Procurement and purchasing, while often use interchangeably, actually refer to separate functions within an organization.
In general, procurement is the broad strategy companies take to identify their needs, evaluate possible vendors, negotiate contracts, and manage supplier relationships.
Purchasing fits within the procurement cycle, making up the transactional process of ordering specific goods or services from an approved vendor.
In other words, procurement provides the infrastructure for securing goods and services reliably and cost-effectively. Purchasing actually executes the buying process.
What is procurement?
Procurement refers to a company’s strategic approach to acquiring the goods and services it needs to support operations.
The goal of procurement is to foster long-term vendor relationships to improve supply chain reliability and secure favorable pricing to enhance profitability.
Examples of procurement
- A manufacturing company may need to secure long-term, reliable vendors to provide the raw materials and components needed to produce goods.
- A pest control business needs to find a trusted partner to supply and maintain its fleet vehicles at fair prices.
- A SaaS company may consider partnering with a corporate travel management service to oversee business travel needs and secure corporate discounts.
Steps in the procurement process
Each company may approach its procurement strategy differently. That being said, the following steps provide a general look at how the procurement cycle functions:
Identify the need for goods and/or services
The procurement process kicks off when business leaders recognize a need for a specific product or service.
Such offerings may be directly or indirectly related to the business’s operations. Either way, the team recognizes that it will need to source the goods or services from an external source.
Determine specifications or requirements
The next step of the process is to determine exactly what the company needs from the given product or service.
In other words, what are some of the specifications or requirements that the company is looking for from a possible supplier?
For example, a new home builder recognizes that they need lumber to construct home frames. Beyond this, they need to determine the type of lumber, the proper dimensions, quantities, and quality standards they’re seeking.
Identify and evaluate possible suppliers
Once they have narrowed down the specific good or service they need, it’s time to start evaluating potential suppliers.
This requires some level of market research and analysis to determine which suppliers can offer the product or service needed.
In addition, the team should develop a scoring rubric to evaluate their options to further pare down the list, including:
- Location (where relevant)
- Years in business
- Customer reviews
- Pricing
- Referrals
Request and review proposals or quotes
With a shortlist of possible contenders, the company should reach out to each with a request for proposal (RFP) or request for quote (RFQ).
This step is when companies initiate contact with potential vendors and gather key information to help them make their final selection.
While certain vendor details will be available online, this isn’t always the case in business-to-business relationships. Plus, the vendor may offer custom packages or pricing based on the company’s request, which cannot be found online.
Select a supplier and negotiate a contract
Using the details from RFPs or RFQs, internal decision-makers can compare vendors side by side and determine which is best for their needs.
Upon final selection, they can reach out to the vendor to negotiate the final contract details, including pricing, payment terms, delivery schedules, and more.
Purchasing activities
As needed, employees may submit requests to secure specific items or services from the approved vendor.
This step involves submitting requisitions and purchase orders, receiving and examining the delivered goods or services, and processing vendor invoices.
We’ll cover the purchasing process in further detail below.
Ongoing supplier relationship management
The procurement process doesn’t end once goods and services are delivered. A strategic procurement cycle expands beyond purchasing activities, into supplier relationship management via clear communication, performance management, and general collaboration.
This may look different depending on the company’s own philosophies, their industry, and the supplier. However, fostering strong vendor relationships can help teams secure things like:
- Favorable pricing
- Better payment terms
- Quicker delivery cycles
- Innovation of new products or services
Contract reviews and renewals
As the end of the vendor contract approaches, both parties will meet to discuss the opportunity for renewal or expansion. In other words, will they continue working together, end the contract, or expand their engagement?
This step is often initiated by the supplier or service provider, who has a financial interest in securing renewal revenue.
However, these discussions provide businesses with the opportunity to score better pricing, payment, or delivery terms as a reward for their loyalty and continued partnership.
After all, this is the main goal of strategic procurement: securing reliable vendors and favorable pricing to support smooth operations.
What is purchasing?
Purchasing is just one part of the broader procurement process. It involves the ordering and paying for goods and/or services from a vendor.
While purchasing activities are not as strategic as the procurement process, they still play a key role in how businesses control costs and secure the necessary goods and services to support operations.
Examples of purchasing activities
- When onboarding new hires, a manager may secure additional software licenses for a tool that the rest of the team uses.
- A company’s in-house marketing team may request more deliverables from its long-term contractor to support a new campaign.
- A business may reorder inventory from one of its suppliers to restock shelves.
