The difference between procurement and purchasing is often mistaken and these terms are used interchangeably. However, in actual terms, they both are distinct. Their intent is different, and what they accomplish is also different. Here, we will talk about the procurement vs purchasing differences.
While procurement and purchasing are part of the overall business planning process, they are still different from each other.
Let us look deeper into the differences between procurement and purchasing and see how much they differ from each other.
What is Procurement
The process of identifying, selecting, and acquiring the required goods and services from a vendor, either through direct purchase or competitive bidding or tenders, while ensuring the right quality, quantity and timely delivery is called procurement.
Types of Procurement
There are four different types of procurement. Read further to get more insights into these types of procurement.
Direct procurement is the process of obtaining goods and services that are required for operating a business. The goods and services procured by direct procurement find their way to the end customer of the business.
For example, a TV manufacturer procures plastic, glass, metals, silicon, chemical coatings, etc. These materials will eventually be part of the TV that is produced. The process of procuring such materials falls under direct procurement.
The process of obtaining goods and services that are necessary to maintain the day-to-day business of a company is called indirect procurement. Goods and services obtained through indirect procurement do not reach the end customers and do not add to the bottom line of the business.
Some examples of goods obtained through indirect procurement are office supplies, equipment, housekeeping agencies, repairing equipment, etc.
The procurement of physical items is called goods procurement. This procurement procedure involves higher costs due to the nature of the goods (material in nature) involved. Also, the necessity to go through a long supply chain to what the business needs can lead to higher costs and more time.
The procurement for services is mostly for a single period if the business is happy with the services. Leasing services or vendor services for specific projects also fall under service procurement and can be temporary in nature too. This type of procurement generally falls under indirect procurement.
Methods of Procurement
The difference between procurement and purchasing will be more evident from the methods of procuring. There are six procurement methods for procuring goods or services. Each of them is briefly explained below:
Open tendering is the method of procurement based on open or competitive bidding. It enables bidding on the goods or services in a healthy competition, with the following requirements met:
- 1) Locally advertising
- 2) Unbiased and inclusive technical specification
- 3) Objective evaluation
- 4) Equally open to all bidders
- 5) Bidding at a minimum cost takes the cake
Although open tendering seems fair, many experts believe it becomes difficult for large enterprises to procure goods.
In restrictive or selective tendering, the procurement teams send tender invitations to a limited number of agencies or companies based on certain guidelines. The limited number of tender invitations streamlines the selection process and identifies the best-suited vendors for goods or services. The procuring entity would set guidelines to select the vendors to create the invitation list, unlike random selections.
Request for Proposals (RFP)
Unlike open and restricted tendering, in the RFP procurement method, the suppliers or vendors approach the procurement manager by proposing why they should buy goods or services from these vendors. To win the bid as a supplier or vendor, you must convince the procurement manager by submitting a two-envelope proposal. The financial component is hidden in the second envelope, which is only opened after the procurement manager accepts the first envelope containing the proposal. This process allows objective and cost-independent proposal review.
The two-stage tendering has two procedures, each with two stages. The first procedure is like RFP, where the bidder or vendor submits a two-envelope proposal to the procurement manager/ team with an additional technical proposal. The technical proposal consists of the solution associated with the requirements of the procurement team. Depending on the solution provided by the bidders, they are scored. The bidder with the highest score is invited for further discussion. Upon reaching an agreement, the financial aspects are discussed.
In the second procedure, instead of a full technical proposal, the bidder submits a partial proposal allowing room for more discussion and customization. After the highest-scoring bidder is identified, they are invited to submit a full technical proposal. Once approved, the proposal's financial aspects will be discussed and evaluated. The cumulative score of both the technical proposals determines the vendor's contract.
Request for Quotations
One of the easiest and less complex procurement methods, where no formal documents are involved from both parties. The procuring entity identifies three suppliers or vendors they desire to get quotes from. A comparative analysis of the quotes generated determines which vendor to the supplier to be opted for the service or goods based on compliance.
Single-source is a procurement method where the procuring entity or manager relies on a single vendor for the goods and services. This non-competitive procurement method should be used under specific circumstances, and the scenarios calling out for this procurement method may include the following:
- 1) Emergencies
- 2) Only a single supplier in the market can fulfil the requirements
- 3) Benefits of using a single vendor are apparent
- 4) Only one supplier is available with the suppliers
- 5) Other suppliers cannot reproduce same work
Procurement Process Flow Chart to highlight the difference between procurement and purchasing
Below are the expansive procurement process steps that demarcates one of the major differences between procurement and purchasing, as depicted below: