Important Differences Between Purchasing and Procurement

Purchasing

Purchasing refers to the act of acquiring goods or services in exchange for payment. It is a fundamental function of the supply chain management process, which involves identifying the specific needs of an organization, finding potential suppliers, evaluating supplier proposals, negotiating prices and terms, and making the actual purchase.

The main objective of purchasing is to ensure that an organization has a reliable and uninterrupted supply of materials and components required for production, while also minimizing costs and maximizing efficiency. To achieve this objective, purchasing departments or professionals are responsible for developing and implementing effective procurement strategies, establishing supplier relationships, and managing the purchasing process from start to finish.

Effective purchasing practices are essential for the success of any organization, as they can have a significant impact on the quality and efficiency of the production process, the level of customer satisfaction, and the overall profitability of the organization. Purchasing professionals must have a deep understanding of the organization’s needs, market conditions, and supplier capabilities, as well as the ability to negotiate effectively and manage supplier relationships for optimal outcomes.

Examples of Purchasing

Here are some examples of purchasing:

• Raw materials: A manufacturing company purchases raw materials like wood, steel, or plastic to produce finished goods.
• Office supplies: An office purchases items like paper, pens, and printer cartridges to support its daily operations.
• Equipment: A construction company purchases heavy equipment like excavators and bulldozers to complete construction projects.
• Services: A consulting firm purchases marketing and advertising services to promote its brand and services.
• Utilities: A business purchases electricity, water, and gas from utility providers to power its operations.
• Maintenance and repair services: A business purchases maintenance and repair services for its equipment and facilities to ensure they operate smoothly.
• IT hardware and software: A company purchases computer hardware and software to support its IT infrastructure and operations.
• Vehicles: A delivery company purchases vehicles to transport goods to its customers.

Types of Purchasing

There are several types of purchasing, depending on the nature and purpose of the purchase. Here are some common types of purchasing:

1. Direct purchasing: This involves buying goods and services that are directly used in the production of a product or service, such as raw materials or equipment.
2. Indirect purchasing: This involves buying goods and services that are not directly used in production, but are necessary for the operation of the business, such as office supplies or utilities.
3. Spot purchasing: This involves buying goods or services on an as-needed basis, typically at the prevailing market price.
4. Strategic purchasing: This involves developing long-term relationships with suppliers to ensure a reliable and cost-effective supply of goods and services over time.
5. Centralized purchasing: This involves consolidating purchasing activities within a single department or individual to achieve economies of scale and better coordination of purchasing activities.
6. Decentralized purchasing: This involves delegating purchasing responsibilities to different departments or individuals within an organization, which can lead to greater flexibility and faster decision-making.
7. E-procurement: This involves using electronic systems and tools to streamline the purchasing process, such as online catalogs, e-auctions, and purchase order management systems.
8. Just-in-time purchasing: This involves purchasing goods and materials only when they are needed for production, in order to reduce inventory costs and improve efficiency.

Objectives of Purchasing

The objectives of purchasing can vary depending on the nature of the organization and its operations, but some common objectives include:

• Ensuring a reliable supply of goods and services: One of the primary objectives of purchasing is to ensure that an organization has a reliable and uninterrupted supply of the goods and services it needs to operate efficiently and effectively.
• Reducing costs: Purchasing can also help organizations to reduce costs by negotiating better prices with suppliers, optimizing inventory levels, and minimizing waste and inefficiencies in the supply chain.
• Improving quality: Purchasing can play a key role in ensuring that the goods and services an organization acquires meet high standards of quality, which can help to improve customer satisfaction and loyalty.
• Minimizing risk: Effective purchasing practices can help organizations to mitigate risks associated with supply chain disruptions, supplier failures, and other potential challenges.
• Developing supplier relationships: Building strong relationships with suppliers is another objective of purchasing, as this can help organizations to secure better prices, improve delivery times, and access new products and services.
• Enhancing operational efficiency: Purchasing can also help organizations to improve operational efficiency by streamlining the purchasing process, improving communication and collaboration with suppliers, and optimizing inventory levels.

