Procurement vs. purchasing: what’s the difference?

The process of procurement is an essential part of conducting business. Well-designed and smart procurement processes reduce costs and boost efficiency. This procurement process entails defining needs, researching suppliers, negotiating contracts, and optimizing inventory management.

When the procurement process is aligned with organizational goals, it can foster strong supplier relationships, cost savings, and ethical supply chain practices. 

In this article, we will delve into the nuances of procurement and purchasing, shedding light on their differences and roles in an organization. We will also discuss how the effective use of these processes can significantly impact your business's bottom line.

Understand the significance of invoice reconciliation in both procurement and purchasing processes by visiting What is Invoice Reconciliation?.

Procurement vs. purchasing: defining the two terms

While procurement and purchasing are often used interchangeably, they represent different aspects of acquiring goods and services.

Procurement is a broad process that includes activities like need identification, supplier research, price negotiation, contract awarding, and inventory control. It's a strategic function aimed at optimizing organizational spending, strengthening supplier relationships, and ensuring a steady supply of goods and services for the organization's operations. It is part of the larger source to pay process.

On the other hand, purchasing is a subset of the procurement process that involves the transactional exchange of money for goods or services. It's more operational and focuses on ordering, receiving, and paying for goods or services.

Procurement is about strategically planning and managing the sourcing activities, while purchasing is about executing these plans and carrying out the transactions.

To further illustrate these differences, let's consider a practical example. Suppose an apparel company needs to source fabric for its upcoming clothing line. The procurement process would involve identifying the fabric's specifications, researching potential suppliers, and negotiating contracts with the chosen supplier(s).

Once the contracts are in place, the purchasing process comes into play. The company would place orders per the contract, receive the fabric, and pay the supplier.

While both procurement and purchasing are crucial for business operations, their roles and responsibilities differ significantly.

Understanding the procurement process

The procurement process is a structured method essential for organizations to obtain goods and services efficiently. Procurement involves reviewing, ordering, receiving, and paying for goods or services, while purchasing is the overarching process of acquiring these necessities.

In any procurement management, the 3 Ps—Process, People, and Paperwork—are crucial. The management of the three Ps is usually performed through the following steps: 

• Needs recognition: Organizations identify their requirements for goods, services, or works, outlining what is necessary for their operations.
• Purchase requisition: Formal requests are generated detailing the items needed, their quantity, and essential information required for procurement decisions.
• Requisition review: The requisition undergoes careful scrutiny for accuracy and necessity, focusing on budget availability and managerial approval.
• Solicitation process: Organizations develop a procurement plan and strategy, inviting potential suppliers through Requests for Quotation (RFQs). Bids from suppliers are received, compared, and evaluated to shortlist suitable candidates.
• Evaluation and contract: Supplier quotations, delivery times, and terms are reviewed and assessed. The most suitable supplier is chosen based on evaluations, and contract terms are negotiated and finalized. A formal purchase order (PO) is issued to the selected supplier, solidifying the agreement.
• Order management: Suppliers deliver the agreed goods, services, or works within the stipulated time frame. Buyers inspect received items, ensure quality and accuracy, and address discrepancies with suppliers.
• Invoice approvals and disputes: Invoices are meticulously matched with Goods Receipt Notes (GRNs) and POs to confirm accuracy. Any discrepancies or conflicts are resolved through communication with suppliers. Approved invoices are processed for payment.
• Payment processing: Upon receipt of an invoice that matches the PO and goods received, the organization processes the payment. This can be done through various methods, such as bank transfers, credit card payments, or check issuance. The payment method depends on the agreed terms in the contract.
• Record keeping: Comprehensive records include purchase requests, approved invoices, contracts, and relevant documentation. All records are stored centrally, facilitating effective bookkeeping, audits, and future reference for the organization.

Types of procurement

There are three primary categories of procurement activities: direct, indirect, and services.

Direct procurement

This category encompasses directly acquiring raw materials, machinery, and wholesale items, directly contributing to the company's final product. Key stakeholders involved in direct procurement processes include procurement officers and contracted suppliers.

