What is the Difference Between Purchasing and Procurement?

What is the Difference Between Purchasing and Procurement?
| Updated on: April 8, 2022

Some people use the terms procurement and purchasing interchangeably. But, there is a difference between the two and it is important to understand this.

What is procurement?

Most businesses need to buy goods or services to run their business. Procurement is the process that a company goes through that culminates in the act of buying the goods and services that it needs. Procurement can refer to the actual act of purchasing or all the steps involved in the process of buying necessary goods and services.

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What are the steps of the procurement process?

Step

Description

1

Identifying the requirement

2

Creation of a purchase request

3

Evaluation and selection of vendor

4

Negotiation

5

Creation of a purchase order

6

Three-way verification

7

Payment

8

Record-keeping

Step 1: Identifying the requirement

The first step in procurement is identifying the requirement. This involves specifying the exact item or services, its different attributes, and quantity. It may be a new item or service or a repeated order.

Step 2: Creation of a purchase request

After identifying the need for something with the associated specifics, the formal request for the purchase has to be made. This is achieved through a purchase request. Different companies have their own methods by which a purchase request is made. A purchase request would have to go through the designated hierarchy of management for the purchase request to be approved or rejected. If a purchase request is approved, it goes through the rest of the procurement steps. If a purchase request is not approved, it ends at this stage.

Step 3: Evaluation and selection of vendor

Companies have their own unique ways of selecting vendors. Some maintain a list of pre-approved vendors that they buy from. These vendors are approved by fulfilling the criteria set by the company and have pre-negotiated terms and conditions. Some companies call for vendors when they have a requirement and go through the vendor selection process to negotiate the best deal. It is good  to maintain a cordial relationship with vendors so that a company does not have to go through the entire vendor selection process when they have a requirement. This saves time, money, and effort.

Step 4: Negotiation

After choosing a suitable vendor, the company negotiates the prices and terms for the order. Both the buyer and the vendor will try to achieve the most beneficial deal. The negotiation process will cover the technical specifics of the item or service, the cost, quantity, delivery dates and  other terms and conditions. Every aspect of the item specifications and quality should be discussed at this stage.

Step 5: Creation of a purchase order

The purchase order is one of the most important documents  generated in the procurement process. It officially lists all the details of the purchase that is being made. While the negotiation process may create a contract between the parties, the purchase order  becomes a legal purchase contract when sent to the vendor and accepted.

Step 6: Three-way verification

When the item or service is delivered, three important documents must be checked and cross-verified; purchase order, vendor invoice, and packing slips. The items and details on the three documents should match and be the same as the actual product supplied. Incorrect matching or carelessness at this stage can lead to disputes and revenue loss if the order has been incorrectly fulfilled. The delivered items should also be verified for quality and quantity as per the purchase order.

Step 7: Payment

The order supplied will have the supplier invoice attached. This invoice will specify the rate and amount due for the supplied order. The buyer should make payment as per the contractual schedule and terms that were set out and agreed upon in the negotiation stage.

Step 8: Record-keeping

The entire procurement process should be recorded in the company’s records. All paperwork should be filed appropriately either in physical or digital form as per the company’s practices.

What is purchasing?

The process of obtaining or procuring the services or products required by an entity is called purchasing. Purchasing also works to obtain these items in the required quality and quantity in the most cost-effective manner possible. In manufacturing companies, the purchasing department is vital to the company’s operations as it obtains the raw materials required for manufacturing activities. The purchasing process in such a company is a continuous and ongoing process.

The objectives of purchasing are:

  • The identification of suppliers for the required goods and services
  • To ensure that there is a timely purchase of the required goods and services as per the quantity and specifications required
  • To obtain the requirements at the lowest possible cost

The activities in purchasing are:

  • Receive and validate purchase requests
  • Find competent suppliers to fulfill the requirements at the lowest cost
  • Issue request for proposal (RFP) documents to attract suppliers
  • Validate and compare the replies to the RFPs
  • Choose the best supplier
  • Negotiate the terms and conditions and achieve a purchase contract
  • Manage the contract in the long and short term
  • Manage purchase orders through the purchase cycle and close them when completed

What are the steps of the purchasing process?