Process of Purchasing

The process of purchasing typically involves the following steps:

• Identifying the need: The first step in the purchasing process is to identify the need for goods or services. This may involve forecasting demand, reviewing inventory levels, or responding to specific requests from internal or external stakeholders.
• Defining the requirements: Once the need has been identified, the next step is to define the specific requirements for the goods or services to be purchased. This may involve specifying quality standards, quantities, delivery timelines, and other relevant factors.
• Identifying potential suppliers: Once the requirements have been defined, the next step is to identify potential suppliers who can meet those requirements. This may involve conducting market research, issuing requests for proposals (RFPs), or soliciting bids from a pool of prequalified suppliers.
• Evaluating suppliers: Once potential suppliers have been identified, the next step is to evaluate them based on a range of criteria, such as price, quality, delivery times, and past performance. This may involve conducting site visits, reviewing references, and negotiating terms and conditions.
• Negotiating contracts: After selecting a preferred supplier or suppliers, the next step is to negotiate contracts that outline the terms and conditions of the purchase, including price, delivery schedules, warranties, and other relevant factors.
• Placing orders: Once contracts have been negotiated and agreed upon, the next step is to place orders with the selected suppliers. This may involve issuing purchase orders or other formal documents that specify the goods or services to be delivered, the delivery schedule, and other relevant details.
• Receiving and inspecting goods: Once goods or services have been delivered, the next step is to inspect them to ensure that they meet the specified requirements. This may involve conducting visual inspections, performing quality tests, or verifying that the goods or services meet relevant safety or regulatory standards.
• Processing invoices and payments: The final step in the purchasing process is to process invoices and payments to suppliers. This may involve reconciling invoices against purchase orders and contracts, verifying that goods or services have been received and approved, and issuing payments in a timely manner.

Activities in Purchasing

The activities involved in purchasing can vary depending on the nature and complexity of the organization’s operations, but some common activities include:

• Demand forecasting: Forecasting demand for goods and services is a critical activity in the purchasing process. This involves analyzing historical data, market trends, and other relevant factors to predict future demand and plan purchasing activities accordingly.
• Supplier selection: Identifying and selecting suppliers who can meet the organization’s requirements is another key activity in purchasing. This may involve conducting research, issuing RFPs, and evaluating potential suppliers based on a range of criteria, such as price, quality, delivery times, and past performance.
• Negotiating contracts: Negotiating contracts with suppliers is another important activity in the purchasing process. This involves defining the terms and conditions of the purchase, including price, delivery schedules, warranties, and other relevant factors, and reaching agreement on those terms.
• Purchasing order placement: Once contracts have been negotiated and agreed upon, the next step is to place orders with the selected suppliers. This may involve issuing purchase orders or other formal documents that specify the goods or services to be delivered, the delivery schedule, and other relevant details.
• Supplier relationship management: Managing relationships with suppliers is an ongoing activity in the purchasing process. This involves maintaining open communication, addressing any issues or concerns that arise, and working collaboratively with suppliers to optimize supply chain efficiency and effectiveness.
• Receiving and inspecting goods: Receiving and inspecting goods when they arrive is another important activity in purchasing. This involves verifying that the goods meet the organization’s requirements, and conducting any necessary inspections or tests to ensure quality and compliance with relevant standards.
• Payment processing: Processing payments to suppliers is the final activity in the purchasing process. This involves reconciling invoices against purchase orders and contracts, verifying that goods or services have been received and approved, and issuing payments in a timely manner.

Procurement

Procurement is the process of acquiring goods, services or works from external sources to support the organization’s operations. It involves identifying the requirements, sourcing potential suppliers, negotiating contracts, purchasing the goods or services, and managing the delivery and payment process. Procurement can cover a wide range of activities, from simple purchases of goods or services to complex procurement projects involving multiple suppliers and stakeholders. The goal of procurement is to ensure that the organization obtains the right goods and services, at the right time, in the right quantity and quality, and at the best possible price.

