Procurement vs. Purchasing: The Definitive Guide

Welcome to our latest blog post, which clarifies the differences propagating the’ Procurement vs Purchasing debate.’ While often used interchangeably, they represent distinct aspects of supply chain management. Understanding ‘procurement vs purchasing’ is fundamental to optimizing your business operations, and this blog aims to help you do just that.  

Procurement vs. Purchasing: What is Purchasing?  

Purchasing is the act of acquiring goods or services. It is the transactional phase of the process, which includes activities like order placement, price negotiation, and receipt of goods.  

No, procurement and purchasing are not the same. Purchasing is a part of the procurement process. Purchasing is more transactional – it’s how goods or services are ordered. On the other hand, procurement is an umbrella term that includes purchasing but also involves identifying company needs, selecting suppliers, establishing payment terms, and managing supplier relationships. 

Take, for instance, a company’s purchasing department that sources raw materials from a supplier, negotiates the price, and places the order. The goal of purchasing is to acquire the correct goods, at the best price, within the appropriate timeline.  

Procurement vs Purchasing: Understanding Procurement  

Procurement is a broader, more strategic process when comparing’ procurement vs purchasing.’ Procurement includes purchasing and encompasses identifying the organization’s needs, sourcing potential suppliers, negotiating contracts, establishing payment terms, and even managing supplier relationships.  

For example, a company might need new office chairs. The team conducts research, evaluates suppliers based on cost, quality, and sustainability practices, and negotiates terms before making a purchase. The procurement process ensures that the organization’s needs are met effectively and efficiently.  

From a strategic standpoint, procurement is more relevant long term. Using the same example as before, a company may require new office chairs every so often that the procurement team must purchase chairs every 6-12 months. They cannot, or more to the point, need not go through the entire procurement process all over again if they maintain a good relationship with their previous vendors/suppliers and their quotes are favorable.  

Now, imagine this extrapolating to all of the organization’s purchasing needs.  

Procurement vs Purchasing: The Key Differences  

Even though purchasing and procurement involve acquiring goods or services, their scope and depth fundamentally differ when considering ‘procurement vs. purchasing.’  

Purchasing, a part of procurement, is more transaction-focused, dealing with the buying and receiving goods. On the other hand, procurement is an all-encompassing process, dealing with supplier selection, risk management, contract negotiation, and even performance evaluation.  

To simplify these differences, here’s a comparison chart:  

Procurement	Purchasing
Strategic	Transactional
Long-term	Short-term
Proactive	Reactive
Managing supplier relationships	Buying goods/services

Examples of Procurement and Purchasing 

There are many different types of procurement and purchasing, but they all have one goal in mind: to get the best product or service for the best price. Here are a few examples of procurement and purchasing: 

1. Open market procurement: This is when the government buys goods or services from the open market, without any restrictions on who can provide the goods or services. 
2. Competitive bidding: This is a process where potential vendors submit bids to provide goods or services, and the government chooses the bid that offers the best value. 
3. Sole source procurement: This is when the government contracts with a single vendor for goods or services, because that vendor is the only one who can provide what is needed. 
4. Reverse auction: In this type of procurement, vendors compete against each other to offer the lowest price for goods or services. The government contracts with the vendor who offers the lowest price. 
5. Request for proposal (RFP): An RFP is issued when the government wants to buy goods or services, but there are multiple vendors who can provide what is needed. Vendors submit proposals outlining their prices and qualifications, and the government chooses the proposal that offers the best value. 

Procurement vs. Purchasing Lifecycle  

While we’ve delved into the specifics of procurement and purchasing, understanding the entire lifecycle of these processes will further highlight their unique roles and impacts on businesses. When we talk about ‘Procurement vs. Purchasing,’ each phase involves its own set of activities:  

Purchasing Lifecycle:  

1. Requisition: The need for a product or service is identified.  
2. Purchase Order Issuance: A formal order is placed with the supplier.  
3. Delivery and Receipt of Goods/Services: The ordered goods/services are received and inspected for quality and quantity.  
4. Invoice Approval and Payment: The supplier’s invoice is checked, approved, and the payment is made.  
5. Record Keeping: Details of the transaction are recorded for future reference.  

Procurement Lifecycle:  

1. Identifying Needs: This is the first step, where an organization determines and quantifies its requirements.  
2. Market Research: The organization surveys the market for potential suppliers who can fulfill these needs.  
3. Supplier Evaluation and Selection: Suppliers are evaluated on various parameters such as price, quality, delivery time, and post-purchase service. The most suitable ones are selected.  
4. Negotiation: This involves negotiating the price, delivery, and payment terms with the selected suppliers.  
5. Contract Formation: A formal contract is drawn up with the agreed terms and conditions.  
6. Review and Control: Supplier performance is continually reviewed once the contract is in place reviewed, and corrective actions are taken if required.  

Difference between Procurement and Purchasing, in terms of technology used?  

Technology plays a significant role when distinguishing ‘procurement vs. purchasing.’ Technologies such as AI, IoT, Blockchain, and Cloud Computing have brought about immense efficiency, cost-saving, and improved risk management in both procurement and purchasing.  

However, purchasing is a relatively low-tech process, often involving basic software facilitating placing orders, tracking, supplier communication, and payments. 

However, procurement has a larger scope for higher-tech applications. For instance, AI can streamline procurement by automating tasks like supplier research and contract analysis. Simultaneously, IoT devices can track goods in real time during the purchasing process, enhancing transparency. ‘Cognitive Analytics’ can process data from IoT devices, organizational needs, purchasing patterns, and suppliers to provide a comprehensive lay of the land and inform the procurement strategy in the future.  

What does your organization need – Procurement or purchasing? 

Choosing between procurement and purchasing involves considering various factors, including your business size, industry, and specific needs.  

Smaller businesses with less complex operations may lean more towards purchasing due to its immediacy and transactional nature. In contrast, larger corporations or those in industries with complex supply chains would benefit from a comprehensive procurement strategy that offers long-term benefits and strategic alignment with their business goals.  

Conclusion  

While procurement and purchasing play significant roles in an organization, it’s crucial to understand ‘procurement vs. purchasing.’ Recognizing their unique functions and strategic value can significantly impact your business’s operational efficiency, cost savings, and supplier relationships.  

Frequently Asked Questions: Procurement vs. Purchasing 

1. Can a business have both procurement and purchasing functions? 

Many companies, especially larger ones, have separate procurement and purchasing functions. The procurement team is involved in strategic decision-making about suppliers, contracts, and risk management. In contrast, the purchasing team deals with the transactional aspects of ordering, receiving goods, and making payments.  

2. How does technology impact procurement and purchasing? 

Technology can significantly streamline and enhance both procurement and purchasing processes. Advanced software can automate mundane tasks, provide data-driven insights for better decision-making, enhance visibility into supply chains, and improve supplier collaboration.  

3. Which is more critical – procurement or purchasing? 

Both procurement and purchasing have unique importance and cannot be compared directly. Procurement is more strategic and can have a broader impact on a company’s bottom line, supplier relationships, and risk management. Purchasing, being a part of procurement, is essential to ensure that the day-to-day operations of a business run smoothly

Remember, it’s not about choosing between procurement and purchasing. Instead, it’s about understanding their unique roles in your business and ensuring they work together effectively.