Many people use the terms purchasing and procurement interchangeably, but despite their similarities, they do have different meanings. With this said, let’s clarify any confusion on the difference between procurement and purchasing.
First thing’s first: Procurement deals with the sourcing activities, negotiation and strategic selection of goods and services that are usually of importance to an organization. Purchasing, on the other hand, is the process of how goods and services are ordered.
In this guide, we’ll explain the difference between procurement and purchasing and the roles that these two important functions play in business.
Table of contents
- What is Procurement?
- What is Purchasing?
- Procurement vs Purchasing: What’s the Difference?
- Automating Your Procurement and Purchasing Strategy with E-Procurement
Procurement is the process of sourcing and acquiring the goods and services a company needs to fulfill its business objectives.
An effective procurement strategy can do many things. For instance, it can save a company money by negotiating favourable terms and pricing. It can also ensure supplier quality, efficiency, and timeliness.
Procurement involves much more than just handing over the company credit card and paying for a purchase. For example, an effective procurement strategy includes everything involved in the procuring process, from identifying which goods and services a company needs, right through to maintaining the right documentation and records.
Here’s a quick overview of how the procurement process works:
- Identify which goods and services the company needs.
- Submit a purchase request.
- Assess and select vendors.
- Negotiate price and terms.
- Create a purchase order.
- Receive and inspect the delivered goods.
- Conduct three-way matching.
- Approve the invoice and arrange payment.
- Conduct record keeping.
Keep in mind, however, that how a company shapes its internal procurement process influences factors like the company’s size, industry, available human resources, and organizational structure.
For an in-depth explanation of the procurement process, check out our guide: What are the Stages of the Procurement Process?
Procurement is important in business because it directly impacts a company’s profit margin. For an organization to be profitable, the cost of procuring goods needs to be less than the amount it sells those goods for, minus whatever costs are associated with processing and selling them.
Enacting the best procurement procedures will ensure that the buyer (i.e. the company) is acquiring goods and services at the best possible price at all times.
In addition, procurement is linked to several core business functions within an organization. Therefore, it should always be considered a critical part of any organization’s corporate strategy.
The four pillars of corporate strategy
To understand this, consider how procurement can influence the four pillars of corporate strategy:
- Corporate Identity
- What does our company do and stand for?
- What beliefs inform our business model?
- Market Placement
- Who are our customers?
- What do they want?
- What do they believe in?
- Company Capabilities
- What are our strengths and weaknesses?
- Do our strengths support our long-term goals?
- How do we want to grow?
- Management Issues
- Do we need to hire/develop talent to lead us to our goals?
- Does the company have the resources needed to achieve our goals?
Procurement touches on each of these components.
For instance, procurement and corporate identity are intertwined. If your business is building (or has built) its identity around an environmentally conscious ethic, for example, then your procurement strategy should reflect this decision. However, for this to be successful, policies must be in place to ensure you are sourcing from companies with similar ethics, or that you are sourcing materials that are not environmentally hazardous.
A company’s procurement strategy should also be shaped with its market placement, company capabilities, and management issues in mind. It’s essential that a company has the right people in place to put into action the beliefs and philosophies you want to govern your business by. Handling vendor relationships, then, should reflect company philosophy.
Purchasing is a set of tasks involved in buying goods and services. Purchasing involves tasks such as ordering, raising purchase orders, receiving, and arranging payment.
As a function, purchasing is a subset of procurement. And as such, the purchasing process sits inside the procurement process.
However, unlike procurement-related tasks outlined above, you shouldn’t tailor the steps explicitly related to purchasing to suit the size and scope of each individual vendor you’re purchasing from. This is a fundamental step of good purchasing and makes your process more streamlined. Ultimately, your purchasing process should employ routine best practices across all vendors.
Here are the steps in the purchasing process:
- Purchase Order Acknowledgement
- Advance Shipment Notice
- Goods Receipt
- Invoice Recording
- 3-Way Match
- Payment to Supplier
Good question. Essentially, you perform both procurement and purchasing when a company needs to acquire goods and services. But these two functions have different focuses and different methods for achieving their respective end goals.
Here’s a handy table that explains the differences between procurement and purchasing:
|What is the end goal?||To identify company needs and fulfill the procurement of those needs. Strategic, proactive process.||To arrange company expenditure and buy goods/services for the company. Reactive process.|
|How goods/services are assessed||Places more importance on an item’s value than how much it costs.||More focused on price than value.|
|When it’s deployed||Involved in the end-to-end activities needed to acquire all necessary goods and services.||Gets involved when it’s time to buy goods and services.|
|Tasks involved||Everything from need recognition to sourcing, contract closure, and recordkeeping.||Ordering, expediting, and payment.|
|How it deals with suppliers||Focused on developing long-term, win-win relationships with suppliers (relational focus).||Focused on making efficient transactions; not overly concerned with developing vendor relations (transactional focus).|
Procurement and purchasing both fall within an overarching process known as the Procure-To-Pay Cycle. This cycle encompasses all of the steps a company must take to identify and acquire the goods and services it needs to do business. (In other words, it’s procurement and purchasing combined).
To help you visualize how procurement and purchasing support one another throughout this cycle, here’s when these two functions get involved in the Procure-To-Pay Cycle.
Procurement steps in the procure-to-pay cycle
- Identify goods and services required
- Approve purchase requests
- Identify suppliers
- Sending Inquiries (RFQs and RFPs)
- Receipt of quotes from suppliers
- Negotiate pricing and terms
- Select vendors
Purchasing steps in the procure-to-pay cycle
- Acknowledge purchase orders
- Advance shipment notice
- Receive goods
- Inventory management
- Invoice Recording
- 3-Way Match
- Payment to Supplier
Procurement and expense management platforms like Procurify can help your team better oversee all procurement and purchasing activities with features like:
- Purchase requesting functionality for everyone on the team
- Purchasing and procurement workflows
- Purchase order creation, approval, and storage
- Approved vendor catalogues that every team member can access online
- Approval systems based on locations, departments and dollar thresholds, that are easy for employees and procurement managers to follow
- A mobile app that helps you request, approve and receive goods on the go
- Vendor management and vendor performance tracking
- 3-way matching
- Data exporting into your accounting system
The efficiencies that procurement and purchasing software can bring to your company’s procurement strategy can eliminate overspending and yield huge savings (both time and money), regardless of the size of your organization.
Ultimately, purchasing is a process within the overarching procurement process. Despite this, procurement and purchasing are oftentimes interchangeable. In the business world, the practice of using similar terminology in either conversation or printed materials is routine, although it is often confusing and should be avoided.
Procurement deals with the sourcing of activities, negotiation and strategic selection of goods and services that are usually of importance to an organization. Purchasing ,however, explains the process of ordering goods and services. In addition, purchasing also describes the transactional function of procurement for goods or services.