Difference Between Purchasing and Procurement Explained

When it comes to buying goods for businesses, the terms 'purchase,' and 'procurement,' are used interchangeably,  with business owners not knowing sometimes that they are not the same. 

There are different processes, objectives, and goals that every organisation wants to achieve. Understanding the difference between purchasing and procurement will help companies to optimise their business operations, budget, and other workflows, thus helping them become more efficient.  It also maximises customer value and ensures that all functions are running smoothly throughout.  Let's discuss the main difference between purchasing and procurement below and more.

Did you know that using complete automation solutions can help businesses save time and money on their investments, plus optimise operations? Since all records are digitised, an electronic trail is created and it is easier to audit records in the process. 

What is Purchasing?

Purchasing is the act of buying products from an entity in cost-effective ways and in the desired quantities as possible. The purchasing department buys the required raw materials from manufacturing companies and obtains the permits for carrying out all related manufacturing activities. Purchasing is a continuous and ongoing process, being constantly refined by the business requirements of brands.

How to Use Purchasing Correctly?

There are many ways to make the most of your purchasing strategy. Following are some tips:

• Be aware of when to use either and be considerate of the timing. Purchasing works best when done outright while procurement might take a bit longer.

• You can get volume discounts with purchases if buying in bulk and it works with procurement strategies too

• Procurement services can be expensive subject to market conditions which is why purchasing is the best route. You enjoy a great degree of customization as well since you work directly with vendors and take advantage of amazing discounts.

• You can find purchasing services to be affordable and strike good negotiations with dealers. If you have built good relationships with your existing vendors, you can purchase items outright from them. This means you don't have to invest heavily on your procurement strategy and actually save money. Purchasing and procurement are essential but in such cases, you don't need to use both at the same time.

Also Read: How to Start Tissue Paper Manufacturing Business in India?

What is Procurement?

Procurement is the process by which companies acquire goods and services to run their business operations. The act of procurement is what ends up with purchasing and it is important to note that procurement comes before purchase. It involves a series of steps the company goes through to find suppliers or dealers to buy products from and works on identifying key business requirements.

How Does Procurement Work?

There is a three-way verification involved and procurement creates purchase requests. There are also other steps involved in procurement such as negotiations, contracts, payments, and record-keeping for future reference. The following are the sequential steps followed in procurement:

Identifying Your Requirement

This involves identifying the new product or service you want to purchase. Finding out which products or raw materials are ideal for your business. The business owner spends time learning about their business operations and invests in the process. Setting guidelines for key attributes in purchase orders, predefined quantities, and standardized benchmarks can make placing future orders easier, which is why this step is very important.

Creating a Purchase Request

A purchase request involves running your different business departments through what items you want to buy. Everyone on the team validates if the order is needed and gives their manual approval. Different companies have different ways of making purchase requests. But once the request is approved, will the vendor be approached and orders are made.

Evaluating and Selecting Vendors

Some companies keep a list of pre-approved vendors while others have their own unique ways of selecting and evaluating vendors. The general consensus is that vendors have to fulfill the companies' criteria when supplying goods and go through a selection process. Some vendors may be requested for an interview and negotiate deals with companies. It's good to curate a list of vendors and maintain good business relationships with them long-term. This saves businesses time, money, and helps streamline their operations.

Negotiation

Negotiation includes setting the terms and conditions for the purchase or sales agreements. It covers details such as pricing, order quantity, delivery dates, and product technical specifications. The vendor and business owner work on coming to the best terms when negotiation. If the negotiation is successful, the purchase order gets made and the vendor receives the go-ahead.

Creating a Purchase Order

The purchase order is an official document which documents and drafts the details of the purchase. It contains signatures from key authorities and solidifies the contract between parties. When a purchase order is made, it is sent to the vendor who reviews and then accepts it. The vendor is legally and morally obligated to provide a response to these agreements. Once they accept, vendors work on procuring the items and getting them delivered to the business by agreed dates.

3-way Verification

When the order is made, purchase documents must be verified and critical details are cross-checked. The details on the official documents should match the ones presented by ones provided by the supplier. Incorrect matching may lead to disputes, discrepancies in paperwork, and cause errors in invoicing. It ensures that the orders aren't fulfilled correctly. 3-way verification also checks if the orders are delivered in the right quantities and quality. If the product condition is not good, the order may be cancelled and the items are returned for refunds.

Payment

The vendor will supply the purchaser with an invoice which mentions details for the mode of payment. The buyer checks the prices, rates, and amount of orders listed on it. Payment has to be made according to the contract's schedule and must comply with all the terms that were initially set during the negotiation stage.

Record Keeping

All the paperwork for the purchase of goods is recorded and archived by the business. It is stored securely in the company's headquarters and buyers maintain electronic copies as well in databases. If any problems crop up, they can refer to these documents in the future and resolve disputes.

Also Read: How to Set Up a Cement Dealership Business in India?

Differences between Purchasing and Procurement

Purchasing and procurement are closely related terms, but they do have some distinct differences. Here is a comparison of the two:

Procurement is a broader term that encompasses all aspects of acquiring goods and services, while purchasing is a specific step within the procurement process. Procurement is more strategic in nature and takes into account the entire supply chain, while purchasing is more tactical and focuses on the transaction itself. 

Also Read: List of Top Pharma Companies in India in 2023

Automation in Purchasing and Procurement

The paperwork and processes involved in purchasing and procurement can pile up in terms of volumes. It can be difficult for organisations to keep up with information outflows and inflows. Traditional paper-based systems print out and share details, however, can be destroyed physically. It is recommended to convert data into electronic copies and store it in much safer places. However, a lot of manual labor is involved in ensuring the integrity and accuracy of data when keying it into systems.

Types of Procurement

There are several different types of procurement, each with their own unique characteristics and processes. Some of the most common types of procurement include:

1. Direct procurement: 

This is the most basic form of procurement and involves purchasing goods or services directly from a supplier.

2. Indirect procurement: 

This type of procurement involves purchasing goods or services that are not directly related to the production of a product or delivery of a service. Examples include office supplies, IT equipment, and consulting services.

3. Strategic procurement: 

Such procurement involves long-term planning and relationship building with suppliers to achieve mutual benefit and cost reduction.

4. Emergency procurement: 

Procurement is used when an organisation needs to purchase goods or services quickly in response to an unexpected event or emergency situation.

Conclusion

Purchasing and procurement are beneficial for tax filing purposes as well. Sharing documents across different locations, ensuring legal compliance, and improving customer satisfaction through better logistics becomes easy then. Businesses are using inventory management software these days to handle their accounts and purchases, so that there are no chances of duplicate entries or false positives.

Purchases are focused on the prices of order while procurement involves the entire sourcing, logistics, distribution, and management strategies. Business owners can reduce the total cost of ownership of their company, minimize operational expenses, and maximize profits if they pay attention to these two areas.

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