Definition
Purchasing refers to the process of how goods and services are ordered. It typically involves receiving a list of requirements, identifying potential suppliers, negotiating price, and delivery schedule. On the other hand, procurement is a broader term encompassing the whole process of acquiring goods and services, from ideation and planning to risk assessment, financing, and contract management, which encompasses purchasing.
Key Takeaways
- Purchasing refers to the process of how goods, services, or works are ordered. It involves activities such as identifying the need for certain goods or services, selecting suppliers, negotiating price, and delivery schedules.
- Procurement, on the other hand, is a broader term that includes purchasing but also involves activities such as identifying potential suppliers, negotiating terms and conditions, setting strategies for making the purchase, managing inventories, examining and re-evaluating available suppliers, and even disposing of surplus assets or recycling them if necessary.
- While both processes are essential for successful business operation, understanding the distinction between them is vital for effective management and strategy development. In simpler terms, purchasing is merely an activity within the grander scheme of procurement.
Importance
Understanding the difference between purchasing and procurement is vital in the finance world as they play unique roles in managing a company’s resources. Purchasing refers explicitly to the process of buying goods or services, focusing on short-term transactions like price negotiation, order placement, and delivery arrangement.
On the other hand, procurement is a broader term encompassing all the activities related to obtaining goods and services, including market research, supplier selection and relationship management, contract negotiation, and risk management, apart from buying. It’s a more strategic process aimed at providing a long-term benefit to the organization.
Equating both may lead to missed opportunities for strategic sourcing, cost savings, relationship building with suppliers, risk management, and overall process improvement. Thus, distinguishing between purchasing and procurement and applying them correctly aids an organization’s effective resource management, operational success, and profitability.
Explanation
Purchasing and procurement are terms often used interchangeably in the world of business and finance. However, while they might seem similar, they serve distinct purposes in an organization’s operations. Purchasing primarily refers to the process of how goods and services are ordered.
The purpose of purchasing is to ensure the organization has the necessary resources to continue its activities, either by acquiring raw materials for production, products for resale, or the equipment required for operations. It’s more concerned with short-term transactions, with a focus on getting the best prices and timely delivery of goods and services. On the other hand, procurement is a more strategic process, encompassing a broader set of activities aimed at optimizing an organization’s spending.
It involves identifying and evaluating potential vendors, negotiating contracts, establishing payment terms, and managing relationships with suppliers. Procurement is essential for managing costs, reducing risks, and improving the efficiency and quality of the supply chain. It aims to ensure that the organization gets value for its money in its purchases, aligning buying decisions with the organization’s strategic goals and priorities.
Examples of Purchasing vs Procurement
Corporate Supplies: A company needs office supplies, such as paper, pens, computers, and furniture. When the company goes to a store to directly buy these items, it is referred to as purchasing. However, say the company decides to set up an ongoing relationship with a vendor who provides these supplies consistently. This would involve negotiating terms, setting up contracts, and evaluating the vendor’s performance over time – this process is known as procurement.
Construction Industry: Consider a homeowner who decides to renovate their house. If they buy the necessary materials like cement, bricks, etc., directly from a hardware store, they are engaging in purchasing. However, if they hire a contractor who, in turn, has relationships with suppliers of these materials and arranges for these materials to be delivered when needed, it is an example of procurement.
Healthcare Industry: A hospital that needs medical supplies like gloves, syringes, or medications is another instance. If they buy these items directly, that’s purchasing. But larger healthcare systems may engage in procurement by setting up contracts with medical supply companies who provide needed materials on an ongoing basis. Procurement in this scenario would also involve managing relationships with these suppliers, monitoring their performance, and making sure they comply with all relevant regulations.
Frequently Asked Questions about Purchasing vs Procurement
What is Purchasing and Procurement?
Purchasing is a subset of procurement. It involves acquiring goods and services for business use from external sources. Procurement, on the other hand, involves not only purchasing but also the management and oversight of all aspects related to acquiring goods and services such as, sourcing, budget approval, supplier management, and negotiation.
Are there any differences between Purchasing and Procurement?
Yes, purchasing is a component of procurement. In other words, all purchasing activities are a part of procurement, but procurement covers other activities as well such as sourcing of suppliers, strategic selection of goods, quality negotiation, and risk management of supply.
What are some benefits of effective Procurement over simple Purchasing?
Effective procurement strategies bring multiple benefits to an organization, including cost savings, improved supplier relationships, increased efficiency by standardizing processes, better use of internal resources, and promoting fair competition. Purchase, being a part of Procurement, contributes to these benefits to a limited extent.
Is it necessary to have a specific department for Procurement in an organization?
Depending on the size of the organization and the extent of its buying needs, it can be beneficial to have a dedicated procurement department. This can lead to better management and coordination of all procurement-related functions and ensure a structured approach towards strategic sourcing and supplier management.
Related Entrepreneurship Terms
- Direct vs Indirect Procurement
- Capital Expenditure (CapEx)
- Operating Expenditure (OpEx)
- Supplier Relationship Management (SRM)
- Strategic Sourcing
Sources for More Information
- Investopedia – A comprehensive source of finance-related information, including both purchasing and procurement topics.
- Chartered Institute of Procurement & Supply (CIPS) – An international organization providing professional qualifications in procurement and supply chain.
- Next Level Purchasing Association (NLPA) – They offer resources, training, and certification programs related to purchasing and procurement.
- Procurious – An online business network for procurement and supply chain professionals with a variety of articles and learning resources