We often use the words purchasing and procurement interchangeably. However, purchasing is the overview of the broad process of obtaining goods and services. Procurement is the detailed process that directly ensures the maximum value, quality, and timeliness of the process of obtaining goods and services.

We can also refer to the purchasing activities of a company as the procure-to-pay (P2P) process. This refers to the most basic process in the purchase, the transaction. While, in a home or in personal life, something is purchased to fulfill the requirement at the lowest price, purchasing in a business has many more implications. A company’s purchasing process should also protect the company from fraud, wasteful spending, stock-outs, poor quality supplies, late supplies, insufficient supplies, and other financial dangers. In order to ensure that all these aspects of purchasing are met, the purchasing departments must:

  • Create an efficient purchasing procedure
  • Maintain good supplier relationships
  • Optimize the supply chain for value and cost
  • Enhance and optimize the efficiency of the procurement cycle
  • Ensure good record keeping with transparency and an audit trail that can be examined internally and externally
  • Create a business process management model that integrates purchasing with the rest of the company’s activities
  • Have a systematic and streamlined purchasing process that can be implemented at all locations of the company

 Procurement vs. purchasing

As detailed above there is a difference between purchasing and procurement. Purchasing is the overall process of obtaining goods and services for a company. Procurement is the sub-process within purchasing that defines the steps by which the organization identifies its needs, locates a supplier, negotiates, orders, receives, verifies, and makes payments for the purchase.

Difference between purchasing and procurement

Procurement

Purchasing

The detailed steps and activities related to acquiring goods and services

The overall functions for buying goods and services

Covers the end to end steps that lead to a purchase, happen during purchase and after the purchase,

Covers only the actual purchase transaction process

Common in a production-based company

Common in a wholesale or retail company

Value before cost

Cost before value

Encompasses identifying the needs and then fulfilling it

Refers to the specific transaction

Identifying requirements, finding a source and closing the contract

 

Ordering, verifying and making payment

Is proactive

Is reactive

Relational–seeks to create and maintain good vendor relationships

Transactional–Is more focused on the transactions than the overall relationship

Procurement and purchasing automation

As seen in the sections above, there are many important steps in procurement and automation. Each step has its own important documentation that flows to the next step. Purchasing and procurement documentation also flows outward and inward to and from external parties. The documentation shared to and by vendors/potential vendors is all-important and vital to the accuracy and speed of the purchasing process. Despite the difference between purchasing and procurement, they both require a series of documentation.

In traditional paper-based systems, the documentation would all be printed and shared as hard copies. The manual preparation of documentation also required time, attention, and careful attention to the details. Manual processing of purchasing documentation slows down the entire process owing to the delay in conveying physical documents back and forth.

Physically filing and storing paperwork can also result in a lack of efficiency and transparency in purchasing. Since purchasing approvals are essential to start the process, a manual process can also get bogged down in red tape.

Businesses that rely on purchasing to drive their operations, the procurement cycles are repetitive. Paperwork slows down a process that would otherwise be faster. The procedure of documentation could possibly slow down each procurement cycle by days or even weeks. In multi-locational companies, the process is liable to be even slower.

A complete digital solution for purchasing such as TallyPrime is the key to purchasing and procurement efficiency and transparency. Since all records are digitized they support a digital process. Instead of exchanging hard copies of paperwork, documentation can be shared and processed digitally.

Sharing information, documents, and approvals across locations are effortless when you use a solution such as TallyPrime that supports multi-location access to the inventory and purchasing databases. TallyPrime integrates the accounting and inventory aspects of purchasing so that there is no chance of errors and mismatches caused by manual double entries.

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