Procurement vs Purchasing: Understanding the Differences

So you know about procurement and you probably know about purchasing as well. 

Do you also know that they aren’t the same? 

Yes, there are some undeniable connections between the act of procuring and purchasing, but if you want to develop a more strategic approach to the management of your business’s operations, it’s critical to understand that procurement and purchasing aren’t concepts to be used interchangeably. 

So let’s make this blog a review of their main unique characteristics and key differences. 

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What’s Procurement?

Procurement is the end-to-end process that companies follow when they seek to buy or hire products or services from external parties such as suppliers, vendors, or consultants. From the moment you identify a need to acquire a product to the materialization of the purchase, everything is part of the procurement lifecycle. 

Steps you’ll often see as part of it include:

• Assessing internal requirements
• Analyzing the market
• Identifying possible suppliers
• RFI and/or RFQ
• Soliciting proposals and reviewing bids
• Selecting the right supplier, making negotiations, and signing a contract. 
• Receiving goods and checking the quality 
• Respecting payment terms
• Building a positive relationship with suppliers

Quite comprehensive isn`t it?

What’s Purchasing?

If procurement is the whole puzzle, we can say that purchasing is a piece of it. As the name hints, purchasing involves buying all the goods or services that your business needs.  Compared to procurement is not so much focused on strategy but rather deals with a concrete action. 

Activities you’ll see as part of the purchasing process include:

• Handle purchase requisitions
• Assessing quotes 
• Invoice approval
• Payment processing 

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Key differences between Procurement vs Purchasing

Definition

Just like we have seen above purchasing is all about the act of buying, it deals mostly with placing orders and processing payments. On the other hand, procurement covers a wider range of activities, including identifying needs, selecting suppliers, negotiating contracts, and managing supplier relationships in the long term.

Focus

Considering that procurement works on strategy, then it’s logical to say that it has a long-term view, aligning purchases with your company’s goals and planning for future needs. Purchasing is mostly reactive as it works on solving immediate requirements like fulfilling the acquisition of a product. 

Tasks included 

Remember procurement includes a quite large list of actions, like need recognition, sourcing, and contract negotiations. Purchasing, on the contrary, is limited to ordering, expediting and payments.

Goals

Purchasing works to buy the product and obtain the best prices, and procurement works to add value by considering factors such as quality, delivery times, and past performance, intending to maximize efficiency and profitability. 

Supplier relationships

For purchasing building relationships with suppliers is not a priority, the only thing that it seeks is to complete the transaction. Procurement, on the other hand, prioritizes developing strong partnerships with suppliers, fostering collaboration so everyone can benefit.

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Steps in the Procurement Process 

Determine needs

The beginning of everything starts when you or someone in your company identifies the need to purchase a product or hire an external service. The right way to do this is to precisely define what you need to acquire. The more detailed you are, the easier it will be to find the right supplier.

Research market 

Okay, so you now know what you’re looking for, the next step is to investigate potential suppliers who can fulfill your needs. Look into their reputation, reliability, and track record. Compile a list of candidates that meet your criteria, it’s always a smart idea  to consider factors beyond just price, such as quality and delivery times.

Request quotes

You have the list, what’s next? Communicate 

You will want to get in touch with your potential choices and ask for quotes through a Request for Quotation (RFQ). You can’t underestimate how important is at this point to be clear about your specifications, otherwise how could you be sure that you are selecting the right choice?

Evaluate proposals

The quotes will come according to the format you have set, take your time to review each proposal carefully. Go back to your defined criteria so it’s simpler to find the supplier that offers you the best according to what are you looking for. 

Negotiate

Once you’ve selected a supplier, it’s high time to discuss and negotiate the terms of the agreement. Talk about pricing, delivery schedules, contingency plans and any other important details to minimize the chances of misunderstandings later on.

Order management

Alright, so the supplier is selected and the contract has been discussed and approved. Now you can place your order. In most occasions, you will receive the goods as expected, but if you get something you didn’t order, it’s important to inform the seller right away.

3-Way match

And talking about situations where things don’t go as planned. Using the 3-way match method is an incredibly effective way to ensure that what you ordered matches what has been delivered. This process involves comparing the purchase order with the invoice and the actual items received.

Payment

When you’re satisfied with the goods or services received, process the payment as per the agreed terms. Timeliness is crucial here, unless you want to incur in a delay and ruin your supplier’s trust on your business. 

Record-keeping

While payment is a critical part of procurement, it doesn’t end there. After a transaction is completed, procurement departments need to document it in a centralized system for future reference, audits, and planning purposes.

Monitor supplier performance 

As we have mentioned so far, one of the key features of procurement processes is that it’s oriented to building and maintaining productive positive relationships with your suppliers. Learning to monitor their performance regularly helps you to determine quality levels and ensure that your needs are being met. You can use procurement software to make things easier for you and your team

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Why Procurement is Important?

Procurement has a reputation for being a long and sometimes complicated process, but the benefits that come with it are hard to ignore. 

First, it’s an excellent way to save costs as it sets a structure for evaluating suppliers and negotiating better terms. This way you can secure the most competitive prices. Keeping quality levels high it’s also a very important goal of procurement. Why? Because in the sourcing phase guides companies to set clear standards, so your brand’s reputation is always protected.  Additionally, procurement helps you mitigate risks by identifying potential supply chain disruptions, allowing you to develop alternative routes before it’s too late. Plus, procurement focuses on strategic sourcing, promoting long-term supplier relationships that foster collaboration and innovation. 

Steps in the Purchasing Process 

Requisition

The purchasing process is perhaps more straightforward in the sense that it clearly begins with the creation of a purchase requisition, a document that outlines what you need and is typically approved by a manager or relevant procurement authority.

Purchase Order

If the purchase requisition is approved, and it usually is, the next step is to generate a purchase order, a legally binding document that formalizes the order and provides clear instructions to the supplier.

Place the order

Send the purchase order to the selected supplier, ensuring they have all the necessary details to fulfill the order.

Invoice management

Once the order has arrived at your location and you have already checked that there are no mistakes, it’s time to process the supplier's invoice for payment.

Payment

Okay, if you have reached this stage and everything looks as if it should, then it’s time to fulfill the payment according to the agreed terms. This helps maintain a good relationship with the supplier.

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Why Purchasing is important?

Purchasing is as important for your business as procurement. The main and most obvious reason is that it’s the mechanism with which you can buy the necessary goods and services to keep operations running as expected.  By efficiently managing purchasing activities, you can avoid delays and maintain productivity. That being said purchasing is also beneficial to help you control costs. How? Well, the purchasing process itself is designed to compare prices and seek the best deals, so you can maximize your budget. Besides that , purchasing plays a key role in inventory management—by tracking what you buy, you can prevent overstocking or shortages, something that can disrupt your operations. 

And while it’s true that it’s not fully oriented to supply relationship management, it serves as the foundation for having more profitable relationships with suppliers.

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Final thoughts

In conclusion, understanding the difference between procurement and purchasing can really enhance how you approach your business needs. While purchasing is all about acquiring goods and services, procurement takes a broader view, focusing on strategy and long-term relationships.

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