How is Supply Chain And Procurement Different From Each Other

September 17, 2022
Alok Suman
Procurement Management

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.

What is Procurement?

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:

  • Direct Procurement

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.

  • Indirect Procurement

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.

Steps in the Procurement Process

Here are the main steps involved in the procurement process:

  • Selection of Vendor

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. 

  • Preparing Purchase Orders

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.

  • Receiving the Goods 

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.

  • Invoicing and Payment

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.

Who Oversees Procurement Management?

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:

  • Eliminating Waste

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.

  • Optimizing the Overall Buying Process

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.

  • Controlling Costs

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.

What is a Supply Chain?

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. 

Steps in the Supply Chain Process 

The key steps of a supply chain are as briefly explained below:

  • Sourcing all the raw materials required by the business
  • Refining the sourced materials 
  • The next step is combining all the refined materials to create a product
  • Fulfillment of orders and sales
  • Delivery of the product
  • Customer support 
  • Return services, if any

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:

  • Raw material producer(s)
  • Manufacturer: Your company 
  • Distributor: The companies you work with
  • Retailers: The retail locations that sell your products
  • Customers: The people who purchase your products from the retailers you work with

What is Supply Chain Management?

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:

  • Efficiency – Since supply chains in any organization have several moving parts, an effective supply chain management function means finding innovative and strategic ways to allocate/spend time and resources.
  • Cost-efficiency – Supply chain managers are qualified enough to reduce spending and cost fluctuations by streamlining the overall supply chain processes.
  • Quality control – Being able to anticipate and address changes to the supply chain can help eliminate issues regarding quality to a significant extent.
  • Collaboration – Clear and transparent communication with suppliers helps with better collaboration and drives beneficial outcomes for both parties involved.
  • Risk mitigation – Effective supply chain management allows managers to identify and better manage various risks by monitoring different aspects of the supply chain process.

Overall, supply chain management involves various efforts taken by the supply chain teams to reduce or eliminate disruptions throughout the logistics. 

Who Oversees Supply Chain Management?

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:

  • Negotiating contracts with suppliers as well as customers
  • Collaborating with procurement managers and other stakeholders in the supply chain
  • Managing supply chain performance and implementation of new processes 
  • Quality control and cost management
  • Overseeing product storage and handling

Differences Between Procurement and Supply Chain Management

Difference Procurement Supply Chain Management
Meaning Procurement refers to the purchasing and acquisition of goods and services that a company needs. Supply chain management is a broad term that covers everything required to bring products to market. It includes procurement and several other tasks in getting a product from raw materials suppliers to manufacturers and finally to the consumer.
Process Procurement involves a company sourcing goods and services from a set of shortlisted external suppliers. Supply chain management involves managing various processes for a business to transform raw materials into final products and deliver them to end users.
Focuses on Procurement is a part of supply chain management with the main focus on the acquisition of goods for the business. Supply chain management, on the contrary, includes a wider set of processes with the main focus on aspects such as selection of vendors, invoicing, logistics and distribution.
Functions Research the market, find suppliers, negotiate payment terms, create purchase orders, and receive the ordered goods. Procure raw materials, send them to suppliers, begin manufacturing, start distribution, and store in retail locations so that customers can buy the goods/services and materials.
Emphasizes on Procurement has more of an input focus. Supply chain management is largely output-oriented and ensures that products/services reach customers as efficiently as possible.

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.

Final Thoughts

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.

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