Indirect procurement

Indirect procurement involves acquiring items, such as office supplies, which do not directly impact the company's final product or financial bottom line. Instead, these purchases support the day-to-day management of the business. In smaller companies, office managers might handle indirect procurement, whereas larger corporations might enlist facilities management companies for these tasks.

Services procurement

This type of procurement includes hiring temporary staff, leasing software, and engaging short-term vendors for events or seminars, expanding beyond tangible goods to encompass various service-based acquisitions.

Understanding the purchasing process

The purchasing process is the next step after the procurement process. It is the actual transaction where goods or services are bought from suppliers.

This process is a subset of procurement, encompassing the entire process from identifying the need for a product or service to paying the supplier. The purchasing process can be broken down into the following steps:

Order placement: Once a supplier has been selected through the procurement process, a purchase order is placed detailing the goods or services required, their quantities, delivery instructions, and the agreed price.

Delivery: The supplier delivers the ordered goods or services per the purchase order. The delivery should be timely and meet the specified quality standards.

Inspection and verification: Upon delivery, the received goods or services are inspected to ensure they match the purchase order in quantity, quality, and specification. Any discrepancies are communicated to the supplier for rectification.

Invoice processing and payment: Once the goods or services have been verified to meet the order's requirements, the supplier sends an invoice. The invoice is checked against the purchase order and delivery documentation for accuracy. If everything checks out, the invoice is approved, and payment is processed.

Recordkeeping: All documentation related to the purchasing process, including the purchase order, delivery documents, and invoice, is kept for future reference and auditing purposes.

As you can see, the scope of procurement is much broader than purchasing. It includes strategic planning, supplier research and selection, value analysis, financing, price negotiation, purchasing, supply contract administration, inventory control and stores, disposals, and other related functions.

The purchasing process, on the other hand, is a part of the procurement process that deals specifically with the purchasing activity. It is more transactional, routine, and clerical compared to procurement.

Types of purchase orders

There are four main types of purchase orders: standard, planned, blanket, and contract. Each type has its unique characteristics and use cases.

Standard purchase orders

These are the most common types of purchase orders. They are used when a company knows what they need, such as the quantity, price, and delivery schedule.

Planned purchase orders

Planned purchase orders are used when a company knows it will need specific goods or services but doesn't have all the details yet. These orders are often used in conjunction with a master agreement.

Blanket purchase orders

Blanket purchase orders establish long-term supplier relationships for repeat purchases. They often specify a maximum quantity or total cost for purchasing things over a specified period. This allows for flexibility regarding when the goods or services are delivered while still locking in a set price.

Contract purchase orders

Contract purchase orders are used when a company enters into a contract with a supplier to deliver goods or services over a set period. This type of order typically includes more specific terms and conditions than other types of purchase orders, such as penalties for late delivery or non-compliance with the contract terms.

These different purchase orders allow companies to manage and control their purchasing activities effectively, ensuring they acquire the goods and services they need most cost-effectively and efficiently.

The difference between procurement and purchasing

Purchasing, a subset of procurement, is transaction-oriented, primarily dealing with the buying and receiving goods. In contrast, procurement encompasses a broader spectrum involving supplier selection, risk management, contract negotiation, and performance evaluation, making it a strategic and proactive process.

Since purchasing is part of the procurement process, many of the steps of purchasing are part of the procurement steps.

Choosing between procurement and purchasing depends on business size, industry complexity, and specific needs. Smaller businesses might lean towards purchasing due to its immediacy. At the same time, larger corporations and those in intricate supply chain sectors benefit from comprehensive procurement strategies, offering long-term advantages and strategic alignment with their business goals.

Examples of procurement and purchasing

An example of a typical purchasing process: A company's office manager identifies the need for office supplies such as pens, paper, and printer cartridges. The office manager then directly contacts a local office supply store or places an order online to buy the required items. This transaction involves the simple act of buying the goods needed for immediate use. In this case, purchasing focuses solely on obtaining the items necessary for day-to-day operations.

