Know the Difference Between Procurement and Purchasing

For those who are professionals in managing procurement, the difference between procurement and purchasing is a phrase they recognise instantly. There shouldn't be any confusion over which is which. But, it's recommended to review a refresher course. This is precisely the topic of this article.

This article will distinguish purchasing from procurement while examining the main reasons they differ from each other and the steps for each procedure.

After you finish reading through the points mentioned in this article, you'll be aware of how you can use purchasing and procurement to make purchasing more efficient.

Did You Know?

Procurement costs are divided into numerous distinctive categories. It depends on the demand for procurement. Moreover, bidding takes place when a part of a huge scale procurement processes with multiple bidders. 

Do you know the difference between procurement and purchasing? Check the key differences by reading the following section.

Also Read: What is the Difference Between Auditing and Accounting? - Learn Auditing and Accounting

Procurement vs Purchasing: Key Differences

What is Procurement?

Procurement is the strategic management of the supply chain for organisations. It is crucial to the overall success of any organisation. Purchasing costs can represent over 50% of an organisation's revenue.

 A lack of strategic decisions regarding supply can sink an otherwise profitable company. In addition, excessive wastage in the supply chain can hurt a company's reputation and bottom line. 

Whether your organisation uses a single supplier for all or a network of suppliers, it is important to understand how procurement works.

1. The entire process starts with identifying the need for the product or service, collaborating with departments and other stakeholders, and preparing the necessary authorisations and contracts. 
2. Then, the procurement team must communicate with suppliers and vendors. This requires them to understand their vendor onboarding and relationship management systems and their data. 
3. After that, the process flow moves to the next step: receiving the invoice. Then, the invoice is inspected by the organisation and the procurement team. Only then is payment released.

Procurement involves many different departments and processes, but ultimately, it benefits the company by adding value in the long run. This is why chief procurement officers are often the people who lead the most dedicated teams. Typically, these individuals also serve on the board of executives. When selecting vendors, they should consider the company's values and corporate identity.

You have understood the meaning of the procurement process, next check the detailed steps of the procurement process.

Steps in the Procurement Process

Here's an example of a common Procure to Pay process classified into nine steps. The process of procuring goods and services may contain any/all of these actions based on the specifics of your business and needs. 

1. Identify the internal needs
2. Negotiate contracts with the chosen vendor
3. Evaluate and choose a supplier
4. Approve an internal purchase requisition
5. Receive an invoice
6. Release a purchase order
7. Receive and audit delivery
8. Maintain proper records
9. Complete payment

Know the meaning of purchasing by referring to the following section.

Also Read: Learn the Difference Between Bookkeeping and Accounting - Changing Faces of Accounting and Bookkeeping

What is Purchasing?

 In general, purchasing means the activity of obtaining items or services. The activities involved in purchasing can include

• soliciting bids and quotes
• developing and writing up product specifications,
• awarding supply contracts
• evaluating goods.

Purchasing can also refer to an individual's lifestyle, especially in the context of an organisation.

Purchasing is the process of buying items that the business needs. This includes food, paper supplies, pans and tableware. In some companies, purchasing is centralised so that it can achieve economies of scale and focus on more important tasks. 

It also involves teaching other members of a team how to deal with suppliers. Ultimately, purchasing is a management function that can increase the efficiency of an organisation. However, it is often overlooked.

Purchasing agents' goal is to acquire goods with the best terms for the buyer. This process generally involves minimising the cost while meeting the buyer's requirements. Other commercial terms may include warranties, transfer of risks, confidentiality and remedies. 

Purchasing agents work to minimise the transaction costs while ensuring the best deal for the buyer. Both parties must sign the agreement. The process should be fair, honest, and efficient. Also, if you want to support liquidity to start a fresh business, don't step back to opt for a business loan if you have confidence that your ideas will work.

Steps in the Purchasing Process

In contrast to consumer habits typical for consumers, businesses generally take a more formal approach to buying. Instead of making purchases on impulse, companies will look at prices, assess suppliers and evaluate the quality of products and services before completing the sale.

While some companies might spend more time on certain process aspects, they may skip certain steps altogether. The majority of business-to-business purchases can be broken down into nine different steps. 

1. Examination of the needs
2. Review and Approval of the Purchase Order
3. Purchase Requisition to Purchase Order
4. Approval of Invoice and Payment
5. Proposal Requests
6. Shipping and receiving the products
7. Agreement of Negotiation and approval
8. Matching in a 3 Way System
9. Securing Record Updates

What Are the Procurement and Purchasing Differences?

The distinction between procurement and purchasing will be addressed in the coming issues:

1. The term "purchase" refers to the company's function, which includes the purchase of products and services to meet the company's needs in carrying out the manufacturing process. However, purchasing is nothing more than the sourcing or arrangement of services and goods that includes soliciting bids, negotiations over terms, testing the quality of the items bought and paying for them, etc., to satisfy the requirements of the business.
2. Purchasing is a reactive process; first, the need for the goods is identified, and suppliers are asked to submit bids. It varies from the procurement process, where initially foremost, a market survey is conducted to identify prospective suppliers. Then, a list of the suppliers shortlisted is compiled, the internal requirements are identified, and a request for a quotation is made.
3. The purchasing process is tactical; however, purchasing is a strategic process.
4. The purchasing process is direct that involves purchasing the product at a price. In procurement, it affects all the steps leading to purchasing a product, regardless of whether they are performed before, during, or after the purchase.
5. The term "purchase" refers to purchasing items or other things at a set price. However, procurement is acquiring items or services, equipment or supplies, whether by lease, rental or on a contract basis.
6. While purchasing focuses on making transactions efficient and doesn't emphasise building an alliance with suppliers/vendors, procurement has a different approach. Procurement is focused on establishing an ongoing and solid relationship with suppliers. Therefore, it is possible to say that purchasing is the focus of a transaction, whereas procurement is more of a relational one.
7. When purchasing, more weight is placed on the items' price rather than their value. However, in the purchase, the worth of the product is more significant relative to the price.
8. The purchasing process involves placing orders, expediting them, and making payments. In contrast, procuring consists of purchasing and sourcing actions, such as sourcing, closing contracts, identifying the need, and recording records.
9. Purchasing is a common practice in wholesale environments, i.e. when the items are bought in bulk to sell them. However, purchasing is a method where the raw materials must be procured for the manufacturing process.

Conclusion

In large businesses, the need for components, raw materials and other materials is constant. As a result, the notions of purchasing and procurement have evolved.

Procurement covers everything from expediting to quality, right from transport to the process of making payments. But, this isn't the case when purchasing, as it involves purchasing items from outside sources to pay money.

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