Procurement vs Purchasing: What

Is The Difference?

Mark Twain said, “The difference between the almost right word and the right
word is really a large matter—it’s the difference between the lightning bug and
the lightning.”

While purchasing may get materials in the door, professional procurement

strategies can reduce a company’s purchase spend by an average of 8 to 12
percent per year, significantly impacting liquidity. Knowing the difference
between procurement and purchasing pays off.

What is Purchasing?
Purchasing is a simple transaction, when companies pay for and receive goods or
services. Purchasing can be considered a subset of procurement. For a small

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business with no procurement department, this may mean a phone call to an
office supply store when the supply of pens runs low or a new computer is
needed. Small businesses often lack the purchasing power of a major enterprise
and have no leverage with which to negotiate.

A simple purchasing process is generally performed on a transactional basis with

little strategy:

1. Placing the order

Without strategy, goods and services are ordered as needed. Reactive
purchasing comes with a host of money-wasting issues. Businesses that
buy on demand without approved purchase orders (PO) typically lack
oversight and budget control.

2. Supplier communications
Most companies have a established list of suppliers they work with to
purchase supplies.

3. Receiving of goods or services

Purchasing requires receipt of goods and services. Good purchasing
strategy includes protocols for recording and tracking purchases.

4. Invoice receipting
In companies with no procurement department, invoices are usually sent
to accounts payable. With no automated tracking system, each invoice
recording must be verified by hand, an inefficient and time-consuming
process prone to error.

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 5. Supplier payment
Invoices are typically paid without completing the 3-way match to verify
the invoice against the PO and packing slip. Common results of poor
strategy include late payments, over-payments for items not delivered,
and duplicate payments.

For a growing business, purchasing without procurement strategy has distinct

disadvantages. Lack of control, purchasing rules, preferred vendor relationships,
and accurate metrics leaves companies vulnerable to fraud and overpayment.
Well defined procurement process helps minimize spend, even for a small
business.

In essence, the procurement process is a comprehensive set of strategies and

protocols designed to extract the best value of purchasing; purchasing is the
end result – the transaction.

What is Procurement?
Procurement is a far more over-arching concept, encompassing end-to-end supply
chain management strategies for sourcing, negotiation of contracts and acquiring
goods, raw materials, services or work from external sources, then following
through to ensure contracts are fulfilled according to contract terms. The ultimate
long-term goals of the procurement function are cost savings, spend control, and
workflow efficiency.

Where a simple purchasing decision may include considerations such as price,

delivery, and convenience, procurement plans are a corporate strategy with a
comprehensive overview of every detail affecting purchases.

Procurement considerations include:

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Business ethics
Today’s consumers expect businesses to conform to certain standards,
and sourcing scandals can be fatal. Distasteful stories of sweatshops or
destructive mining processes sweep social media like wildfire, burning
customer trust in its wake. Procurement department responsibilities
include ensuring that company values are upheld and raw materials are
sourced in ethical, legal, and customer-approved ways.

Logistics
What is the optimal method of delivery, factoring in time, cost, taxes and
tariffs, risk, and ethical considerations? Procurement departments
determine the most efficient and timely ways to receive goods.

Quality
In some industries, it can be acceptable to cut corners to save money. Tee
shirts made of thinner fabric, for example, are harmless and cheaper
fabric may even appeal to buyers. In other industries, quality of materials
is the single most important consideration. Building projects and food
products are examples of industries where cutting quality can be
dangerous. Procurement strategy includes identifying the best possible
quality at the lowest price.

Supplier capability
Procurement departments keep a close eye on suppliers, making sure
they are capable of delivering the quantity needed on time. Strategic
sourcing includes alternate plans for suppliers who may be in the path of
a disruptive event capable of destroying supply lines, like a hurricane or

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flood. These sourcing activities can ensure the supply chain is not
disrupted.

Cost
the price of raw materials is an issue for every business. Typically, a
procurement department uses a tendering or competitive bidding process
to request proposals from trusted suppliers and ensure the lowest price
and most favorable payment terms after all other considerations are
factored.

Overall budget
One benefit of a centralized procurement department is enhanced buying
power. By consolidating spend from all departments, a savvy procurement
manager can negotiate better deals based on bulk pricing.

Spend control
Comprehensive procurement strategy identifies spend categories and sets
protocols for purchasing based on category, expected purchases, or dollar
amounts. Tight control eliminates maverick spending and unapproved
purchasing while simplifying expected purchases.

Risk analysis
Systematic identification, assessment and strategies to minimize risk
contribute significantly to procurement success. Risk management is
integral to effective procurement management, particularly for large scale
or geographically diverse businesses.

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 Establish protocols for purchasing
Procurement strategy facilitates ordering and eliminates bottlenecks by
establishing governing rules for automated purchases and defining the
process for goods and services requiring approval.

Accounts payable
The procurement department uses 3-way matching to verify invoices
against the purchase order and goods receipt. This eliminates duplicate
payments, ensures invoice items are delivered as promised, and flags
invoices for timely payment in the procure-to-pay cycle.

A strategic approach to procurement seeks to streamline operations by defining

every aspect of the supply chain and setting protocols for purchase requisition,
automated spend, approval process, and optimal delivery options.

Where a purchase begins and ends with the acquisition of goods and services,
procurement is an ongoing detailed design process to make informed buying
decisions based on available data, which must be kept up to date. The purchasing
department continually seeks to optimize and improve supplier relationships,
forge connections, and find ways to lower supply chain cost and minimize losses.

What’s your goal today?

1. Use PLANERGY to manage purchasing and accounts
payable
We’ve helped save billions of dollars for our clients through better spend
management, process automation in purchasing and finance, and reducing
financial risks. To discover how we can help grow your business:

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