When it comes to acquiring goods and services for business functioning, it is common to find people who use ‘procurement’ and ‘purchasing’ interchangeably. Since both terms come into play when an organization is buying goods and external services, they are often mistaken to mean the same.
However, in reality, they differ significantly in objectives, processes, and the goals they want to achieve for the organization. We know that the methods used by an organization to source goods and services have a significant impact on its cost savings objectives and the ultimate bottom line. Hence, understanding how procurement differs from purchasing will enable organizations to execute these functions and maximize the value they provide effectively.
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Procurement refers to a series of processes that are executed to acquire goods and services for an organization.
What one can infer from this definition is that procurement is an umbrella term with a subset of processes which help fulfill organizational requirements of goods and services. While every organization has its procurement process, a general framework of the processes can be laid out in the following way:
The first step of a procurement process is the identification of a business requirement of goods and services. This step highlights the needs of the various business units in an organization. It helps map the relevant vendor to every requirement without duplicating efforts and resources.
The second step entails identifying a set of suppliers, evaluating them, and finally selecting the most competent supplier for the requirements. Identification of suppliers helps create a list of preferred suppliers that can cater to the requirements. Once the identification of suppliers =, they are evaluated based on critical criteria like pricing, quality, after-sale service, industrial recognition, risks, etc. Post evaluation, the supplier that provides the maximum value at the lowest possible cost is selected.
Post supplier selection, the organization moves to the contracting phase to negotiate the pricing and quality, terms and conditions, scope of work, etc. Effective contracting ensure all obligations are complied with, and the maximum value is extracted from the relationship built with the suppliers.
The payment and delivery process commences after finalizing and signing the contract. Organizations usually initiate payments by releasing Purchase Requisitions (PRs) that act as internal approvals for procuring goods and services from suppliers. Once the relevant authorities approve the PRs, the finance team releases a Purchase Order (PO) for the supplier. POs contain critical information like payment terms, pricing, and quantity, supplier information, etc. Once the supplier receives the PO, an invoice is sent to the organization. Based on the payment terms, before or after the delivery, they release the payment.
The fifth step entails auditing the delivery received and ensuring supplier compliance critical to measuring and evaluating supplier performance. In addition to that, it also helps gauge if a supplier relationship needs to be renewed or terminated.
Purchasing refers to the set of steps associated with executing a transaction between organizations and their suppliers to buy goods and services.
The definition iterates the fact that purchasing, as a process, is a subset of procurement. It starts and ends with placing and receiving an order. Below elaborated are a few steps that constitute purchasing.
This step entails placing an order for goods and services required by various business units, which is typically done by raising PRs that contain information regarding the deliverables expected from the vendor.
After raising a PR, it goes through an approval workflow. All the stakeholders in the workflow need to approve the PR for it to move ahead. Post-approval, they release the PO. POs are commercial documents that officially confirm an order. As mentioned earlier, a PO contains vital information like payment and quantity information, supplier information, and the PO number. Once the supplier receives the PO, it releases an invoice to the organization requesting payment for the order. The matching of the PO and invoice takes place to ensure all order-related information is consistent in both the documents. Organizations have specific payment terms with its vendors. Because of this, a payment release takes place either before or after receiving the request.
After placing the order, the supplier starts tracking the delivery tracking status.
As the name suggests, this step refers to the delivery of the order as per delivery terms and conditions. After receiving the order, the organization conducts conduct an audit to ensure that the supplier has complied with all the terms and conditions regarding fulfilling the order.
If the payment terms dictate so, the supplier receives the payment after fulfilling an order successfully.
After looking at the definitions and processes, one can infer that purchasing is a tactical function, while procurement is strategic. Purchasing pertains to the transactional aspect of buying goods and services; it starts and ends with placing an order and receiving it. However, procurement contains the whole ambit of processes that commence the moment there is any business requirement of procuring goods and services. Procurement focuses on strategic aspects like finding the right supplier, maximizing contractual value, etc. It is an end-to-end function that carries on even after receiving an order, and hence, it is a crucial part of any corporate strategy of an organization.
Purchasing focuses on the cost of the order, while procurement focuses on value creation and Total Cost of Ownership. While purchasing aims to minimize the cost of an order, procurement aims at other objectives like risk mitigation, contract compliance, cost savings, ongoing supplier relationships, etc.
The focus on building supplier relationships is almost absent within purchasing as it tends to only work with the existing supplier base. However, procurement places immense importance on building long-term, collaborative relationships with preferred suppliers. Procurement enables suppliers to be valuable strategic partners of an organization which further enhances the value of a supplier-organization relationship— one of the major underlying reasons behind Supplier Relationship Management (SRM) being a critical component of the procurement function.
Given the transactional nature of purchasing, it doesn’t focus on identifying and mitigating risks. Lack of focus is detrimental to an organization. An Organization faces various supply chain risks while engaging with suppliers like operational risk, financial risk, data security risks, etc. Procurement aims to identify risks with business impact and mitigate them by enforcing compliance amongst all the stakeholders.
In general, people treat procurement and purchasing interchangeably. The reason for that is because of the terms coming into the picture when an organization requires goods and services. However, if one looks closely, there are significant differences between the two. An in-depth understanding of their differences can help organizations improve their performance.
Through this article, it is clear that procurement is an end-to-end function that covers the entire cycle of fulfilling an organization’s requirements of goods and services, even after receiving an order. It aims at strategic activities that will maximize value-creation from the purchaser-supplier relationship. Purchasing, on the other hand, is a subset of procurement that pertains to fulfilling the transactional aspect of acquiring the goods and services which begins and ends with placing an order and its fulfillment.
The processes that constitute both the functions and their scope of work also have a stark difference. They have different goals and objectives which renders purchasing as tactical and procurement as strategic. Procurement places high importance on non-transactional facets of acquiring goods and services and for example, achieving cost savings through effective spend analysis, unlocking the highest value of contractual agreements, enhancing buyer-supplier relationships, etc. To re-iterate, purchasing focuses on placing an order and ensuring timely payments and delivery.