Procurement and purchasing are two terms (and departments) that often get confused as one. It's an understandable mistake.
If you’re procuring a good or service, you’re purchasing it, right? I mean, you’re probably not getting it for free.
While the two terms could be considered synonyms in the English language, when it comes to the business lexicon, the distinction is important.
In this article, we’re going to help you understand that distinction. We’ll explain in plain terms what procurement and purchasing are, how they differ, how they work together, and best practices for improving your own procurement and purchasing processes.
Definition of procurement
Procurement is the full end-to-end process of obtaining goods and services for your business from third-party suppliers.
It begins with planning and needs identification, progresses through supplier identification, vetting, and negotiation, and encompasses all purchasing tasks, such as raising a purchase order, receiving the requested goods, and sending invoices to accounts payable for payment.
So, purchasing is actually a part of procurement.
Definition of purchasing
Purchasing is the term that covers all activities related to a business's immediate buying needs.
It usually starts with a purchase order (though there may be a purchase request and some approval and supplier selection stages that occur first) and continues until the goods and an accompanying invoice are received, at which point the accounts payable process kicks off.
Purchasing is not separate or distinct from procurement; it's a part of procurement.
Procurement vs. purchasing: Key differences
There are three critical differences that separate procurement from purchasing:
- Procurement is more proactive; purchasing is more reactive
- Procurement is more strategic; purchasing is more tactical
- Procurement is more focused on the long term; purchasing deals more with the short term
Proactive vs. reactive
Procurement is a proactive approach.
It recognizes and considers the organization’s future purchasing needs and identifies potential suppliers in advance, putting relationships and agreements in place that will facilitate purchasing down the line.
Purchasing, by contrast, is more reactive.
It begins when someone in the organization has an immediate need to buy something and often leverages the existing relationships that the procurement process has established.
Strategic vs. tactical
Procurement is a strategic business venture that envisions future needs and anticipates growth, then takes action to negotiate favorable terms and set up fruitful business relationships.
Purchasing is more tactical.
There are some strategic elements (you’re going to strategically choose the best vendor for your current needs, for example), but it’s more about solving an immediate and pressing problem.
You need to buy something, so you find someone to buy it from.
Long-term vs. short-term
Procurement has a long-term focus.
It doesn’t just consider what the company’s needs are right now when selecting and vetting suppliers; it also looks at how those needs might change as the business grows and develops.
Purchasing is much more concerned with the short term and focused on solving the immediate need to acquire a good or service.
The importance of effective procurement and purchasing strategies
If you want to set up effective procurement and purchasing policies and processes, then it's critical to be able to delineate between the two, understanding where each starts and stops so you can develop your procurement strategy appropriately.
A well-structured procurement strategy can lead to cost savings, improved supplier relationships, and better quality goods and services.
For example, if you only implement purchasing practices, you’ll likely miss out on the strategic and financial benefits that come with investing time in envisioning and solving long-term needs (the goal of procurement).
On the other hand, if you only engage in high-level sourcing practices, you won’t have effective procedures and workflows to follow when it comes time to order and purchase goods or services from your suppliers.
In short, you need both procurement and purchasing, and you need the two to work together harmoniously.
How procurement and purchasing work together
Let’s examine what the end-to-end procurement and purchasing process looks like and where the former flows into the latter.
The first ten steps below are pure procurement. The final eight represent the purchasing process, which can be considered a part of the broader procurement process.
- Business needs identification
- Assessment and review of the current situation.
- Make or buy analysis.
- Market research.
- Vendor shortlisting.
- Supplier vetting and risk analysis.
- Request for quotation (RFQ) or request for proposal (RFP)
- Vendor prioritization.
- Contract negotiation.
- Agreement and contract signing.
- Purchase requisition.
- Vendor selection.
- Purchase order creation.
- Purchase order approval.
- Purchase order sent to vendor.
- Goods or services received.
- Quality check.
- Invoice routed to AP for payment.
SMB challenges in procurement and purchasing
While procurement and purchasing departments and processes are more common in enterprise organizations, they’re still a good fit for small and medium-sized businesses.
That said, SMBs do face some unique challenges when it comes to setting up efficient procurement and purchasing outfits, such as:
- Limited bargaining power due to lower purchase volumes
- Shadow spending due to employees not following established policies
- Difficulties investing time in vendor relationship management
- Finding the delicate balance between quality and cost-effectiveness
- A lack of internal expertise and experience
- Challenges with measuring and reporting on the performance and effectiveness of procurement and purchasing processes
Best practices for improving procurement and purchasing processes
Setting up your first procurement or purchasing business unit? Or simply looking for a few ways to work faster, smarter, and more effectively?
If so, consider implementing these four best practices.
Leverage modern procurement technology
Start by investing in a procurement and purchasing software solution.
These advanced tools can support activities such as supplier management and vetting, purchase order creation, invoice matching, and purchase approvals workflows.
Many have built-in automation functionality to help minimize the need for routine manual tasks and give more time back to your team to work on strategic initiatives.
BILL, for example, helps AP departments reduce their workload by as much as 50% using effective automation workflows.
Implement standardized procedures
Improve compliance and ensure consistency across procurement and purchasing activities by providing clarity on your expectations.
Start by creating standardized procedures, documenting them clearly, and providing simple step-by-step workflows that procurement and purchasing team members can follow across the board.
Then, ensure these documents are kept up-to-date and accessible by all by using a document storage solution like Google Drive or Slite.
Invest in ongoing team education
Enforcing standardized procedures will help ensure consistency and compliance, but it won’t necessarily advance the skillsets of the people on your team.
Help your procurement and purchasing team members learn about the best vetting practices, powerful new ways to source and prioritize suppliers, and new ideas for designing procurement strategies.
This requires ongoing investment in team training and education. Consider signing up to outlets like Procurement Magazine to support ongoing learning.
Put spend management practices in place
One of the biggest challenges SMBs face is monitoring and managing where every dollar goes.
Good procurement and purchasing practices help here, but to improve spending visibility, you’ll want to implement some specific spend management practices, too, such as:
- Providing team leaders with purchase cards
- Requiring all invoices to match a purchase order
- Centralizing all financial data in a single location
- Making expense reimbursements fast and easy
- Using virtual cards for increased security
Streamlining procurement and purchasing
If you’ve made it this far, the difference between procurement and purchasing should be clear.
Purchasing is the set of short-term, tactical processes related to obtaining goods or services, such as placing a purchase order.
Procurement is more strategic and focused on the long-term. It encompasses all of the purchasing and upstream tasks like strategic sourcing and contract negotiation.
Modern financial technology solutions such as BILL can support aspects of the procurement cycle, such as managing payments to vendors and automating the matching of invoices to purchase orders.
Streamline your procurement and purchasing workflows. Start using BILL today.
