Is procurement and purchasing the same concept? Most people often confuse both these terms and use them interchangeably. However, there is a world of differences between procurement and purchasing which mainly depend on the results that they create in an organization. In simple terms, procurement and purchasing are two different business processes that are related to the sourcing and acquisition of goods as per the organization’s needs.
If an organization is not able to distinguish between procurement and purchasing, it may overlook some key components that help to improve the bottom line. In this blog, we will see the major differences between both the terms and evaluate their significance in business.
What is purchasing?
Purchasing is the process of buying goods/services for the organization. It is a particular function that comes under procurement. The common steps in the process include placing the order, selecting the suppliers, receiving goods/services, generating invoices and paying the supplier. It mainly focuses on short-term goals such as fulfilling the five rights in a transaction (right quality, right quantity, right cost, right time, and right place).
What is procurement?
Procurement is the process of sourcing and acquiring goods from a third party to fulfill the needs of an organization. It is a strategic process that involves identifying the needs of the organization, finding the right suppliers, building long-term supplier relationships, managing risks in procurement, negotiating with suppliers and creating contracts. The main focus of procurement is to ensure the profitability of the organization in the long run while focusing on the value and return of investment. While purchasing is concerned only about the acquisition of goods, procurement is an ongoing function that continuously looks after supplier relationships, internal needs, market trends and supply chain costs.
Purchasing vs Procurement: Shifting focus from price to value creation
While purchasing is a specific function that is related to the buying of goods/services, procurement takes a holistic view of the overall process with an emphasis on the strategic goals of the company.
|Purchasing (the reactive process)||Procurement (the proactive process)|
|Focuses on buying goods/services for the company||Identifies the needs of the company and the fulfillment of those needs.|
|Gives more importance to the price of the goods||Gives more importance to the value of the goods than the price|
|Straightforward process of purchasing commodities||Involves the steps that happen before, during, and after purchase|
|Includes ordering, expediting, and payment fulfillment||Includes need recognition, sourcing, and contract closure|
|Transactional–focuses on transactions than vendor relationships||Relational–focuses on creating long-term vendor relationships|
Why procurement is more important than purchasing?
Procurement is a wider term that encompasses some of the core functions in business. It includes the selection of suppliers, maintaining healthy relationships with suppliers, documentation and also aligning the procurement strategy to the corporate strategy. Well, the last function shows how a wrong procurement strategy can make the company pay a huge price. For instance, if a company has adopted a green policy, it should be reflected in the procurement strategy too. The procurement function is more detail-oriented, involves many people and tasks and has strategic importance as it drives the overall performance of the organization.
Following are the key factors that must be considered in procurement:
- Business ethics
Nowadays, customers have a lot of expectations from businesses. Apart from the quality of the products, they also check if the brand is conforming to the ethical and legal principles in the country. In a nutshell, businesses must be legally and socially responsible if they want to build customer loyalty. So, the procurement team has to ensure that the raw materials are sourced in ethical and legal ways.
The procurement team will deal with the transportation of goods. The mode of transportation, cost, travel time and risks are to be taken into consideration.
Quality is a key factor in the procurement process. The brands that compromise on quality for cost savings will have to pay in the long run. In fact, quality is one of the most important factors that attract the customer.
- Risk management
Risk is unavoidable in business processes and procurement is not an exception. The focus should be on identifying these risks and taking the steps to manage them proactively. Risks in procurement can be a delay in getting the products/services, fraud or inefficient contract management.
- Setting rules for purchasing
The procurement department is responsible for preparing a purchasing strategy that regulates the purchasing function. They will also set the rules that the purchasing professionals must follow to ensure profitability.
- Reducing costs
Price of raw materials is always a concern for organizations. An important aim of the procurement is always to get the products/services for the best price possible.
How to improve an organization’s procurement process
As procurement has a direct impact on the profitability of an organization, we should always look for ways to improve the function. Following are some of the important tips to improve the procurement process:
- Provide training in procurement to help employees think strategically
- Analyze the procurement process to foresee the long-term trends
- Manage positive relationships with the suppliers
- Manage contracts efficiently
Purchasing professionals need to know the major differences between purchasing and procurement. If they are focusing on the superficial aspects like reducing the price, they will probably miss the major dimensions that affect the business in the long run. So, it is high time that you realize purchasing is an outdated concept and procurement is the future.