Procurement and Purchase – Two sides of the same coin?
Recently, I got into an argument with one of my colleagues. We were discussing the role of the procurement function on the business bottom line. My point was that the procurement function involved deep analysis and evaluation before making the purchase decision. I added that the purchase function was a sub-process of the larger procurement function. While my friend insisted that procurement and purchase were the same and the buying decision was based on a simple evaluation of vendors and settling for the lowest price. Who do you think was right?
Procurement and purchase are used interchangeably to refer to “buying” in a business. For a layman, both mean the same, but if you ask Finance or Procurement personnel you are bound to get a complete list of differences between procurement and purchase. Read on to know how these two seemingly similar terms are in fact two sides of the same coin.
Procurement Function in Business
The scope of the procurement function in business spans the entire supply chain management process. It involves strategies for sourcing, contract negotiation, purchase of goods/services/raw materials, vendor compliance, and managing vendor relationships. The procurement function aims at establishing long-term vendor relationships, control over spend, workflow efficiency, and cost-saving.
The procurement function is crucial to business growth, giving this function its due importance enables businesses to establish profitable business relationships and service levels. Managing the purchase function also provides better spend control and improves core business competencies. The purchase function involves the logistics, quality, and finance departments.
The procurement function has to take into consideration the following:
Logistics: While planning for the purchase of goods/raw materials, the procurement function needs to design the optimal delivery method and time. Other logistics considerations include taxes, tariffs, and ethics.
Quality: Cutting corners to save money is a common procurement strategy adopted by businesses. Compromising quality to cut costs is not a wise procurement strategy. Businesses looking to establish long-term customer relationships must focus on delivering the best quality goods/services at the lowest prices.
Business Ethics: The procurement function must upkeep the company’s values and ethics while sourcing material/services. There should never be a compromise on ethical or legal standards.
Vendor Capabilities: Sourcing strategies must keep in mind the capabilities of the vendor and find the right fit for them in the supply chain. It must be ensured that the vendor is capable of fulfilling the requirements at all times. Including a disaster management plan within the sourcing strategy is a great way to manage unforeseen delays.
Cost and spend control: Tenders or bidding processes are followed for procuring raw materials for a business. You get the lowest price and favorable payment terms by following such strategies. The overall spending is controlled by the procurement officer by setting sourcing and purchase protocols.
An overview of the procurement function:
- Identify the business requirements
- Raise a purchase request
- Evaluate and identify suppliers
- Negotiate the cost and terms
- Create and submit a purchase order
- Inspect the goods received
- Raise invoice to Finance department and follow up approval
- Document the process
According to Adroit Market Research, the Procurement as a Service market would reach 12 billion USD by 2028. Key market growth drivers are automation and Artificial Intelligence, which need to make the Procurement process transparent and improve operational efficiency. Implementing the best procurement procedures like automation ensures that the procurement function is a profit center to the business. Cflow is a no-code workflow automation solution that can automate your procurement function within minutes.
Purchase in Business
Purchasing is a sub-process in the procurement function. Purchasing involves the buying of goods, materials, or services for a business. Various tasks in the purchase function are: placing a purchase order, receiving the order, and submitting payment invoices. It is a fairly simple process when compared to the procurement function.
Purchasing involves the following steps:
Placing the purchase order:
Depending on the requirements, goods or services are ordered with the vendor by placing a purchase order.
Communicating with the vendor:
The purchase department is in constant touch with the vendor once the purchase order is placed. The status of goods/services to be delivered is followed up till delivery.
Receiving Delivery of Goods/Services:
Protocols are followed for recording and tracking the orders. The condition of received goods is inspected while receiving delivery.
The invoices are sent to procurement or finance departments for approval.
Ensuring vendor payment:
Once the invoice is approved, the payment to the vendor is completed.