A typical example of procurement: The company's procurement department thoroughly analyzes office supplies requirements. This involves evaluating various suppliers, negotiating contracts, considering bulk discounts, and assessing the long-term relationship potential with the suppliers.

The procurement team might issue a Request for Proposal (RFP) to multiple office supply vendors, comparing their offers in terms of price, quality, delivery times, and additional services. After careful evaluation, the procurement team selects a supplier based on strategic considerations, not just immediate needs.

Procurement encompasses a broader perspective, including supplier selection, risk management, and long-term cost-efficiency. It involves a more strategic and multifaceted approach beyond the transactional aspect of purchasing.

In comparison, purchasing is often a more reactive approach, responding to immediate needs without necessarily considering long-term implications.

The distinction between procurement and purchasing becomes even more evident in larger, more complex organizations. For instance, a multinational corporation might have a dedicated procurement department responsible for managing supplier relationships across different countries and regions. This entails understanding local market conditions, navigating regulatory frameworks, and building strategic partnerships with local suppliers to ensure a stable supply chain.

On the other hand, the purchasing team in the same organization might focus on the day-to-day procurement of goods and services required for operational purposes. They might be responsible for placing orders, ensuring timely delivery, and processing invoices.

The role of procurement manager vs. purchasing manager

While both procurement and purchasing managers play crucial roles in an organization, their responsibilities and objectives often differ.

Here’s a quick comparison of their roles and responsibilities:

Procurement Manager:

• Develops and implements procurement strategies aligned with company goals.
• Builds and maintains relationships with suppliers, negotiates contracts, and manages supplier performance.
• Identifies and manages potential risks in the supply chain.
• Works towards long-term cost reduction and efficiency improvements in the procurement process.
• Establishes and enforces procurement policies and procedures.
• Set up e-tendering procedures or use an e tender software and ensure adherence.

Purchasing Manager:

• Ensures the timely placement and delivery of orders.
• Communicates with suppliers for order confirmation, delivery times, and invoice reconciliation.
• Maintains appropriate inventory levels and ensures the availability of necessary goods and services.
• Checks and ensures the quality of received goods.
• Negotiates with suppliers for immediate cost savings on purchase orders.
• Handles problem resolution related to invoice discrepancies, shipping errors, and order rejections.

The procurement manager operates at a strategic level, focusing on long-term goals and objectives, while the purchasing manager deals with day-to-day operational activities. Both play vital roles in ensuring the smooth functioning of an organization's supply chain.

Total cost of ownership in procurement and purchasing

TCO is a financial estimate that helps organizations determine a product or system's direct and indirect costs. It goes beyond the initial cost considerations to include factors such as maintenance, operation, replacement, and even disposal costs in some cases.

TCO is a critical factor in supplier selection and contract negotiations in procurement. It allows procurement teams to assess the long-term cost implications of partnering with different suppliers. Therefore, a supplier with a slightly higher initial cost but lower maintenance or operation costs might be more cost-effective in the long run.

In purchasing, TCO is often used to compare the costs of different products or suppliers at the point of purchase. It helps purchasing teams make informed decisions based on the total cost rather than the upfront price. However, purchasing often prioritizes immediate cost savings, so focusing on TCO might not be as comprehensive as in procurement.

Best practices for an efficient procurement and purchasing process

Improving the efficiency of procurement and purchasing processes can significantly impact an organization's bottom line.

For instance, streamlining the procurement process by implementing a digital procurement system can reduce manual effort, improve accuracy, and speed up the process. Similarly, automating the purchasing process with an intelligent AP automation solution can eliminate human errors, reduce processing time, and enable quicker approvals.

Here are some best practices to enhance the efficiency of procurement and purchasing processes:

1. Adopt smart sourcing and strategic sourcing methods

Smart sourcing focuses on choosing suppliers based on the total value they can deliver rather than just their price. It involves evaluating suppliers on various criteria, including quality, reliability, delivery speed, and service level.

For instance, a company might choose a supplier who charges a slightly higher price but delivers consistently high-quality products on time over a less expensive supplier with unreliable delivery times.

