The purchase vs. procurement distinction is a vital yet often poorly understood concept in business. It helps control corporate spending on the goods and services your business needs to maintain internal operations and or manufacture its product output.
Inexperienced finance teams usually allow their employees to make purchases at will whenever the need, even if first approved, arises. However, this lack of strategic spending almost inevitably results in an inefficient use of the budget and a missed chance to take advantage of savings opportunities and forecasting.
That’s why growing organizations have procurement and purchasing departments specifically tailored to cover this aspect of financial management. While “purchasing” and “procurement” are often used interchangeably, it’s definitely worth knowing the important distinction between the two to get a solid grasp on your financial processes.
We’re going to talk about the two terms, as well as how they apply to budget management. We’ll also cover exactly what you can do to get the most out of your purchasing teams and procurement process overall.
Defining the Terms
If you try to Google search purchasing and procurement, you’ll find that most articles define both together. The concepts are indeed similar enough to be described in the same breath, but let’s start by going into detail about each definition separately.
What Is Procurement?
Have you ever done market research either as a company or as an individual? Any time you’ve had to compare insurance plans or choose a specific smartphone model, on a smaller scale you’ve done part of what procurement departments do every day.
Procurement is the process of finding out your needs, gathering information on the market, building a list of goods and services that fulfill those needs, and acquiring those products from a third-party vendor or supplier. The specific steps involved might include:
- Determining internal needs: Lower-level employees or staff express their desires for new supplies or cloud-based services by submitting a purchase request, which gets sent to relevant supervisors and stakeholders for approval.
- Surveying the market for potential vendors: Research and create a list of potential suppliers that you can purchase those needs from, and narrow it down gradually as you identify your ideal third-party vendor.
- Assessing potential suppliers: Ask for quotations from suppliers in the form of a request for quote (RFQ) or a request for proposal (RFP). Based on the price, quality of products, and vendor reputation and risk, the most suitable third-party supplier will be selected at the end.
- Negotiating with suppliers and building contracts: The ideal supplier is one that can match the quality and price needs of the client while being able to deliver on those goods in an acceptable and agreed upon time frame.
- Generating purchase orders: This document, known as a PO, is a legal document signifying the relationship between the vendor and the client organization for a particular transaction. The PO specifies the delivery times, price, payment method, and other details that both sides have to agree to.
- Receiving goods and checking their quality: Auditing ordered items is important for procurement specialists to make sure they are receiving exactly what they agreed to pay for. Supplier contract compliance is the focus of this step.
- Fulfilling payments through invoice approvals: Once approved, the goods are officially received and final payments are made.
- Developing vendor relationships: At the end of the transaction, the procurement manager assesses the performance and compliance level of the supplier. If all goes well, future purchases will be made from the same third-party.
- Collecting data analytics to improve future procurement: Record keeping is important not only for preventing discrepancies in the ordering process but also keeping tabs on business spending.
The items in question can be anything from office supplies to professional services like consulting. Really anything that is necessary for the continued operations of the company goes through procurement teams, and if there is no procurement team, a procurement process carried out by finance.
What is Purchasing?
- Processing purchase requisitions, proposals, and quotations
- Sending out the purchase order
- Ensuring that delivery procedures are tuned for an on-time delivery
- Receiving the goods and checking on their quality
- Performing a three-way match, where the purchase order, received goods, and original invoice are all compared to ensure consistency
- Issuing payments
You’ll notice that these steps are a portion of the procurement steps we mentioned in the section above. They handle most of the “transaction” phase of the overall procurement process.
Breakdown of the Key Differences
Purchasing largely begins when the request to buy new supplies starts. However, all the work involved in finding the perfect third-party vendor, and everything done to maintain supplier relationships after the fact is outside of the actual definition of purchasing. The broader process is known as the procurement cycle, and purchasing is just the transactional work to acquire goods in the middle.
Procurement and purchasing processes differ significantly in several ways.
- Scope: Purchasing deals with a one-time transaction and aims to optimize it alone. Procurement looks at the overall financial strategy and attempts to build positive relationships with suppliers to ensure future procurement success.
- Goals: Because it includes a more involved process, procurement is used for mission-critical or long-term purchases. Buying a few office supplies will probably just involve the purchasing procedures, but selecting a service provider for year-long professional services would likely fall into the procurement category.
- Time scale: Procurement takes a lot more consideration and work from multiple executives and stakeholders compared to purchasing. As a result, the time scale to be expected for completion is a lot longer for the former.
- Focus: It wouldn’t be incorrect to consider procurement an overall strategic process that impacts the entire company. Purchasing only covers the transactional paperwork and policies. In purchasing, you only think about getting the most out of a single order. In procurement, you’re thinking about how the supplier will contribute to your overall risk mitigation strategy, supplier relationship management, and return on investment.
- Approach: Procurement is a proactive approach that forces management to dig out business needs and respond by acquiring goods. Purchasing is more reactive by satisfying the already given need with a purchase.
- Flexibility: Submitting purchase orders, receiving goods, arranging payment, and other aspects of purchasing are typically standardized across all suppliers. Procurement, on the other hand, can differ immensely among organizations operating with different needs and different organizational structures.
Some companies will even differentiate purchasing managers from procurement managers. The former naturally take on a more focused role than the latter. And procurement itself is just a subset of an overall corporate strategy and must therefore reflect the values and goals of the business as a whole.
Which One Should I Focus On?
The title of this article might imply some type of war between two factions, but it should be clear from our descriptions that the two terms work in tandem. While smaller businesses may conduct purchasing processes more often than procurement processes because purchasing is shorter in scope and involves smaller stakes, all companies rely on both elements to some extent.
The main idea of this article is to emphasize that there’s no contest between purchasing and procurement. Both fulfill essential roles in an organization, whether we’re talking about acquiring goods and raw materials for manufacturing, accounting software or SaaS subscriptions, or basic supplies for employees.
Purchasing can be improved through a few tactics:
- Streamlining approval workflows for requisitions and orders
- Creating a directory of trustworthy suppliers
- Accelerating payment authorization
You can boost the effectiveness of the procurement process by:
- Developing strategies to improve supplier relationships
- Offering training to procurement team members
- Optimizing inventory management
- Deciding on a consistent format for vendor contracts
- Collect data to analyze long-term trends
- Adopting the right tools and technologies to help you out
Improving your purchasing process ultimately supports procurement since the former is housed within the latter.
What About Sourcing and Other Distinctions?
Another term you might have heard when talking about this topic is “sourcing.” Sourcing, yet another component of a broader procurement function, has to do with:
- Identifying potential suppliers
- Choosing the exact products you need
- Negotiating payment terms
- Staying in contact with key vendors
Product selection is a topic we haven’t covered fully just yet. Besides supplier selection, product selection can matter just as much. You need a balance of quality and affordability. For instance, a production facility might be able to take the cheap route with raw materials now, but if the final product suffers as a result, then the ultimate revenue will go down.
Sourcing managers are responsible for obtaining vendor information, discussing pricing and order quantities, and vetting necessary materials from those third-parties.
If you want to dig even deeper, there are other related terms heavily connected with sourcing and procurement. Strategic sourcing has come up as a more dynamic and overarching process compared to traditional or tactical sourcing. And all these terms have to do with supply chain management, an entirely different can of worms to open.
Future Trends To Look Out For
What does the future hold for purchasing and procurement policies across all industries? Like any business process, both are set to evolve heavily as new technologies and methods are discovered and organizations race to adopt the optimal strategy to outpace one another.
Some of the trends we’re starting to see take shape today are the following. Keep in mind that these points aren’t necessarily brand new, but they certainly enjoy a large amount of attention at the moment.
The proliferation of internet communication has allowed companies to operate and compete on a global scale. We are no longer restricted to local suppliers anymore and can order from overseas if necessary.
This trend complicates the work of procurement officers and pushes for the adoption of more efficient tools to handle procurement policies in both efficient, and legal ways.
Legal compliance is becoming a big topic as businesses have faced sanctions for breaking industry standards and governmental regulations regarding the acquiring of goods and services.
If you’ve heard of the term “sanctions screening,” it’s the practice of ensuring that you aren’t working with an entity banned by law. The United States Office of Foreign Assets Control publishes its trade sanctions list of foreign entities that pose a threat to national security. Your own due diligence is required to prevent yourself from accidentally dealing with similar parties.
It doesn’t take a marketing professional to know that today’s customers are demanding a degree of sustainability from the firms they work with. If sustainability is high on your list of business values, then make sure the suppliers you choose reflect that value.
It’s up to procurement departments to add sustainability to the list of factors when deciding among various vendors.
The Significant Impact of E-procurement
No matter which of the two you’re focusing on, getting them both done efficiently nowadays mandates the use of an e-procurement solution. Thanks to trends like globalization and increasing competition in the market, businesses are scrambling to deal with the mess of paperwork and the complicated approval workflow necessary to handle modern procurement.
Procurement cycles can last for months on end, and any delays in processing or communication can cause significant disruptions in operations for businesses and ruin their trust with third-party vendors.
That’s why the demand for e-procurement has arisen. It’s essentially a software platform that assists procurement managers with their work and uses online communication to streamline negotiations. You can think of it as an extension of the digital transformation most firms are going through nowadays.
What exactly does a procurement automation platform do? In addition to reducing or eliminating manual work and human error, automation provides:
- Automated requisitions to order new products whenever inventory goes low
- Software-generated POs that can be distributed automatically
- Vendor tracking to compare various vendors quickly and easily
- Phone notifications for stakeholders so that they can respond to approvals promptly
- Storage of order records for compliance, analysis, and quality assurance
- Spend visibility to ensure transparency, control, and easier auditing
The feature set of individual e-procurement platforms differs, and the ideal one for you depends on the unique needs of the company. But when you’re in the market for an e-procurement software solution, look for these specific functionalities:
- Dashboards so that data can be easily read and interpreted by procurement management. This way, the decision-makers don’t have to go scrambling for all the relevant information.
- Data analytics and reporting for interpreting real-time data. These tools help you make smarter business decisions and spot potential problems early on.
- Integrations with other business tools like enterprise resource planners (ERPs), APIs, and other applications. We certainly work with a lot of enterprise apps from communication to financial management platforms, and keeping everything working together prevents fragmentation and friction in the business.
- Customizability, as tailoring the solution to your needs is often necessary to get a perfect fit.
Getting the best results when it comes to e-procurement means asking the right questions. You need to ask questions such as:
- Is a prospective e-procurement service suitable for the organization?
- Is it capable of serving the magnitude of your demands?
- Is it affordable given the budget?
- Are the features enough for you?
Answering these questions will enable you to find the ideal solution based on your organization’s individual needs.