Steps in the purchasing process
Again, the exact steps for purchasing may vary depending on an organization’s approvals process and internal policies. Here is a general overview of what this process can look like:
Submit a purchase requisition
When an employe recognizes the need for goods or services from an approved vendor, they’ll typically need to submit a formal request to their manager of finance department before making the purchase.
This is often done in the form of a purchase requisition, which collects details about the requested purchase, such as:
- Item description
- Price
- Quantity
- Preferred vendor
- Desired delivery date
- Supporting notes/purchase justification
Secure internal approval
After submitting the requisition, it will be routed to the appropriate parties for approval.
Again, this will vary between companies, but a typical flow is an initial approval by the requestor’s manager before being passed along to the department head then someone in the finance department.
Throughout this step, the approver may request additional information before approving it, or even deny the request if it doesn’t adhere to internal policies.
Submit a purchase order (PO)
Up until this point, all requests regarding this purchase have occurred internally.
Once the employee gets the necessary approvals, they may submit a purchase order to the selected vendor to formally request the desired items or services.
Similar to the purchase requisition, this will include details like an itemized list of goods and services, quantities, prices, delivery details, and payment terms.
Receive ordered goods/services
After processing the purchase order, the supplier will deliver the specified goods or services.
An employee should review the delivered goods or services against the PO to verify quality and quantity, ensuring the company received what it paid for.
Process the supplier’s invoice
Usually upon delivery, the vendor will issue an invoice to the customer. The invoice will lay out the total order amount, payment terms, and the due date.
On or before the invoice due date, the accounting department should initiate a payment to the vendor, applying any early payment discounts.
Request payment confirmation from the supplier for internal record keeping.
What is e-procurement software?
E-procurement software is a type of web-based application that can help businesses streamline procurement activities in one central location.
These solutions help to automate key functions in the procurement cycle, including approvals routing for requisitions, ordering, invoice processing, and payments.
Teams may implement e-procurement software to enable better collaboration with internal stakeholders, reduce approval wait times, and ensure payments are processed accurately and on time to support vendor relationships.
Key aspects of e-procurement software
- Automation: These tools automate recurring, time-consuming tasks in the procurement cycle so teams have more time to focus on more valuable work.
- Centralization: E-procurement solutions compile key procurement details in one location, offering better visibility into purchasing activities and standardizing processes across departments.
- Online Portals: Software solutions typically offer self-serve portals for employees, managers, vendors to update key information, submit bids and requisitions, and confirm order details at their convenience.
- E-Sourcing & E-Tendering: Some tools help with the vendor selection process by enabling prospects to submit RFPs/RFQs electronically.
- Supplier Management: These solutions may also help with ongoing supplier relationship management by providing a clear location for teams to communicate, share important documents, and track performance and renewals.
Benefits of e-procurement software
Businesses focused on modernizing operations for the digital age may enjoy these benefits from implementing e-procurement software:
- Increased efficiency: E-procurement tools help reduce teams’ reliance on manual processes, speeding up processing times and enabling quicker approvals.
- Cost reduction: By providing better visibility into spend data, these tools can help teams control budgets more easily, identify cost-saving opportunities, and uncover unnecessary spending.
- Improved spend policy compliance: An e-procurement solution strengthens the enforcement of a a company’s spend policies. All purchase requests are routed through the proper approvals, helping teams stay on-budget and only use approved vendors.
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Frequently asked questions
What is the difference between purchasing and procurement?
Procurement is the overall strategy an organization uses to secure vendors, oversee supplier relationships, and build a reliable supply chain. Purchasing is one step within the procurement cycle, when internal stakeholder order goods or services from an approved supplier.
Is purchasing also called procurement?
Procurement and purchasing may sound similar, but they refer to two separate processes. In some settings, a person may use the two terms interchangeably, though the general idea is that procurement is a more strategic function with a long-term focus, while purchasing is a transactional process at a certain point in time.
What are the 8 stages of procurement?
The eight stages of procurement are:
- Identifying the need for goods/services
- Determining the specifications and requirements
- Identifying and evaluating potential suppliers
- Requesting and reviewing RFPs and RFQs
- Selecting a supplier and negotiating a contract
- Purchasing activities
- Ongoing supplier relationship management
- Contract reviews and renewals
What skills are needed for procurement?
Procurement is a strategic business function that requires analytical abilities, negotiation and communication skills, financial knowledge, and risk management expertise.
What are the four types of purchasing?
The four types of purchasing include:
- Direct purchasing
- Indirect purchasing
- Goods purchasing
- Services purchasing
