Difference between Procurement and Purchasing

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

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.

Indirect 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.

Goods Procurement

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.

Services Procurement

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

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.

Restricted Tendering

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.

Two-Stage Tendering

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

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:

Diagram for Procurement Process

What is Purchasing?

To make the difference between procurement and purchasing clearer, let's understand the latter. Purchasing forms a subset of the expansive procurement process resulting in the organised attainment of required goods and services between the buyer and supplier. The purchasing process steps start and end with placing and receiving an order, but the procurement process goes beyond this.

Types of Purchasing

While we had earlier talked about procurement, let us talk about the types of purchasing now to understand the difference between procurement and purchasing.

Purchasing could be divided into four types based on the type of purchase order. Let's learn about the different types of purchasing involved in the procedure purchase steps.

Standard purchase order (SPO)

In the standard purchase order, the buyer places a one-time order for goods or services. The standard purchase orders are highly detailed, consisting of procurement price, payment details, product quantity, and delivery dates. But SPOs are placed intermittently at irregular intervals.

Planned purchase order (PPO)

Planned purchase orders are similar to SPO except the delivery information. The delivery dates and payment details are tentative in PPOs. A "release" is issued corresponding to the PPO once the order is ready, confirming the delivery schedule and payment details.

Blanket purchase order (BPO)

The blanket purchase order omits the product quantity or even the product's price along with the delivery and payment details. It has the list of goods or products required, and similar to PPO a release is generated to confirm the price of items, quantity, time, and delivery date.

Contract purchase orders (CPO)

The contract purchase order is different from the types of purchasing mentioned above. In CPO, the order is placed based on the pre-understanding between the two parties (i.e., buyer and supplier). Based on this pre-agreement and trust they share; an order is placed even without the product information but includes the payment and delivery details.

Methods of Purchasing

Bulk Purchasing

Bulk purchase is the most common and economical purchasing method where the products or goods are bought in bulk. However, bulk purchasing requires storage space, relatively more capital investment, and a high cost of storage considering likely goods damage. Amazon Business offers bulk purchasing for your b2b and wholesale business needs.

Hand to mouth purchasing

Unlike bulk purchasing, hand-to-mouth purchasing is demand-based. The demand for the goods or products informs its quantity and transaction details. This method prevents the high stocking investment capital, product wastage, and associated charges. Hand-to-mouth purchasing comes in handy in emergencies or for occasional goods. Although cost-effective, it does involve the risk of product halt or product unavailability.

Speculative Purchasing

Speculative purchasing involves purchasing the goods or products in large quantities if they incur a lower price; expecting this surplus may fetch a better price in the future. Speculative purchasing can result in high profit given enough storage space, and capital is invested. However, there is also a risk of these products becoming obsolete.

Blanket Purchasing

Blanket purchasing is adopted for frequently purchased goods, items, or services for an effective procurement process. The same group of items is ordered under one category in blanket purchasing.

Reciprocate Purchasing

Reciprocate purchasing is agreement-based purchasing where the two or more companies agree to purchase items or products from each other regardless of whether these purchases incur the low cost or best value to the buyer.

Steps Involved in Purchasing Process to highlight the difference between procurement and purchasing

Compared to the procurement process, the purchasing process is less complex and has fewer steps. These steps will limelight the difference between procurement and purchasing even further:

Diagram for Purchasing Process

Procurement vs. Purchasing

To cement the difference between procurement and purchasing further, we have highlighted the key differences between them below:

Strategic versus tactical

A key difference between procurement and purchasing is that procurement is a strategic process while purchasing is tactical. The purchasing process begins and ends with placing and receiving an order, whereas procurement begins with the instant need for goods or services arises. Procurement in business involves strategic aspects like finding the right supplier, cost-effective terms, contractual agreements, etc. Learn more about strategic procurement priorities with Amazon Business.

Long-Term vs. Short-Term Goals

The extent of goals is another difference between procurement and purchasing. Procurement focuses on long-term goals like strategic planning, risk mitigation, aligning with the business objective, gaining competitive advantage, maintaining a contractual relationship with suppliers, etc. Conversely, purchasing focuses on short-term goals to fulfil the transaction, like having the right quantity, quality, cost, place, and time.

Proactive vs. Reactive

The way needs are tackled also illuminates the difference between procurement and purchasing. Procurement is proactive, it analyses and assesses the need and then fulfils it. But purchasing is reactive in nature, it fulfils the internal needs.

