Procurement vs. Purchasing: Understanding the Key Differences

Procurement plays a crucial role in any organization since it has the responsibility of ensuring that all the goods and services needed by the organization are sourced effectively to meet the requirements and, at the same time, keep a step ahead of competitors. It involves more than just buying consumables, it also involves searching for vendors, as well as trying to get the best terms of the contract while at the same time developing good relations with people who can supply high-quality and valuable products.

While the terms purchase and procurement may, at times, be used interchangeably, they perform different roles in acquisition. The entire process of acquiring products and services is encompassed in procurement. It is an effective and detailed approach that entails need assessment, acquisition of suppliers, negotiation of contract, and management of the supplier. It is focused on goals that are more time stable, for example, in goal setting, creating value, and compliance with goals of business strategy.

On the other hand, purchasing is more tactical and specific to operate at the levels of the individual business organization and is concerned with the direct procurement of goods and services, with the major objectives presiding over the function revolving around effective purchasing and cost minimization. It is crucial for organizations to understand such differences and enhance the acquisition processes and their performance in general.

Understanding Procurement: A Comprehensive Overview

Procurement is the total process of purchasing goods, services, or people (on-contract/outsourced) over a certain period. It involves identification, acquiring, negotiating, purchasing, receiving, and accepting goods, invoicing, payment, and supplier administration. Here, costs are kept low, time is reduced, and good working relationships with the supplier are fostered.

Companies can be most often associated with procurement since they have to order services or goods, and this is generally done in larger quantities. This is a vital process that companies must go through before arriving at the final decision.

Key Stages of an Effective Procurement Process:

• Departmental Budget Planning: Budgets are established for teams or departments during the planning stage. The departmental stakeholders and the finance team work together on this process.
• Supplier Selection and Evaluation: Sourcing is the act of acquiring the overall suppliers with satisfying business needs by applying competitive analysis and constant strategic sourcing partnerships. In this review procedure, everyone in the department concerned with the heads of the department and the buying approvers are involved.
• Ordering and Payment Process: At this stage, supplies and services are procured and verified, and payment is made. Another aspect is the satisfaction of organizational requirements together with cost-effective means. The best items are bought at the lowest costs and at the best conditions when the costs and conditions of buying are well observed.
• Performance Review and Relationship Building: This stage involves reviewing current supplier relationships, anticipating future costs and expenses, and making further improvements to cost-cutting and further increasing profit margins. It also employs the historical performance and the data of the current month.

Essential steps in the procurement process:

• Understanding business requirements.
• Purchase order.
• Review of requisitions.
• Create vendor connections.
• Assessment and agreement.
• Order processing.
• Approvals and disputes for invoices.
• Record-keeping and documentation.

A Comprehensive Overview of Purchasing

The collection of tasks involved in obtaining the supplies and services a company needs is known as purchasing. A small portion of the larger procurement activity is purchasing. Ordering, rushing, receiving, and processing payments are all part of this procedure.

Purchasing is the phase of the procurement cycle that deals with the acquisition and payment of products and services. It begins with the purchase order (PO) being created, and it moves logically forward through the billing, fulfilling, transmitting, and paying phases.

Important Steps in the Procurement Process:

• Acquiring a purchase order.
• Making proposal requests.
• Issuing purchase orders officially.
• Getting goods and services.
• Checking the quality of delivered items.
• Making vendor payments.

Purchasing is an activity that occurs across functions; when firms lack controls against risk factors such as procurement mavericks, due diligence, or uninformed orders, they expose themselves to cash leakage through mismanaged purchasing. In addition, if staff members fail to take the necessary precautions to lessen these risks, business continuity, reputation, and data security are all in danger.

Finally, disorder may be felt in the accounting departments for the lack of visibility unregulated purchasing brings about. Therefore, established procedures in purchasing must be followed.

Key Procurement and Purchasing Differences:

• Procurement is about long-term goals that support competitive advantage and strategic outcomes by seeking out and finding the most cost-effective option from among viable solutions while also considering factors other than price or vendor location. Purchasing has more to do with short-term objectives that are centered on controlling business expenses and managing to acquire certain resources.
• Purchasing is done increasingly in response to internal requirements. When it becomes clear that you need something, you purchase it. Procurement, however, adopts a proactive stance. This is because it collaborates with every department to determine the appropriate needs. Procurement’s practical market knowledge aids in product design as well.
• Purchasing is only done through transactions. It is the primary goal instead of fostering relationships. The purchasing agent is concentrated on carrying out the deal as effectively as possible. On the other hand, it is more relational in procurement. The procurement specialist’s primary goal is to build and preserve beneficial, long-term connections with suppliers and vendors who meet the necessary qualifications.
• Value-based procurement prioritizes the importance of a certain good or service. Rather than the price, they are more interested in the brand that does business. In purchasing, value is never prioritized over price. This makes it obvious, given that the primary responsibility of the role is effective cost control.
• Procurement is usually done before purchase, even though it includes the act of purchasing something. Procurement activities cover every step of the process, from need identification to bill payment and fulfillment. On the other hand, at the conclusion of the procurement procedure, when the demand has already been met, purchasing takes place.
• Purchasing concerns itself with the fundamental duties associated with obtaining goods or services. With a purchasing function, transactions of ordering, receiving, and payment are considered. The purchasing function’s focus is on transactional functions like purchase orders, buy requisitions, and payment processes. Procurement's focus is on the "bigger picture." Finding and meeting a company’s demand as soon as feasible with the greatest amount of efficiency is the key objective. It is also known as the procure-to-pay process (P2P), and it entails more than just financial transactions. It is expected of a procurement team to establish and nurture long-lasting connections that ultimately save the business money.

With our extensive range of service options at Procurement Resource, you can help your procurement strategy achieve the maximum level of success by giving your company the ability to make informed business decisions.

Our solutions are designed to promote efficiency and cost savings by enhancing supplier performance through a shared objective of accelerating growth, which is assisted by comprehensive supply chain intelligence. We are producing insightful work in conjunction with data science teams through procurement analytics. Understanding market dynamics and pricing patterns through category Insights allows for efficient risk management and spending optimization without losing sight of chances arising from competitor strategies that fall within the scope of market intelligence.

Our expertise in supply chain intelligence, procurement analytics, category insights, and market intelligence services helps you to make confident business decisions in the pursuit of sustainable, profitable growth. Contact us now to understand how we can help your company succeed in the dynamic global marketplace.

Author

Mansi Singh (Associate Business Analyst in Procurement Resource)