How do you call it when you order, say, stationery for your office? Purchasing? Or procurement? You’ll mostly hear people use these terms interchangeably, but let’s find out why you shouldn’t.
Although quite similar, procurement and purchasing are two distinctive processes, and understanding the difference between them can help facilitate your organization’s success.
If you approach these two like separate processes, you can pay close attention to their distinguishing aspects such as supplier selection and management, expediting, and risk mitigation.
This article will compare purchasing and procurement processes in depth, explain critical differences between them, and talk about their role in business.
Scroll down to find:
- Procurement and purchasing: side-by-side comparison table;
- Procurement and purchasing defined. Processes overview;
- Procurement vs. purchasing: differences explained;
- Why procurement is crucial for your business;
- How to improve your procurement process;
- Quick answers to topical questions.
Purchasing and Procurement at a Glance
|A complex process associated with sourcing and obtaining goods and services||A set of activities directly related to acquiring goods and services|
|Includes multiple stages and has numerous people involved||Fewer steps and fewer employees involved|
|Stages can be tailored depending on the company and vendor||Stages are usually standard among all businesses|
|Takes place before, during, and after the purchase||The actual process of purchasing|
|Aimed at recognizing and satisfying the company’s internal needs||Aimed at ordering and paying for goods|
|Proactive approach||Reactive approach|
|Involves need identification, supplier management, contract management, and purchasing||Comprises placing an order, expediting, receipt of goods in the stock, and making payments|
|Has long-term goals like gaining competitive advantage for the business||Has short-term goals like obtaining the necessary goods at the right time|
|Focused on creating and maintaining strong supplier relationships||Focused on making transactions|
|Places more importance on the item’s value than its cost||More focused on the item’s price|
Before we dive deeper into comparing procurement and purchasing, let’s find out what exactly these two processes are and what steps they include.
What is Procurement?
Procurement is an umbrella term for processes a company performs to acquire goods and services from an outside vendor or supplier.
These processes step in when you have to buy materials for the products you sell, office supplies or consulting services, for example — basically, anything your business needs to achieve its goals.
Procurement begins the supply chain and ends when the internal needs of an organization are satisfied and a new supplier relationship is established.
Depending on the business size, industry, or requirements the specific steps of procurement (also referred to as procure-to-pay cycle) can vary, but typically they include:
- Identifying internal need
- Researching the market and shortlisting suppliers
- Issuing RFQ or RFP and selecting suppliers
- Negotiating contracts
- Creating purchase orders
- Receiving and auditing the ordered items
- Receiving invoices and making payments
- Record keeping
- Establishing a supplier relationship
The first step is determining what goods and services the organization needs to operate fully. After that, employees create purchase requisitions that the relevant authorities must further approve.
Determining the specific requirements of a business and connecting every need to a particular vendor helps prevent buying more or less than you need and wasting resources of your organization.
After determining what has to be acquired, an organization should decide where to buy these products. Employees have to search for relevant suppliers and then narrow down their list for further evaluation.
To assess potential suppliers, a buyer sends them a request for quote (RFQ) or a request for proposal (RFP).
Once procurement specialists receive quotations from all the vendors, they compare those based on the price and quality of products, reputation, risks, etc., and select the most suitable suppliers.
Usually, these are the ones that offer the best value of the product for the lowest cost, along with favorable location and delivery timing factors.
Upon choosing the best suppliers, an organization starts negotiating the terms, prices, and quality of purchases.
A purchase order (PO) is a legal agreement between a company and a supplier containing essential information about the purchase, like quantity, price, payment, and delivery terms.
After signing the contract, the responsible person sends a PO to a supplier, who, in turn, has to confirm it.
After the order arrives, a procurement specialist performs the quality check of delivered items and ensures supplier compliance.
Suppose the received product meets the requirements specified in a contract.
In that case, a procurement department representative approves the goods receipt, confirms the invoice issued by a supplier, and arranges payment for the delivered goods.
It’s essential to keep all the relevant records and documents for each purchase to avoid discrepancies and uncontrolled spending.
Upon paying for the order, a procurement manager evaluates the supplier’s performance based on KPI, margins, and contract compliance, and decides whether to continue working with this vendor.
What is Purchasing?
Purchasing is a term for the functions associated with buying goods and services.
It usually includes:
- Creating purchase orders
- Expediting and receiving the ordered items
- Acknowledging the invoice and performing a 3-way match
- Making a payment
If the purchase requisition has been approved, a purchasing manager issues a purchase order (PO) to the supplier and agrees on the delivery date and location.
Once the supplier confirms the PO, the purchasing department launches the expediting process.
The employees track the delivery status and request the delivery schedule updates from a supplier to guarantee that the order arrives at the right time.
After that, purchasing managers audit the received items to ensure their quality complies with the contract terms.
With ordered products, a purchasing specialist receives the goods receipt and an invoice issued by the supplier.
Then they conduct three-way matching and compare the purchase order, the goods receipt, and invoice.
If the data matches, a business can proceed to the last step of the purchasing process and pay for the ordered items according to the payment terms.
When you look through the processes’ breakdown, it becomes apparent that purchasing is a subset of procurement.
Procurement vs. Purchasing: Difference Explained
As you can see, both procurement and purchasing are related to acquiring goods and services a business needs.
But, despite being alike at first sight, they differ in their approaches, goals, and focus. So, let's examine their differences more closely.