Here’s how to implement smart sourcing:

• Identify your needs and specifications before starting the sourcing process.
• Shortlist potential suppliers who can meet your requirements.
• Evaluate suppliers based on various criteria such as quality, reliability, delivery speed, and service level.
• Negotiate contracts with the chosen suppliers, emphasizing total value rather than price.

Strategic sourcing, on the other hand, involves a more comprehensive approach to managing an organization's supply chain. It considers all aspects, from demand planning to supplier contract negotiation, aiming to optimize the overall value of the supply chain.

An example of strategic sourcing is a company forming a long-term partnership with a supplier to secure stable supplies and better prices, thereby reducing risks associated with market fluctuations.

Here’s how to implement strategic sourcing:

• Conduct a thorough market analysis to understand the supply landscape.
• Develop a sourcing strategy based on your analysis and organizational needs.
• Identify potential suppliers and evaluate them based on their capability to meet your strategic objectives.
• Negotiate contracts that align with your strategic goals and benefit both parties.
• Monitor supplier performance regularly and adjust the strategy as needed.

2. Improve supplier management and collaboration

Effective supplier collaboration is a win-win game, fueling innovation, profitability, and trust. Streamlined supply chain processes and joint purchasing strategies boost revenues and ensure competitiveness. McKinsey's survey confirms successful supplier collaboration equals growth, less operating cost, and more profit.

Being a "Customer of Choice" is a bonus, offering privileged access to supplier expertise, lower pricing, and priority during supply shortages. Moreover, it aligns with ESG goals, addressing carbon emissions and fair labor practices. Supplier collaboration is an innovation engine, creating new solutions and growth chances.

Steps to improve supplier management and collaboration include:

• Set up automated reminders and notifications for contract renewals and reviews.
• Maintain transparency by ensuring both parties have visibility into order and task status.
• Decide the KPIs you want to track and ensure the suppliers are aware of them.
• Maintain a central repository or a knowledge base for all supplier-related information, making it easily accessible to all relevant parties.
• Encourage frequent communication and conduct regular meetings to discuss performance, challenges, and opportunities for improvement.
• Foster a partnership-based relationship with your suppliers, treating them as an extension of your business, not just a third-party service provider.

3. Embrace technology proactively

Tech is completely changing the way procurement is handled. AI/ML, cloud, automation, and OCR are some technologies that can help streamline procurement processes. These tools can automate repetitive tasks, minimize errors, improve supplier relationship management, and generate actionable insights from procurement data.

Moreover, they can aid in risk management by providing real-time visibility into supply chain disruptions and ensuring compliance by automating the enforcement of procurement policies.

Here’s a list of procurement tasks that can be optimized with technology:

• Automation can speed up the processing of purchase orders, reducing human error and improving efficiency.
• Cloud-based contract management systems can provide a centralized location for all contracts, making them easily accessible and manageable.
• Real-time data analytics can help identify supply chain risks and disruptions early, allowing for quick mitigation.
• Automated systems can ensure that all procurement activities comply with company policies and regulations.
• OCR and AI can expedite data extraction and processing from documents and invoices, reducing manual labor and improving accuracy.

4. Implement sustainable practices

Implementing sustainable procurement practices protects the environment, enhances brand reputation, increases customer loyalty, and ensures long-term profitability.

In procurement, sustainability can be achieved through responsible sourcing, minimizing waste, and promoting fair labor practices. This involves choosing suppliers who adhere to environmental and social standards and encouraging existing suppliers to adopt sustainable practices.

Questions to consider while implementing sustainable practices in procurement might include:

• Is the supplier committed to reducing their environmental impact?
• Do they follow fair labor practices and ensure safe working conditions for their employees?
• What measures are they taking to reduce waste in their production process?
• Do they have any certifications or awards recognizing their sustainability efforts?

By taking these steps, you can ensure that your procurement process aligns with global sustainability goals and creates value for both your business and society at large.

5. Track and analyze procurement KPIs regularly

Regularly checking procurement KPIs (Key Performance Indicators) is critical to understanding the performance and efficiency of your procurement process. It helps you identify areas for improvement, make informed decisions, and set realistic goals for the future.

