Purchasing vs procurement

The terms purchasing and procurement are often considered to mean the same thing; however, there are significant differences between them. Purchasing is the term used to refer to acquisition or direct purchasing of commodities and services required by an organization. However, procurement is considered as the overall process through which goods, commodities or services are acquired, including activities like recognizing the need for the product or service, sourcing, choosing the relevant supplier, negotiating, placing the order, receiving goods and making payments to vendors or service providers.

In articles “purchasing vs procurement“, we will discuss the functions of purchasing and procurement in detail and explain how they differ from each other.

Definitions

Purchasing

Purchasing refers to the business function of acquiring goods from vendors or availing services of professionals that an entity needs to conduct its business. This function forms the transactional part of an entity’s overall procurement process and typically consists of activities like placing orders for goods and services and issuing payments for them to suppliers and vendors. The prime focus of individuals to whom the purchasing task is assigned in the organization is to deal with some short-term goals like managing required quantity and quality while minimizing cost and obtaining delivery from vendors in a timely manner.

Most organizations purchase goods so as to make sure that they have sufficient supply of materials. This would ensure the smooth working of the production process. When organizations are purchasing goods, they take into account certain specifications, for example quantity, quality, availability, cost, etc.

The purchasing process in a business organization typically consists of following steps:

1. Purchase requisition: The purchasing process initiates with the preparation of a document known as purchase requisition. This document is prepared by an employee or his department that need to buy an item for the use in organization and is submitted to the purchasing department. It contains all the details of the item or service that the concerned department needs to buy on behalf of his organization. The orders that fall within the budget are automatically included in the list of purchase orders. However, expensive or unusual purchase requests are reviewed by an authorized person before they can be updated to the purchase orders’ list. If a purchase request is rejected on the basis of errors or insufficient information, it is returned to the issuing employee or department so that the errors can be fixed or the clarification can be obtained.
2. Request for quotation (RFQ): Purchase orders backed by the budget approval are used to draft request for quotation (RFQ) – a document that is forwarded to potential vendors to receive bids. Vendors who submit their bids are then evaluated on the basis of factors like price, past performance and current reputation.
3. Negotiation and contract: A negotiation is started with the most suitable vendor so that the contract can be signed with him after deciding and reviewing the terms and conditions and making sure that the deal is going to be mutually beneficial.
4. Shipment of goods or provision of services: After successful completion of negotiation and signing of contract in the above step, a time frame for the actual delivery of goods or services is agreed upon between the purchasing entity and the vendor. After delivery, the purchaser examines the goods or services to determine if they match with the order in terms of quantity and characteristics. If discrepancies are found, their details are communicated to the vendor so that the issues can be properly fixed.
5. Three-way matching: Three-way matching refers to the matching of information contained in three documents – purchase order, shipping documents and vendor’s invoice. It helps in verifying the accuracy of transaction information and also prevents frauds and monetary losses that may arise due to unauthorized purchases in the organization.
6. Payment: After performing three-way matching in above step, the payment against invoice is approve and made to the relevant vendor. If incentives like cash discount are available for early payments, they should be availed to minimize the cost of purchased item.
7. Updation of accounting records: Finally, the purchase transaction is brought to the accounting record and all source documents that support the transaction are stored in some appropriate location to be used as reference in future. The purchase process is thus completed.

Procurement

Procurement is a process in which the sourcing of products and services is streamlined so as to enhance the operational efficiency of the organization. The objective of outsourcing is to obtain products and services according to the requirements of the organization at the best price, taking into account different factors like quantity, quality and delivery schedule.

The concept of procurement is quite broad as it includes end-to-end supply chain management strategies for sourcing, negotiating contracts and obtaining products, services or raw materials from external sources. In addition, it includes following up so as to ensure that the contract is fulfilled in accordance with the terms and conditions decided when establishing the contract.

The main objective of the procurement activities is to save costs, control spending and achieve efficiency in the workflow. A purchasing decision simply takes into account factors like price, quality and delivery while the procurement is actually a strategy that comprehensively considers all the aspects that have an impact on purchases.

The following activities are part of an end-to-end procurement process:

• Perform a survey of the market
• Determine potential suppliers
• Generate an approved vendor list
• Identify internal requirements
• Generate an online purchase order
• Request proposals from different suppliers and carry out negotiations
• Obtain the goods and carry out quality assessments
• Establish and manage contracts
• Acquire invoice approvals and complete the terms of payment
• Form a good relationship with the suppliers.

Difference between purchasing and procurement

The main points of difference between purchasing and procurement are listed below:

1. Meaning

Purchasing refers to that activity in an organization in which goods and services are bought to accomplish organizational requirements. On the other hand, procurement is a wider end-to-end process that is related to the sourcing or acquisition of products and services. The process involves requesting for bids, negotiating terms, assessing the quality of the items bought and making payments.

2. Nature

Purchasing is a tactical process whereas procurement is a strategic process.

3. Concentrates on

Purchasing concentrates on increasing the efficiency of the transactions and is not focused on establishing a long-term association with suppliers. However, procurement concentrates on developing a long-term relationship with the suppliers. Therefore, purchasing is said to have a transactional focus, whereas procurement has a relational focus.

4. Activities involved

The different activities that are part of the purchasing process are placing orders, developing purchase orders, obtaining invoice receipt and making the payment. In contrast, procurement comprises of sourcing as well as purchasing activities, such as recognizing the need or requirement of the organization, sourcing, making payment, closing the contract and keeping record of the purchases.

5. Type of process

Purchasing is the direct and straightforward process of buying goods or services, while procurement is a broader process that includes the various steps that happen before, during and after a product is purchased. These include sourcing and developing, negotiating and establishing the conditions of purchase.

6. Focus

In purchasing, the focus is more on the price of the item, whereas procurement gives more importance to the value of the product or service.

7. Type of approach followed

Purchasing follows a reactive approach in that the requirement of a product/service is first identified, after which suppliers are approached for making bids. This is different from the procurement process in which the market is examined to identify the possible suppliers, after which the suppliers are shortlisted.  Internal requirements are then determined and suppliers are asked to quote their bids.

Purchasing vs procurement – tabular comparison

A tabular comparison of purchasing and procurement is given below:

Purchasing vs Procurement
Meaning
The simple process of buying a good or service	End-to-end process related to the sourcing or acquisition of product/service
Nature
Tactical process	Strategic process
Concentrates on
Improving the efficiency of the transaction	Establishing a long-term relationship with the supplier
Activities involved
Placing orders, formulating purchase orders, invoice receipting, making payments	Identifying the need; sourcing; making payment, recognizing organizational requirement, sourcing, making payment and maintaining record of the transactions.
Type of process
Direct process	Steps that happen before, during and after acquiring a product/service
Focus
Price of the product	Value of the product
Type of approach followed
Reactive	Proactive

Conclusion – purchasing vs procurement

It can be concluded from this discussion that purchasing and procurement are two terms that have different meanings. While purchasing refers to the way goods and services are bought, procurement is a more comprehensive term that includes various other activities, including negotiations, sourcing activities and strategically choosing the goods and services that would be beneficial for the organizations. Therefore, it is important for organizations to understand the two processes and determine which one works best for them.