Examples of Procurement

Here are some examples of procurement:

• IT equipment and software: Procurement of IT equipment such as computers, servers, and software is another common example of procurement. This may involve identifying requirements, sourcing potential suppliers, evaluating technical specifications, and negotiating contracts.
• Construction projects: Procurement of construction works is a complex example of procurement. This may involve identifying requirements, preparing technical specifications, issuing tenders, evaluating bids, negotiating contracts, and managing the delivery of the works.
• Transportation services: Procurement of transportation services such as air, sea, or land freight is another example of procurement. This may involve identifying requirements, sourcing potential suppliers, evaluating quotations, negotiating contracts, and managing the delivery of the services.
• Consulting services: Procurement of consulting services such as management consulting or legal services is another example of procurement. This may involve identifying requirements, sourcing potential suppliers, evaluating proposals, negotiating contracts, and managing the delivery of the services.
• Raw materials: Procurement of raw materials such as steel, aluminum, or wood is a critical aspect of manufacturing operations. This may involve identifying requirements, sourcing potential suppliers, negotiating contracts, and managing the delivery of the materials.

Types of Procurement

Here are the four main types of procurement:

1. Direct Procurement: This involves purchasing goods and services that are directly related to the production or manufacture of a company’s products or services. Direct procurement is commonly used in manufacturing or production industries where raw materials, components, and other inputs are required to produce finished goods or products.
2. Indirect Procurement: This involves purchasing goods and services that are not directly related to the production or manufacture of a company’s products or services. Indirect procurement includes a wide range of goods and services such as office supplies, travel services, marketing services, and IT services.
3. Outsourced Procurement: This involves outsourcing the entire procurement process to a third-party service provider. Outsourced procurement can provide cost savings, greater efficiency, and access to expertise and resources that may not be available in-house.
4. Centralized Procurement: This involves consolidating procurement activities into a central department or team. Centralized procurement can provide greater control over spending, better negotiation power with suppliers, and more efficient procurement processes. It is commonly used in large organizations with multiple departments or business units.

Objectives of Procurement

The primary objectives of procurement are as follows:

• Cost Reduction: One of the primary objectives of procurement is to reduce the cost of goods and services acquired by an organization. By identifying the most cost-effective suppliers and negotiating better prices, procurement can help to lower the overall cost of procurement.
• Quality Improvement: Procurement also aims to improve the quality of goods and services acquired by an organization. This can be achieved by selecting suppliers with a good track record of delivering high-quality goods and services and setting quality standards that suppliers must meet.
• Timely Delivery: Procurement also aims to ensure that goods and services are delivered to the organization in a timely manner. This involves managing the supply chain to ensure that the right goods are delivered to the right place at the right time.
• Risk Management: Procurement also aims to manage the risks associated with the acquisition of goods and services. This involves identifying potential risks, such as supplier bankruptcy or supply chain disruptions, and taking steps to mitigate these risks.
• Compliance: Procurement also aims to ensure that the organization complies with relevant laws and regulations. This involves monitoring supplier compliance with laws and regulations, such as labor laws and environmental regulations.
• Innovation: Procurement also aims to foster innovation by seeking out new suppliers, products, and services that can help the organization to stay competitive and adapt to changing market conditions.

Process of Procurement

The procurement process generally involves the following steps:

• Identify the need: The procurement process begins with identifying the need for goods or services within the organization. This can be done through a requisition process, where a request is submitted for a particular product or service.
• Develop specifications: Once the need is identified, specifications are developed for the required goods or services. This involves defining the required quality, quantity, delivery date, and other relevant details.
• Identify potential suppliers: The next step is to identify potential suppliers who can meet the specifications. This can be done through a request for information (RFI) or a request for proposal (RFP) process.
• Evaluate suppliers: After identifying potential suppliers, the organization evaluates them based on various criteria, such as price, quality, delivery time, and reputation.
• Negotiate contracts: Once a supplier is selected, the organization negotiates the contract terms, including price, delivery dates, payment terms, and other relevant details.
• Place the order: After the contract is finalized, the organization places the order with the selected supplier.
• Receive and inspect the goods: When the goods are delivered, the organization receives and inspects them to ensure that they meet the specified quality and quantity requirements.
• Approve the invoice and make payment: After the goods are received and inspected, the organization approves the supplier’s invoice and makes payment according to the agreed-upon terms.
• Manage supplier performance: Throughout the procurement process and after the goods or services are delivered, the organization manages supplier performance to ensure that they meet the agreed-upon standards and that the relationship remains beneficial for both parties.

