Procurement, purchasing, and supply chain management – business people tend to use these terms interchangeably. While they are related and are all part of a company’s finance or accounting function, there are differences.
Let’s understand each one and the differences between them in more detail.
What is procurement?
Simply put, procurement is an overarching term for the series of steps that your organization performs to acquire the goods and services it needs to operate.
The actual steps – referred to as the “procure to pay cycle” – will vary from one organization to another depending on its size, industry and particular requirements.
The overall procure to pay cycle includes:
- Identifying the need
- Selecting and negotiating with trusted suppliers
- Approving the purchase and issuing a PO
- Receiving an invoice and making payment
- Accepting delivery
- Auditing e.g. 3-way matching
- Record keeping
Procurement is, thus, a blanket term that includes multiple internal processes such as purchase requisitions, purchase orders, and invoice approvals.
Procurement is a strategic function for the company because it cannot operate and produce its products without the necessary goods and services. This kind of operational disruption can have a disastrous effect on sales and profits.
Traditionally, procurement’s top priority is to secure materials at the lowest possible cost under the most favorable terms possible. To do that, procurement must find and manage relationships with a reliable network of suppliers, ensure quality standards are met, process invoices and pay suppliers and mitigate risk such as maverick purchases.
Nowadays, procurement’s priorities have grown to encompass corporate initiatives like social responsibility and sustainability. This isn’t purely out of a desire to behave in an ethical manner. Corporate scandals such Nike sourcing from sweatshops or Volkswagen’s emissions scandal spread rapidly, quickly erode customer trust and have the potential to drastically affect the bottom line.
“Procurement is a strategic set of activities and protocols designed to extract the maximum value out of purchasing. Purchasing is the transactional component – the act of buying.”
What is purchasing?
Purchasing is a component of procurement. It’s a simple, transactional task – in contrast with procurement’s strategic aspects – that’s literally about buying goods and services. Typically, receiving and payment are also part of the purchasing process.
That doesn’t mean purchasing is unimportant. Within the overall framework of procurement, the steps in a purchasing process are:
- Sending a PO to the supplier
- Accepting and auditing delivery of goods
- Receiving an invoice
- Making the payment
For a very small business, purchasing might be as simple as calling Staples and ordering a box of pens and some whiteboard markers.
In most cases, the steps involved in purchasing are standard good practices that all businesses should follow. There’s no reason to tailor these practices to the size or industry of a specific business.
For example, no matter the size of your business, you shouldn’t use a credit card and save the receipts. You’re better off using an automated purchase order system with a well-defined purchase order process.
What Is the Difference between Procurement and Purchasing?
A supply chain is the entire network of entities a business works with to create its products and deliver them into the hands of the final customer. It includes suppliers, manufacturing, distribution, retail, etc.
Procurement starts the supply chain and ends when the business has purchased the goods and services it needs to operate. It ensures you have a reliable supply of the materials you need – e.g. plastic, glass or electrical components used in a coffee maker – under the best possible terms from ethical suppliers. Depending on industry, the steps in the Procure to Pay (P2P) cycle vary.
Procurement is an umbrella term that includes purchasing as one of its components. Purchasing deals with the transactional tasks of buying and paying for the goods and services. Good purchasing processes are relatively standard across organizations independent of industry.
Given the complexities of procurement, purchasing and SCM, it’s easy to see why people get confused and use the terms interchangeably.
Companies that effectively manage these processes enjoy higher profit margins, fewer disruptions and increased customer satisfaction.