When it comes to cash outflow, a business should make every effort to plan, manage, and track spend. If you don’t pay close attention to expenses, your profit margin can suffer. Fiscal responsibility all starts with the procurement process and purchasing.
Procurement and purchasing are terms that are often used interchangeably but are actually two distinctive financial systems. Understanding the difference between the two can help facilitate a company’s success.
While purchasing focuses on short-term goals and business needs, procurement focuses on strategic, long-term goals like corporate strategy and a competitive advantage.
These two separate processes should be approached differently. That way a business can pay close attention to distinguishing aspects like supplier selection and management, risk mitigation, and expediting. To focus on corporate strategy and both short-term and long-term growth, a business should be well-versed in the procurement cycle and purchasing process.
Procurement vs Purchasing
The main difference between procurement and purchasing is that purchasing only focuses on order costs and how to lower them, whereas procurement focuses on the overall value creation and total costs throughout the purchasing cycle. Procurement is an umbrella term that covers other purchasing activities and ultimately aims to manage supplier relationships, risk mitigation, lowering costs and contract compliance.
What is Procurement?
The procurement process is about sourcing services and goods from an external place, like a supplier, manufacturer, or third-party vendor. It’s all activities that surround getting ready to buy, and making decisions under conditions of scarcity.
It’s at this time, a business needs to make the smartest choices to ensure the purchase of top-quality goods and services at a reasonable price. Any tasks prior to the establishment of a purchase order will fall under the procurement function.
This can include (but is certainly not limited to):
- Identification of a need (asking each internal department)
- Sourcing activities (identifying potential suppliers)
- Obtaining quotes and approving purchase requests
- Development, negotiation, and contract management
- Post contract tasks (managing supplier relationships)
- Supply market monitoring
- Payment and record-keeping
Steps in the Procurement Process
An effective procurement department oversees everything involved in procuring, from identifying what goods/services are needed for growth to maintaining the right records. How a business shapes its procurement team and process will influence factors like a company’s size, industry, resources, and organizational structure.
When it comes to effective procurement management and strategic sourcing, a business typically follows these steps:
- Recognition of business needs
- Purchase requisition
- Requisition review
- Establish vendor relationships
- Evaluation and contract
- Order management
- Invoice approvals and disputes
- Documentation and record-keeping
What is Purchasing?
Purchasing is part of the procurement process and involves the system an organization or small business uses to acquire goods and services. It’s the action of going out and buying something, once a business knows what it wants. As a function, purchasing is a subset of procurement but should be identified as a separate process.
For example, purchasing involves more than just finding the right price. You must also consider customer service, warranties, payment terms, etc. Although many businesses attempt to set a standard in the purchasing process, it can vary greatly between companies and industries.
Steps in the Purchasing Process
Unlike procurement, the steps involved in purchasing must be regulated for every vendor. It should employ routine best practices for everyone.
Steps in the purchasing process include:
- Receiving the purchase requisition (PR)
- Obtaining and evaluating vendor quotes
- Receipt of goods and raw materials into stock
- Invoice approval process
- Accounts Payable (AP) sends payment to suppliers
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Key Differences Between Procurement and Purchasing
Although the concepts are intertwined, they are not the same. How do we differentiate between procurement vs. purchasing?
The goal of procurement is to fulfill a specific business need. It goes beyond the simple process of ordering goods or services. The purpose of procurement is to dig deeper into buying and exploring different options. to identify the most ideal choice based on certain criteria. This can be anything from the cost to the location of the vendor.
Procurement is all about long-term goals that contribute to achieving strategic outcomes and competitive advantage. Purchasing has short-term goals. The purpose of purchasing is to arrange business spending and acquire a specific resource. This involves getting all the 5 “rights”:
- The right price
- The right quality
- The right quantity
- The right place
- The right time
Proactive vs. Reactive
The process of purchasing is more reactive to internal needs. You buy something once it becomes apparent you need it.
On the other hand, procurement takes a proactive approach. That’s because it works with each department to identify the right needs. Procurement also contributes to product design with working market knowledge.
Vendor Relationship Management
Purchasing is strictly transactional. It focuses on the act of buying rather than building relationships. The person responsible for purchasing is focused on efficiently executing the transaction.
Procurement is more relational. The procurement specialist focuses on establishing and maintaining valuable long-term relationships with qualified vendors/suppliers.
The supplier’s relationship will differ greatly with each point of contact depending on the goal of the job.
Pricing and Value
Procurement puts all the emphasis on the value of a certain good or service. They’re looking more at the brand doing business, rather than the price. Purchasing always puts price over value. This makes sense since the job revolves around properly controlling expenditure.