Activities in Procurement

The activities involved in the procurement process can vary depending on the organization and the goods or services being acquired. However, some of the common activities in the procurement process include:

• Sourcing: Identifying potential suppliers who can provide the required goods or services.
• Vendor evaluation: Evaluating the potential suppliers based on various criteria such as quality, price, delivery time, reputation, financial stability, and compliance.
• Negotiation: Negotiating with the selected supplier to finalize the terms and conditions of the contract, including price, delivery time, payment terms, and other relevant details.
• Contract management: Managing the contract throughout its duration, monitoring supplier performance, and ensuring compliance with contract terms.
• Purchase order management: Creating and managing purchase orders to ensure that the goods or services are ordered, received, and paid for according to the agreed-upon terms.
• Receiving and inspection: Receiving and inspecting the goods or services to ensure that they meet the specified quality and quantity requirements.
• Invoice approval and payment: Approving the supplier’s invoice and making payment according to the agreed-upon terms.
• Supplier relationship management: Managing the ongoing relationship with the supplier to ensure that they continue to meet the organization’s needs and expectations.
• Risk management: Identifying and mitigating potential risks associated with the procurement process, such as supply chain disruptions, supplier bankruptcy, or compliance issues.
• Performance measurement: Measuring the performance of the procurement process and identifying areas for improvement.

Important Difference Between Purchasing and Procurement

Here are some important differences between Purchasing and Procurement presented in a table format:

Key Difference Between Purchasing and Procurement

Here are some key differences between Purchasing and Procurement:

1. Scope: Purchasing is typically focused on the acquisition of goods and services required for day-to-day operations, while procurement encompasses a broader range of activities, including strategic planning, risk management, and performance measurement.
2. Objectives: Purchasing aims to ensure the availability of required goods and services at the best possible price, while procurement is focused on optimizing the entire supply chain and improving overall business performance.
3. Vendor Relationships: Purchasing is transaction-based and typically involves short-term relationships with vendors, while procurement involves building long-term strategic partnerships with suppliers.
4. Timeframe: Purchasing is typically focused on short-term needs, while procurement is a long-term process that requires ongoing planning and management.
5. Complexity: Purchasing tends to be less complex than procurement since it involves acquiring goods and services for immediate use, while procurement requires more complex strategic planning and management of the entire supply chain.
6. Emphasis: Purchasing is more tactical in nature, focused on the immediate acquisition of goods and services, while procurement is more strategic, focused on improving the overall performance of the supply chain over the long term.

Similarities Between Purchasing and Procurement

Here are some similarities between Purchasing and Procurement:

1. Both are important functions of supply chain management and involve acquiring goods and services from suppliers.
2. Both involve supplier selection, negotiation, and contracting.
3. Both aim to ensure the timely delivery of goods and services to support business operations.
4. Both involve managing supplier relationships to ensure quality, reliability, and cost-effectiveness.
5. Both require a thorough understanding of the organization’s needs and the ability to balance these needs with the costs and risks associated with acquiring goods and services.
6. Both require coordination with other departments within the organization, such as finance, operations, and logistics.
7. Both involve ongoing evaluation and performance measurement of suppliers to ensure that they meet the organization’s needs and provide value over the long term.

Conclusion Between Purchasing and Procurement

In conclusion, Purchasing and Procurement are two important functions of supply chain management that involve acquiring goods and services from suppliers. While there are differences between the two, such as scope, objectives, and emphasis, they share many similarities, such as supplier selection, negotiation, and contracting, and ongoing performance evaluation.

Purchasing is more focused on the acquisition of goods and services for immediate use, while procurement involves a more strategic approach to managing the entire supply chain to improve overall business performance over the long term. However, both are critical for ensuring a reliable supply of goods and services, managing costs, and building strong supplier relationships.

Ultimately, the success of an organization’s supply chain management depends on its ability to effectively balance the needs of the business with the costs and risks associated with acquiring goods and services. By carefully managing the purchasing and procurement processes, organizations can ensure that they have the right goods and services at the right time, at the right price, and from the right suppliers.