the following outline provides a broad overview of the procedures:
- Step1: Identifying business requirements
The identification of a business need for goods and services is the first stage in a procurement process. The needs of the various business units within an organization are highlighted in this step. Without duplicating efforts and resources, it helps match each requirement with the appropriate provider.
- Identifying, evaluating, and selecting relevant suppliers
Finding a group of vendors, assessing them, and ultimately choosing the best source for the needs make up the second stage. A list of preferred suppliers who can meet the needs can be created with the help of supplier identification. After suppliers have been identified, they are assessed based on important factors like pricing, quality, after-sale services, industry reputation, risks, etc. Following evaluation, the supplier offering the greatest value at the most affordable price is chosen.
- Negotiating contracts with selected suppliers
After choosing a supplier, the business enters the contracting stage to haggle over terms and conditions, scope of work, pricing, and other factors. Effective contracting ensures that all responsibilities are met and that the connection developed with the suppliers is exploited to its full potential.
- Initiating payment to the suppliers and receiving delivery
The contract is completed and signed after which the payment and delivery process begins. Purchase Requisitions (PRs), which serve as internal permissions for acquiring products and services from suppliers, are typically released by organizations to begin payments. The finance team issues a Purchase Order (PO) for the supplier when the required authorities authorize the PRs. Important details like payment terms, pricing, quantity, supplier information, etc. are all included in POs. An invoice is delivered to the company by the supplier following receipt of the PO. They release the payment either before or following delivery, depending on the payment terms.
- Auditing delivery and ensuring compliance
The audit of the delivery that was received and assurance of supplier compliance, both of which are necessary to gauge and assess supplier performance, make up the fifth phase. Additionally, it assists in determining whether a supplier relationship should be continued or ended.
Examples of Procurement
- Open Market Procurement: When the government purchases products or services on the open market, no one can supply the products or services.
- Sole Source Procurement: This is when the government contracts with a single vendor for goods or services, and the government chooses the bid that offers the best value.
- Reverse Auction:
What is Purchasing?
The collection of tasks involved in procuring the products and services that an organization needs is known as purchasing. A small portion of the larger procurement function is purchasing. Ordering, expediting, receiving, and satisfying payment are all part of this process. A component of procurement, the purchasing process is concerned with the transactional stage of the acquisition of goods and services. The main focus of purchasing is being able to meet immediate objectives for quantity, pricing, and timing.
Several of the steps that make up purchasing are described below:
- Placing an Order
This stage comprises placing an order for the products and services that different business units need. This is done commonly by raising PRs that detail the deliverables that the vendor is expected to provide.
A PR goes through an approval workflow after it is raised. The PR must receive approval from each participant in the workflow before it can continue. They then release the PO after approval. POs are business records that formally confirm an order. A PO, as previously discussed, comprises important information such as payment and quantity details, supplier details, and the PO number. Following receipt of the PO, the supplier issues an invoice to the company requesting payment for the order. To ensure that all order-related information is consistent across both documents, the PO and invoice are compared. With their vendors, organizations have clear payment terms. As a result, a payment release occurs either before or following receipt of the request.
- Tracking an Order
The provider begins monitoring the delivery tracking status as soon as the order is placed.
- Receiving and Auditing the Order
As the name implies, this stage deals with the delivery of the order following the delivery terms and conditions. The company conducts an audit after receiving the order to make sure the supplier has met all the requirements for completing the order.
- Making Payment for the Order
If the payment terms require it, the provider is paid after completing an order.
Examples of Purchasing
- Request for Proposal (RFP): When the government needs to purchase products or services yet numerous vendors can fulfill the requirement, an RFP is issued. The government selects the vendor’s proposal that delivers the best value after receiving proposals from vendors explaining their costs and credentials.
When to Use Procurement over Purchasing or Vice-versa?
When to choose procurement services over purchasing services or vice-versa depends on a variety of factors. Here are some crucial things to remember:
- Timing: Buying something outright could be preferable if you need it straight away. The process can take longer because there are more steps involved in procurement, such as creating an RFP, choosing a vendor, and negotiating a contract.
- Quantity: Procurement could be a better choice if you require a lot of things because you can get volume savings.
- Customization: If you need anything created to a certain specification or customized, purchasing is frequently the best option because you can communicate with the seller to make sure they are aware of your requirements.
- Price: Buying services outright may occasionally be less expensive than using procurement services. It depends on the state of the economy and the kinds of deals that are available.
- Relationship: Purchasing may be a better option than going through the procurement process with a new vendor if you enjoy working with them and want to keep doing so.
Main Differences Between Purchasing and Procurement in Points
- While procurement concentrates on value creation and Total Cost of Ownership, purchasing concentrates on the cost of the order.
- While purchasing aims to keep order costs as low as possible, procurement aims at other objectives like reducing risk, ensuring contract compliance, saving money, maintaining supplier relationships, and other goals.
- Due to its propensity to solely work with its current supplier base, buying places almost no emphasis on developing relationships with suppliers. However, developing long-term cooperative relationships with preferred suppliers is extremely important in procurement. One of the main reasons why Supplier Relationship Management is a crucial part of the procurement function is that procurement makes suppliers become valued strategic partners of an organization, which increases the value of a supplier-organization relationship.
- Purchases are made increasingly in response to internal requirements. Once you realize you need something, you purchase it. The procurement process, on the other hand, is proactive. This is because it collaborates with each department on the proper needs. With practical market knowledge, procurement also aids in product design.
- The value of a particular commodity or service is the only factor that procurement considers. Instead of focusing on the cost, they are more interested in the brand doing business. Purchasing always prioritizes value over money. This makes logical given that the position’s primary responsibility is effective cost management.
- Even though purchasing something is a part of the procurement process, it is always done before purchasing. The range of procurement activities includes all steps involved in meeting a requirement, including finding a solution and collecting payment. When the need has already been satisfied near the end of the procurement process, purchasing takes place.
Most of the time, individuals confuse the terms procurement and purchase. The terms that come into play when a company needs goods and services are the cause of that. But if one examines it carefully, one can see that the two have important distinctions. Organizations can function better if they have a thorough awareness of the contrasts between them. The full cycle of satisfying an organization’s needs for goods and services, even after receiving an order, is covered by procurement, which is shown in this article. It focuses on tactical actions that will maximize the value that may be created from the buyer-supplier relationship. The transactional part of procuring products and services, which begins and ends with placing an order and its fulfillment, is fulfilled through purchasing, which is a subset of procurement. The methods that make up the functions and their range of activity also differ significantly.