The importance of procurement and supply chain management - as strategic contributors to businesses worldwide - is more significant than ever before. Still, procurement and supply chain are two terms that are often confused with each other.
It is, therefore, quite important to know their differences. Identifying the distinctions between supply chain and procurement can help businesses reap several benefits and efficiencies of both.
While procurement is the process of getting the goods or materials your company requires for running its business model efficiently, supply chain management is more a process of converting those goods into products and distributing them to end users efficiently and productively.
Whether you are encountering these terms for the first time or you are already a supply chain pro, this article helps you go over the details, differences, and the relationship between procurement and supply chain management, along with outlining the basics of these terms and what role they play within an organization.
Procurement refers to the process of sourcing goods and services by a business to fulfill the goals and objectives set for day-to-day needs. It is a key step in the organization's wider supply chain management process.
The end-to-end procurement process involves a range of activities that helps a business acquire the goods and services it needs. This includes planning, pricing, quality control, and supplier selection.
Put simply, the procurement process can be defined as the series of activities an organization performs or the steps a business takes as part of its overall procure-to-pay cycle. This includes everything from identifying the procurement needs and running RFPs or RFQs, to invoicing and making the payments.
The procurement function in any business can be categorized into two different types:
This is the process when a business gets goods, services, and materials that are needed for the main business practices regularly. These are also the items that are received directly and affect the organization's overall goals, the bottom line as well as revenues.
This is the process that is associated with the acquisition of goods, services, and materials that, although keep the business up and running, have no impact on the company's bottom line necessarily. Some examples of these include services such as accounting or office supplies.
Here are the main steps involved in the procurement process:
Before a business can order the required raw materials, the designated person from the procurement team must identify, shortlist and select a qualified supplier.
This step involves researching a range of different vendors and selecting the one that best fits the organizational needs.
A procurement purchase order is a document that outlines the details of the types of goods/services required along with various other details, including their amount, cost per unit, and the total cost of the order.
The purchase orders help ensure that both parties involved are fully aware of all the deliverables and timelines.
This step involves getting the goods and services and covers everything from entering the details of things that were ordered to checking or verifying the accuracy of the amounts/types, and more.
The last step in the procurement process is successful payment processing between the parties involved. This involves getting a detailed invoice for the goods provided, payment approval, and payment to the vendor.
Since the process of procurement involves multiple aspects to take care of along with a high amount of constant tracking and updating of the details, many businesses hire a qualified procurement manager to oversee the procurement management function.
Procurement managers are primarily responsible for managing the entire process, taking measures to reduce costs, eliminating waste to bring in better efficiency, and optimizing the buying process.
They are also responsible for managing suppliers and vendors, negotiating payment terms, and ensuring that the procurement process is as smooth and hassle-free.
The responsibilities of a procurement manager are discussed below:
In the procurement process, too many suppliers working towards the same goal often lead to a high volume of invoices, thus requiring more money and resources to finish the tasks.
Procurement managers streamline the process and work towards reducing the number of suppliers to eliminate waste.
When it comes to purchasing and procurement, there are various aspects to oversee, including purchase order creation, shipment, receiving of the items, and invoicing.
The procurement manager constantly works toward optimizing the buying process and ensures to streamline the overall process to help enhance the business efficiency.
Procurement managers help in controlling costs by researching and identifying new suppliers to find similar goods and services at comparatively less cost.
Further, they get involved in onboarding new and advanced automated systems that make the payment and processing procedures easier, thus freeing up procurement professionals for other important tasks.
A supply chain refers to the entire network of stakeholders including suppliers, logistical partners, service providers, and other organizations who collaborate to supply businesses with raw materials, manufacture those materials into products, and finally deliver them to the consumers.
It is important to note here that the supply chain incorporates not just raw material gatherers, wholesale warehouses, and transportation companies but also various tasks and functions that contribute to moving the following product. These tasks represent everything from marketing, procurement, quality control, and sourcing.
Put simply, the supply chain function of a business covers various aspects, including the delivery of sourced goods/materials to the manufacturer followed by its delivery to the consumers or end users.
The key steps of a supply chain are as briefly explained below:
The overall time that it takes to complete the above-mentioned steps in the supply chain from beginning to end is known as lead time.
Supply chains in any organization are managed by supply chain managers. The main role of a supply chain manager is to consistently monitor the lead time and coordinate the processes at each step to be able to maximize customer satisfaction.
One of the key differences between a supply chain and other value chains is that, unlike the other value chains of organizations that aims to add value to a product on top of its inherent value, supply chains primarily aim to fulfill end users'/customers' demands.
While supply chains can be highly complex, at the most basic level, they include:
Supply chain management or SCM refers to the process of managing the end-to-end activities in a business's supply chain. This includes getting raw materials for production, overall logistics, and delivering finished products to the consumer who has placed the order.
Effective supply chain management ensures:
Overall, supply chain management involves various efforts taken by the supply chain teams to reduce or eliminate disruptions throughout the logistics.
The process of supply chain management is overseen and managed by the supply chain manager. They handle everything from the production of goods to distributing them and collecting payments.
Apart from this, the supply chain manager is also responsible for optimizing different supply chain processes, thus positively impacting the business's bottom line.
The other things that a supply chain manager does include:
Let's understand the difference between the two terms with an example.
If your business involves the manufacturing of office furniture, then procurement is the process of sourcing the materials you require to build this furniture.
The supply chain, on the contrary, is the end-to-end process involved in manufacturing and delivering the furniture items, such as chairs, desks, filing cabinets, or other office furniture in your catalog, to end users.
To ease both these functions, procurement and SCM software are available today to manage various parts of the process.
The software is designed to assist with multiple aspects, including planning for demand management, executing day-to-day strategies, visibility to help anticipate and identify risks to proactively manage inventory management, logistics management, and more.
Managing the supply chain and procurement both help streamline a business' logistics. While both are treated as different components in a wider value chain, they work towards the same aim, i.e., efficiently managing third-party relationships.
Procurement refers to the process of getting the goods your organization requires; supply chain management is the extensive infrastructure your business needs to get you those goods.
Overall, for smooth logistics, both procurement and supply chain management should be considered part of the same operational focus.
Companies that have recognized the gap between procurement and supply chain operations and worked hard to bridge it can witness excellent financial benefits along with qualitative business benefits such as seamless processes and better supplier-integrated contracts.