Order of Operations
Although procurement involves the act of purchasing something, it will always come before buying. The scope of procurement activities extends all the way from identifying a need, to fulfilling it and paying the bill. Purchasing happens towards the end of the procurement process, when the need is already fulfilled.
Purchasing focuses on fundamental tasks that surround obtaining goods and services. This includes ordering, receiving, and payment. The primary focus is on transactional activities like purchase requisitions, purchase order management, and payment processing.
The focal point of procurement is much more “bigger picture.” The main goal is to identify and fulfill a business need as quickly and efficiently as possible. Sometimes referred to as the procure-to-pay process (P2P), it involves more than spending money. A procurement team is expected to build and maintain long-lasting relationships that save the company money in the long run.
What is E-Procurement?
E-procurement is the purchase of goods and services through information and networking systems. This includes the internet, electronic data interchange (EDI), and enterprise resource planning (ERP). Optimizing the procure-to-pay cycle starts with the automation of all tasks related to purchasing and has a significant impact on your company’s bottom line.
Procurement and expense management software can help a business better collaborate on purchasing workflows and approved vendor catalogs. It can include complex approval systems based on location, department, and dollar thresholds and three-way invoice matching that requires zero human interaction.
The technology also facilitates supply chain management and offers companies access to mobile opportunities. Users can download a mobile app that helps request, approve, and receive goods on the go. The right procurement platform will automate simple tasks, eliminate overspending, and yield big savings (both time and money)—regardless of company size.
Is E-Procurement the Solution for Your Business?
Every modern business needs to digitize its processes to stay competitive. All financial systems run smoothly in the cloud, and procurement is no different. Quality can be greatly improved, as the right software enables total control over spending.
Modernizing procurement provides a variety of advantages, including:
A cloud-based procurement strategy helps a business meet evolving market demands without the need for expensive upgrades. It’s easy to use with a small learning curve.
The flexible nature of e-procurement means shortened project schedules and a faster time to market. It takes less time to develop and implement a product/service around processes while ensuring cost savings.
The cloud also reduces the number of manual transactions through the entirety of the P2P cycle. Selection criteria enable a solution to automate tasks like:
- Purchase order management
- Process non-manual supplier invoices
- Manage revisions to procurement paperwork
- Weigh negotiated prices
The cloud is a shared environment, so digitizing your procurement process improves visibility and, subsequently, performance. Procurement management solutions have an intuitive dashboard that provides a 360-degree view of the entire procure-to-pay process.
Users can check the status of any purchase or deliverables at a glance. This helps a company enhance efficiency by immediately spotting gaps in the process and fixing them in real-time. A business also has access to easy-to-interpret reports that ensure you’re making data-driven decisions with more strategic planning.
Cloud-based procurement management is super cost-effective. A business doesn’t need to pay upfront costs (or maintenance fees) for a SaaS procurement solution. This allows a company of any size to not only streamline the entire procurement process but keep operational costs at a minimum.
Costs can also be controlled by choosing the most value-driven suppliers while appraising risks at a fraction of the price. No matter the scope of the project, e-procurement helps reduce both time and processing costs while adhering to company policy and eliminating overage spending.
E-procurement also serves the employees of an organization. When you give people the autonomy to make their own purchases, it elevates job satisfaction and adds to retention.
Workers have the tools to immediately utilize approved vendors. The faster employees can access the supplies they need, the quicker the job gets done. It also ensures compliance, reduces unnecessary spending, and helps a business achieve cost savings.
E-procurement enables a seamless flow of information to everyone, irrespective of a specific role, department, or location. It allows people to communicate, all the time, from anywhere. It’s the ultimate digital bridge.
Procurement technology helps speed up the decision-making process and reduces turnaround time. This only happens through quick data retrieval and seamless collaboration.
Universal access to cloud-based procurement systems fosters a cohesive space where everyone gets exactly what they need. It also allows everything to be monitored according to company policy.
Licensed procurement software often comes as a disconnected piece of code that stands apart from existing procurement tools. Today, more brands gravitate towards cloud management. This allows for seamless integration opportunities and capabilities through API integration. It also helps to eliminate manual intervention and data redundancy and offers a single version of the truth without any friction.
- Smart redistribution of labor
- Improved compliance and regulation
- Eliminates bottlenecks in the approval process
No matter what role you serve in the procurement process, understanding how the system works as a whole is critical to job success. Deeper insight into the entire P2P workflow will help define purchasing as both an important part of procurement, as well as a separate component.
E-procurement will help a business handle the process of researching, requisitioning, sourcing, procuring, and paying more efficiently. It assists with the strategic selection of goods/services based on a company’s budget, values, and more.
For quick reference, procurement is the broader process that’s proactive and more relational. Purchasing is transaction-based, direct, and reactive. It’s as simple as that!