What’s the Difference Between Procurement and Purchasing?
If you thought that procurement and purchasing are the same, then think again. Many people often assume that purchasing and procurement are the same. Some people even use the terms interchangeably. Although these two functions might sound similar, they are quite different in the way they function and what they do. Here is what you need to know about purchasing and procurement.
So what does procurement mean?
In simple terms, procurement is the strategic process that is used to source the goods and services required by a supplier. It involves determining which goods and services are required, selecting the ones that would be most beneficial, and selecting a suitable supplier who will provide those goods and services promptly. Procurement also involves ensuring the quantity of the goods and services is right while ensuring their quality. Procurement can involve buying directly from the buyer or it can involve competitive bidding. The procurement manager is responsible for coordinating procurement activities.
The procurement function consists of many steps. First, the market is studied and evaluated. Next, potential suppliers are listed. Then the vendors are studied, analyzed, and shortlisted. Next, the organization finds about the actual requirements and needs for which procurement is required. Then a purchase order is created. Then quotations are requested from suppliers and these are analyzed. Negotiation with the suppliers takes place after that and the order is placed. Then when goods and services are delivered, they are checked for quality. Then contracts are made and invoices are approved. The payment terms are fulfilled while ensuring the focus is on creating a good relationship with the supplier.
What is Purchasing?
Purchasing is different from procurement because it is a subset of procurement. Purchasing is defined as a certain set of actions that are related to getting goods and services that are needed by the organization. Procurement can be seen as a larger function that includes purchasing as one of its many functions. Numerous activities are included in the purchasing function in any type of organization. For example, receiving goods and services is part of purchasing and so is placing an order for the goods and services required. Payment fulfillment is another aspect that comes under purchasing.
How Procurement And Purchasing Differ
Both procurement and purchasing are functions that are carried out when an organization needs certain types of goods and services. Here is what you need to know about procurement vs purchasing.
Procurement involves stages that start before the beginning of the actual purchase as well as steps that follow after the purchase has been complete.
Both procurement and purchasing differ in the environment in which they are used. Procurement is often referred to as being an internal process while purchasing is considered as an external process. This is because procurement is used in the production environment. Purchasing, on the other hand, is used in the wholesale environment.
Procurement involves tasks that are related to acquiring goods and services such as planning, researching, and negotiating with the suppliers. On the other hand, purchasing involves buying goods and services for the organization. Purchasing includes raising of POs and ensuring payments are arranged.
Procurement has a different set of steps which include recognizing requirements, sourcing the goods and services, and closure of the contract. Purchasing on the other hand, has steps such as expediting, ordering products, and fulfillment of the payment. Hence, their approach to meet organizational requirements is not the same.
The procurement function focuses on building a relationship with vendors so they can continue to do business in the future. Procurement is about building long-term relationships with the right suppliers. Purchasing places emphasis on transactions rather than on building vendor relationships.
Procurement is about activities that ensure that the requirements and needs of the organization are fulfilled. Procurement also involves looking at places where there is a need for goods and services. This is distinct from purchasing which deals with committed expenditure and takes a different approach.
Procurement is said to take a proactive approach. A proactive approach is a long-term approach because it ensures that problems don’t appear in the first place. On the other hand, purchasing takes a reactive approach. A reactive approach is one where the problem is managed after it has been identified.
Procurement functions focus on how valuable the good or service is rather than the cost. However, purchasing deals with focusing on getting the best deal or the best price for the good or service required by the organization rather than the value it provides. This is a big difference between the two functions.
Procurement is about long-term planning and reaching goals that will benefit the organization in the future. That is, procurement means ensuring the corporate goals are met. However, purchasing is about reaching short-term goals such as getting the cost, place, quantity, time, and quality of the products right.
Is One Better Than The Other?
Not exactly. While the two processes have distinct functions, one is not better than the other because which approach an organization takes depends on their particular requirements. For instance, large enterprises might lean towards using the procurement approach because while start-ups may prefer to use the purchasing approach instead. It all depends on the type of organization and what its goals are. Hence, one cannot be said to be better than the other because while one approach may be feasible in one scenario, the other approach may be better for a different scenario.
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