Procurement and purchasing are two distinct business processes that are related to the sourcing and acquisition of goods and services for business.
Often confused with each other and used interchangeably, both procurement and purchasing are separate and can largely be seen as part of the procurement department.
While procurement is more of a strategic process, purchasing is purely transactional in nature when sourcing and acquiring goods and services for the organization.
To help you understand the two terms better, we will dive deep into how procurement and purchasing function, the differences between them, and some examples of both.
Procurement refers to a collective set of processes related to acquiring goods and services to fulfill an organization's needs.
It includes everything from placing orders with suppliers to confirming the orders, making the payment, and ensuring accurate and timely delivery of the ordered product/service.
For instance, if your organization requires raw materials to produce and manufacture goods, the process involves choosing where to procure materials from, making and sending a purchase order to the selected vendor/supplier, and paying for delivered items.
Serving as a foundation of supply chain management, a robust procurement strategy ensures that there is no time wasted in obtaining the required products/services that the organization needs to function smoothly.
The process of procurement typically goes through the following steps:
A purchase requisition refers to a detailed document from staff or an employee requesting to make a purchase for the organization.
The procurement team needs to check whether this document has all/sufficient information along with a full-proof reason for approval.
As soon as the requisition request gets approved by the concerned team, a purchase order is made, and the same is sent to the supplier with all the details regarding goods/services needed, along with other aspects such as price points, quantity needed, etc.
As the name suggests, this step is majorly about speeding up the process of communicating with the identified supplier about aspects such as quality, production schedules, and compliance to ensure that the agreed delivery deadlines of the order are met.
Once the concerned team receives the completed order, it is checked for the specified quantity and quality standards against the original purchase order.
At this stage, the supplier generates an invoice copy, which is thoroughly checked by the internal teams for accuracy of aspects such as purchase orders and invoices, agreed quantities, and right values.
This helps confirm that the procurement team received the completed order without any overspending.
The last step is to make the payment to the suppliers as specified in the payment terms drawn by both sides. The same is usually managed by the accounts payable department of the business.
Purchasing is essentially a part of the wider procurement process. It involves a detailed system that a business or company leverages to acquire goods and services.
Put simply, purchasing can be defined as the process of buying things for the business as soon as it figures out the need for what it requires.
Although purchasing is a part of procurement, it should be identified as a completely distinct process. For instance, purchasing involves multiple other aspects than just determining the right price. Apart from the price, you must also consider things such as terms of payments, customer service, and more.
The process of purchasing in any organization consists of the following steps:
At a basic level, for most businesses, this stage simply involves calling preferred vendors and placing a purchase order. However, an increasing number of big organizations already have a defined purchase order process that they follow.
In such a case, a requisition for purchase is created stating the things that the business requires. The same must be approved by all the involved parties as per the purchase order policy defined by the business.
Once done, a purchase order (PO) is created for the shortlisted supplier with various details, including quantity, items, and other similar details that the supplier requires.
Upon receiving the PO, suppliers will respond to the request by giving their confirmation on the same. Further, they might also send the tracking information to keep the other party up to date with the timelines related to order fulfillment.
This is the stage where the supplier delivers all the goods or services that have been ordered. Most businesses record and maintain an official delivery receipt in purchasing.
As per the process, the organization receives its purchases and conducts an audit to ensure and match the purchase requested with the items delivered.
Apart from the purchases, the supplier also sends a detailed invoice for all the goods and services they have delivered to the company.
If the business does not have an extensive procurement process in place, this invoice is then sent to accounts payable for manual confirmation of the accuracy of the invoice.
If the organization belongs to the purchase-only category, payment is typically a simple process of making the payment for the invoice through a physical heck.
This is usually an exception to the safeguard processes such as 3-way matching to ensure that the goods or services received match fully with that of the invoice and the purchase order.
If the business is growing or in an expansion mode, it is important to have a well-rounded purchasing and procurement strategy in place. Besides, moving to a well-defined procure-to-pay process helps businesses minimize their spending.
In this section, we will discuss an example of procurement and purchasing:
A manager of a small metal chain business notices roof damage during monsoons and identifies the need to get a roofing company onboard to fix the damage.
To start the process, they make a plan and submit the required paperwork to the main office for approval, citing why the same needs to be done.
The team then hires a third-party vendor to inspect the damage, confirm the reason for the damage, and offer an estimate to repair the problem. The team can even get multiple estimates to ensure competitive pricing from the shortlisted vendors.
If it is found that there is a need for repair and the price is within budget, the business will go ahead with the shortlisted vendor to do the job. The procurement department will maintain direct contact with the vendor to ensure that the job is done promptly and get the required approval for any issues.
Once the repair job is done, the vendor submits their invoice to the procurement team, and the same is paid by the accounts payable department.
In most cases, a company identifies a particular need, which results in the purchase of a product or service. For example, it identifies the need for new equipment to launch a product.
Further, it may also need to replace a broken machine or simply wish to get a better quality/price ratio. The purchasing team then goes over the details of the new equipment characteristics and technical specifications needed to address the problem in the best conditions.
They will then communicate with suppliers, place the purchase order for the equipment, receive the order, and finally make the payment.
What is important to keep in mind during the purchasing process is to identify the reason for the purchase. Specifically, determine whether the need is to improve an existing product or to reduce purchasing costs by seeking the best value for money, as it will help define the performance of your purchase decisions overall.
Although used interchangeably often, purchasing and procurement are quite different from each other.
Purchasing is one of the parts of a wider procurement function and has different goals and methods. In contrast, procurement is a strategic process with a focus on establishing long-lasting relationships with shortlisted suppliers and enhancing the business' competitive advantage.
Unlike procurement, purchasing is a transactional business function with a key focus on short-term goals such as making efficient transactions and ensuring that the supply of necessary goods is on time and at the lowest price.
Both procurement and purchasing are equally crucial for satisfying an organization's day-to-day needs. What is important is to sync and optimize the two processes in a way that helps you avoid uncontrolled spending and unforeseen circumstances and guarantees your day-to-day success in the long run.
If you wish to build a successful procurement strategy and propel your organization in a competitive landscape, one of the first things you need to do is automate your procurement process.
The best way to begin your procurement automation journey is with a robust no-code platform like Hubler that helps you create the right automation software for building and implementing your strategy. It is a one-stop solution to streamline your complex procurement process.
Hubler can automate procurement from end to end, thus freeing you from various time-consuming and repetitive manual processes. Hubler's Procure to Pay is also a well-designed and straightforward platform to help you create an optimized purchase order cycle process for your business.
Right from purchase order requests, budgeting, and RFPs to POs, Hubler allows you to manage everything efficiently using one single solution. Further, Hubler can easily integrate with your existing database and give you a complete view of your overall procurement process.