Stages involved

As seen in earlier sections, the stages involved also accentuate the difference between procurement and purchasing. Procurement has more steps and stages compared to purchasing. Purchasing involves the steps associated with placing and receiving an order. But procurement involves the process before, during, and after purchasing.

Flexible vs. Standardised Process

The rigidity of the process involved also decided the difference between procurement and purchasing. The procurement cycle is flexible, reacting to the changing needs, choosing suppliers, or deciding on the cost varying among companies. But the purchasing process is standardised to minimise the complexities and assure quality and efficiency remain the same for most companies.

Relational vs. Transactional Focus

The supplier relationship also determines the difference between procurement and purchasing. Procurement focuses on maintaining and creating a long-term relationship with the supplier. In comparison, purchasing maintains a transactional relationship with the supplier until the promised products or items are delivered.

Risk evaluation and mitigation

The prominence given to risk evaluation and mitigation informs another key difference between procurement and purchasing. The encompassing procurement process deals with risk identification, data security, and financial risks. The transactional nature of purchasing pays less attention to identifying and mitigating risk.

Why is it Important to Know the Difference Between Procurement and Purchasing?

Now that you know the difference between procurement and purchasing, it's time to review why knowing these differences is crucial for any business or company. Here's why:

• 1) Procurement gives a competitive advantage to your company. Cutting the best deals with the suppliers, streamlining the procurement process, and maintaining relationships with enough suppliers benefit companies while acquiring goods, products, or services.
• 2) Procurement has the power to influence company revenue and is closely associated with the business objective and goals, and corporate strategy.
• 3) Purchasing ensures quality items and delivered on stipulated time and prevents overdue payments.

How to Improve Procurement and Purchasing Processes for your business?

While we are discussing the difference between procurement and purchasing, it is important to note that improving and enhancing the procurement and purchasing process is beneficial for any business to operate seamlessly. Realising the extent of the difference between procurement and purchasing, you could make improvements in these processes this way:

• 1) Revise supplier relationship management strategies and approaches
• 2) Enhance team capability by training and correctly placing procurement or purchasing team members
• 3) Go for a straightforward and less complex approval workflow
• 4) Improve purchasing and procuring with automation
• 5) Eliminate inefficient and unrequired steps
• 6) Have a feedback system in place
• 7) Streamline and strategize sourcing
• 8) Have a standardised purchasing and procurement policy
• 9) Most importantly, centralised information, be it vender information or inventory details

What is E-Procurement?

E-procurement is a b2b process for requesting and purchasing goods and services online. Regardless of the difference between procurement and purchasing, the paperwork and documentation involved in these cycles are laborious. E-procurement makes this task easier by digitising tenders, supplier contracts, auctions, sourcing, ordering, etc.

How E-Procurement impacts businesses?

E-procurement positively impacts any business, saving time and digitising certain stages of the procurement cycle. E-procurement renders the following:

• 1) Contributes to supplier relationship management
• 2) E-information centralises all information securely, making it accessible to registered users
• 3) E-auctioning helps to evaluate suppliers and contract negotiation
• 4) E-ordering makes requisition, ordering, and purchasing of services and goods easier
• 5) E-tendering helps to raise online quotations, proposals, and information
• 6) E-sourcing helps with supplier identification

Advantages of E-Procurement

Still hesitating to make the switch from traditional procurement to e-procurement, then these benefits will convince you:

• 1) Ease-of-use
• 2) Improved visibility
• 3) Improved speed
• 4) Employee satisfaction
• 5) Improved collaboration
• 6) Continuous integration

Which one is Better - Procurement or Purchasing?

Even after understanding the difference between procurement and purchasing, answering this question is difficult. Picking a winner between procurement and purchasing is completely dependent and varies from business to business, enterprise to enterprise, business goals or strategies, needs, and preferences. Procurement and purchasing differences are many.

Large companies or enterprises may go with procurement to align it with their fundamental corporate strategy. But small companies may stick with purchasing for the buying goods or services less complex. Regardless of the approach, a business adopts, introducing automation through software is essential for an effective purchasing and procurement process.

Conclusion

Realising the difference between procurement and purchasing is crucial for any business to determine how to attain the required goods or services. The blog has accentuated this distinction based on the process, cycle, methods, steps, and types of purchasing and procurement. Now it's your turn to decide which process fulfils your business needs and goals and fits your needs. No matter the strategy you pick, improving the process, procedure, and purchasing and procurement cycle would go a long way. Here are some suggestions to reshape procurement.

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