KPIs can be related to cost savings, supplier performance, contract compliance, or process efficiency.

Here are a few KPIs that you might want to track:

Cost Savings: Measure the difference between the previous cost of procurement and the current cost. It shows how much you're saving through strategic sourcing and other initiatives.

Supplier Performance: Evaluate your suppliers based on their delivery time, quality of goods, and adherence to contractual terms.

Contract Compliance: Monitor the percentage of contracts that are being adhered to by your suppliers. It shows how effectively your suppliers are meeting their contractual obligations.

Process Efficiency: Track the time it takes to process purchase orders or the number of errors that occur during procurement. It can help identify bottlenecks and areas for improvement.

6. Adopt centralized purchasing

Centralized purchasing refers to the process of making all buying decisions by a single department or team within the organization. This strategy offers several advantages. It reduces redundancy in purchasing activities, ensures uniformity in procurement processes, and allows for bulk buying, which can lead to significant cost savings.

Let’s look at an example of how centralized purchasing can be beneficial:

Consider a software company with multiple development teams. Instead of each team purchasing its software licenses and tools, a centralized procurement department handles these tasks. This ensures that no unnecessary duplicates are purchased, allows for the negotiation of volume discounts, and provides consistent use of tools across all teams.

While centralized purchasing offers numerous benefits, it also requires careful coordination and communication. It is essential to ensure that all teams' needs are accurately represented and that the procurement process is transparent and efficient.

7. Ensure supplier diversification

A diverse supplier base can increase competitiveness and reduce the risk of supply chain disruptions. Purchasing teams should actively seek out and engage with suppliers from different regions, industries, and backgrounds to ensure a reliable and resilient supply chain. This strategy also fosters innovation and can open up new market opportunities.

A diversified supplier base can also help mitigate risks associated with over-reliance on a single supplier. It can also offer opportunities for competitive pricing, improved quality, and access to innovative products and services.

To effectively diversify suppliers, consider the following steps:

• Regularly review and assess your supplier base to identify over-reliance on specific suppliers or regions.
• Actively seek out and engage with new suppliers. This could involve attending industry trade shows, networking events, or using online platforms to discover new potential suppliers.
• Consider the supplier's financial stability, capacity to meet your demand, and commitment to quality and sustainability.
• Regularly review and update your diversification strategy to keep pace with changes in your business and industry.

8. Invest in procurement training and development

Continuous learning and skills development are crucial to staying competitive in the ever-evolving procurement world. Investing in procurement training and development can increase the effectiveness of your procurement team and lead to improved procurement outcomes.

Training can be in the form of workshops, seminars, online courses, or on-the-job learning. Here are a few areas you might consider for training:

• Understanding how to identify, evaluate, and engage with the best suppliers.
• Learning how to negotiate contracts and pricing with suppliers effectively.
• Keeping up-to-date with the latest procurement software and technologies can boost efficiency and accuracy.
• Training on how to incorporate sustainable practices into procurement processes.

What is smart procurement, and what are its benefits?

Smart procurement stands for automated purchasing and the use of advanced technologies. While still evolving, smart procurement involves harnessing these technologies to efficiently process vast amounts of procurement data.

The technological components of smart procurement include,

• Blockchain: Provides secure and transparent transaction tracking, enhancing financial transparency and negotiation positions in procurement.
• IoT: Enables tracking and monitoring inventory, shipments, and products, contributing valuable data to big data analytics.
• RPA: Automates repetitive tasks and processes, increasing efficiency and reducing costs in procurement operations.
• AI (ML, NLP, Big Data, Advanced Analytics): AI tools aid in data analysis, spend classification, vendor matching, and contract summarization, enhancing decision-making.

Smart procurement offers several key benefits for businesses:

1. Better communication: Smart procurement enhances collaboration between buyers, suppliers, and stakeholders, reducing costs and higher-quality products. Automation also helps secure the best deals by identifying suppliers offering competitive prices.
2. Time and cost savings: Smart procurement helps businesses save money by utilizing technologies like data analysis and automation to identify wasteful spending and optimize purchasing processes. For instance, companies can analyze procurement data to pinpoint costly areas and automate bidding processes, ensuring cost-effective purchases. It prevents over-ordering and waste, providing companies buy only what they need. 
3. Increased efficiency: By leveraging technology, companies enhance the efficiency of their procurement processes, resulting in substantial cost savings and making smart procurement invaluable for businesses of all sizes. It also aids in fraud detection by monitoring employee purchases and safeguarding company assets and customer information. Additionally, automation frees up time for innovative endeavors within the purchasing department, fostering creativity and efficiency

Implementing smart procurement

Implementing smart procurement necessitates a strategic approach involving stakeholder engagement, data integrity, and innovative technological integration.  It is crucial to consider the following factors:

• Stakeholder buy-in: Emphasizing the system's benefits and value proposition is essential to secure support from all stakeholders during the implementation phase.
• Quality data: Ensuring the data's accuracy and accessibility is vital, as maintaining high standards to guarantee the reliability of AI systems.
• Human-software interaction: Striking a balance in human involvement, ranging from active approval to full automation, depends on task complexity, facilitating seamless integration.
• Task automation: Streamlining processes through the automation of repetitive tasks and workflow redesign enhances overall efficiency within the procurement system.
• Bias mitigation: Mitigating biases in AI involves diverse training inputs and stringent vetting processes, ensuring fairness and equity in decision-making.
• Cybersecurity: Robust cybersecurity measures are imperative to safeguard data, processes, and information against potential cyber threats, ensuring the system's integrity.
• Continuous improvement: Regular assessments, integration of new technologies, data collection for enhancements, and demonstrating value to stakeholders are critical aspects of ensuring ongoing optimization within the system.

Smart procurement, while revolutionizing traditional practices, demands careful planning, training, and ongoing monitoring to maximize its potential in streamlining procurement processes and driving organizational efficiency.

Take away

Procurement is a crucial process for organizations to acquire goods and services efficiently. It involves smart sourcing, supplier selection, market analysis, and efficient supplier management.

Technology integration streamlines processes, promoting collaboration, innovation, and cost management. Smart procurement offers cost reduction, time savings, and increased efficiency but demands careful consideration of stakeholders' buy-in, data integrity, human-software interaction, task automation, bias mitigation, cybersecurity, and continuous improvement.

FAQ

What is smart procurement?

Smart procurement is a data-driven approach to purchasing goods and services that focuses on reducing costs, improving quality, and increasing efficiency.

What are the benefits of smart procurement?

The benefits of smart procurement include cost savings, risk reduction, building strong supplier relationships, alignment with organizational goals, and promoting ethical practices throughout the supply chain network.

What are the steps to implement smart procurement?

The steps to implement smart procurement include defining needs, researching suppliers, negotiating contracts, monitoring performance, and optimizing inventory management.

What is the difference between procurement and purchasing?

Procurement is a strategic process focused on value, while purchasing is transactional and price-oriented.

What is the procurement process?

The procurement process includes identifying needs, exploring sourcing options, negotiating contracts, onboarding suppliers, creating purchase orders, receiving goods or services, conducting three-way matching, approving invoices, and making payments.

What is sourcing in procurement?

Sourcing is a subcategory of procurement that involves searching for potential suppliers based on cost, quality, reliability, certifications, financial risks, tax costs, and logistical considerations.

What is purchasing vs. procurement vs. sourcing?

Purchasing refers to the transactional process of buying goods or services. Procurement is a broader, strategic process that includes purchasing but also encompasses activities like needs identification, supplier management, and contract negotiation. Sourcing, on the other hand, is a component of procurement that focuses specifically on finding and evaluating potential suppliers.

What does KPI mean in procurement?

In procurement, KPIs may include cost savings, supplier performance, procurement cycle time, process efficiency, spend under management, and contract compliance. These indicators help organizations track performance over time and make informed decisions about procurement strategy and operations.