As already mentioned above, purchasing is a part of a broader procurement process.
Apart from purchasing, procurement also includes need identification, supplier relationship management, and contract management.
That’s why it’s a more complex process that involves more people and requires more resources than purchasing.
On the other hand, the purchasing process engages fewer people, making it less bureaucratic and time-consuming.
Flexible vs. Standardized Process
The procurement cycle can vary from one business to another, considering factors like the business’s size, industry, and corporate structure.
An organization can also modify the steps of its procurement process depending on the vendor.
Purchasing cycle, on the contrary, is usually standard and remains unchanged for all the suppliers.
Therefore, maintaining it straightforward helps streamline the buying process.
Proactive vs. Reactive Approach
Procurement follows a proactive approach: it's procurement team's task to identify the internal needs and satisfy them by acquiring necessary goods or services.
Purchasing, on the contrary, has a reactive approach and aims at fulfilling needs that are already determined.
Long-Term vs. Short-Term Goals
Procurement is a strategic process with long-term objectives. It aims at continuing vendor relationships, enhancing competitive advantage, and following the corporate strategy.
Procurement managers are also tasked with finding suitable suppliers, ensuring contract compliance, and mitigating supply chain risks.
That's why they emphasize the value of the ordered item and the Total Cost of Ownership more than the purchase’s price.
Purchasing is rather tactical than strategic and has more immediate goals, such as receiving the correct quantity of ordered products for the right price. Therefore, it pays more attention to the item’s cost.
Relational vs. Transactional Focus
One of the procurement functions is to create and maintain solid win-win relationships with suppliers.
Procurement involves sourcing, shortlisting, assessment, negotiation with suppliers, and evaluation of supplier performance after receiving the order.
Purchasing managers usually have to work with an existing supplier base and focus on making efficient transactions.
Why the Distinction between Procurement and Purchasing is Crucial
We've talked about the purchasing and procurement processes and the distinctions between them.
But why do these processes (and their differences) matter for a business? To begin with, procurement as a whole contributes to creating a competitive advantage for a company.
It aims at negotiating the best value of the order for the lowest price with a supplier and thus allows your company to produce more while spending less.
A business’s income depends on its profit margin — the difference between how much it spends on procuring the necessary materials and how much it earns by selling produced goods.
That’s why procurement directly influences a company’s revenue.
Apart from that, procurement is directly related to corporate strategy. For instance, do your company’s values include corporate social responsibility?
Then you should make sure that suppliers you work with also align with this principle and avoid vendors known for poor work conditions or damaging effects on the environment.
On the other hand, purchasing has no less crucial role in business. It ensures that you get the correct quantity and quality of the ordered items, they are delivered on time, and payments are not overdue.
For all these reasons, companies should approach procurement as an essential strategic process and purchasing as its vital component, and constantly look for ways to improve them.
How to Improve Your Procurement and Purchasing Processes?
Let’s take a quick look at some ways to boost the efficiency of your procurement process:
- Revise your strategies of supplier relationship management;
- Train your employees and increase the team capabilities;
- Create a straightforward approval workflow;
- Improve purchasing by implementing a cloud purchasing system.
Now let’s take a closer look at the last point. Optimizing purchasing can contribute to the more efficient procurement process and save your organization time and money on other essential tasks.
A great way to start is to automate purchasing with the right software, which will help you eliminate the error-prone manual work and streamline your buying process.
For instance, Precoro software allows you to enhance purchasing operations, automate your approval workflow, ensure transparency, and avoid overspending.
Precoro has made the purchasing process more accessible than ever, featuring real-time reporting and integration to your favorite accounting system.
Is procurement the same as purchasing?
No. Purchasing is a part of the procurement process. It involves fewer activities and has slightly different focus and goals.
What is more essential for business: procurement or purchasing?
Both processes are equally important as they fulfill the internal needs of a company — acquire raw materials, office supplies, accounting software, etc.
Procurement focuses on establishing strong supplier relationships, whereas purchasing aims at making efficient transactions.
Is procurement broader than purchasing?
Yes. Procurement is a broader term as it includes purchasing and involves several steps that take place before and after the actual purchase (for example, supplier selection and negotiation).
What is the difference between procurement and purchasing managers?
Nowadays, these two professions are practically identical, as many organizations use these terms interchangeably. However, if your employer differentiates between procurement and purchasing managers, purchasing managers will have a smaller range of responsibilities, directly connected to buying goods for a set price.
In contrast, procurement specialists will have to perform market research, choose the best suppliers, negotiate with vendors on most favorable terms, identify and mitigate supply chain risks.
Although often used interchangeably, purchasing and procurement are not the same.
Purchasing is a part of a broader procurement function and has different methods and goals.
Apart from purchasing, procurement also comprises need identification, supplier, and contract management.
It is a strategic process that aims to establish long-lasting relationships with the most suitable suppliers and enhance the competitive advantage.
That’s why it places more importance on maximizing contractual value, risk mitigation, and supplier compliance with the contract.
Unlike procurement, purchasing is more transactional and focuses on short-term goals like making efficient transactions and ensuring the timely supply of necessary goods for the lowest price.
That doesn’t make purchasing any less valuable than procurement — both of them are crucial for satisfying your company's needs.
Harmonizing and optimizing these two processes allow you to avoid uncontrolled spending, unforeseen complications and guarantee your business’ success.