Comparing Procurement vs. Purchasing

Procurement and purchasing - while often used interchangeably - are actually two distinct business functions. Procurement is the overarching strategic process for acquiring goods and services, while purchasing refers more specifically to the tactical transactional function of buying and paying for goods.

In this post, we’ll clarify the key differences between procurement and purchasing, break down the typical activities associated with each, discuss why understanding the distinction matters, and provide actionable steps finance teams can take to optimize their processes.

Key Differences Between Procurement and Purchasing

Strategic vs Tactical Focus

• Procurement takes a big-picture view, aligning spending with longer-term corporate goals and strategies.
• Purchasing focuses narrowly on executing individual transactions to fulfill immediate needs.

Short vs Long-Term Outlook

• Tied to its strategic nature, procurement looks ahead to plan out and negotiate favorable ongoing supplier relationships.
• Purchasing seeks to address needs just-in-time with one-off supplier transactions.

Transactional vs Relational

• Purchasing interacts with suppliers on a transactional basis to secure goods and services.
• Procurement manages more complex, relational interactions across the full supplier lifecycle.

Risk Mitigation

• Procurement is responsible for assessing and mitigating potential risks - financial, operational, reputational - associated with suppliers.
• Purchasing doesn't incorporate rigorous risk analysis into buying decisions.

Goals and Objectives

• Procurement goals relate to cost reduction, operational efficiency, sustainability, and other big-picture metrics.
• Purchasing goals revolve around securing functional goods/services while minimizing price.

Procurement Activities

Sourcing and Supplier Evaluation

Procurement sources, vets, and negotiates contracts with new suppliers through rigorous selection processes. They apply criteria related to pricing, quality, reliability, capabilities, and compliance/ethical practices.

Contract Negotiation

Once supplier relationships are established, procurement manages ongoing negotiations around pricing, service levels, terms and conditions, to maximize value for their organization over the long-term.

Strategic Sourcing

Procurement analyzes enterprise-wide spending to identify opportunities for savings through improved sourcing strategies. This may involve vendor consolidation, contract renegotiation, product substitution, or other initiatives.

Supplier Relationship Management

Maintaining positive supplier relationships is an important aspect of procurement. This continuous collaboration allows both parties to improve processes and address any issues that arise.

Spend Analysis

Through detailed spend analysis, procurement obtains visibility into purchasing trends/patterns across the business. These insights inform strategic decisions around suppliers, contracts, and process changes to optimize spending.

Purchasing Activities

Creating Purchase Orders

Purchasing creates and issues purchase orders to procure the goods/services necessary for everyday business operation based on internal requirements.

Order Fulfillment

Once supplier POs are issued, purchasing oversees timely order fulfillment, handles discrepancies between orders and deliveries, and resolves any associated disputes with vendors.

Payment Processing

Upon confirmation that orders have been fully fulfilled per contract terms, purchasing executes payments to vendors accordingly.

Quality Control

Purchasing confirms procured goods/services meet expected specifications and tolerances before accepting orders and releasing payments.

Why Understanding the Difference Matters

Enables Cost Savings

Aligning purchasing decisions with enterprise procurement strategy allows organizations to consolidate spending for greater leverage in supplier negotiations and realize savings through discounted pricing.

Reduces Risk

Rigorous vetting and continuous monitoring of suppliers by procurement reduces various risks - supply disruption, regulatory non-compliance, legal liability - purchasing may overlook with decentralized transactions.

Provides Competitive Advantage

Sophisticated procurement capabilities are a differentiator that enable more efficient sourcing, contracting, and purchasing than competitors.

Allows Strategic Alignment

Central procurement oversight and coordination with executives ensures purchasing aligns with and supports overarching corporate strategies.

Steps to Improve Procurement and Purchasing Efficiency

Evaluate Current Spend

Conducting thorough spend analysis provides visibility for procurement to identify savings opportunities - redundant purchases across business units, off-contract maverick spending, pricing discrepancies across locations.

Identify Savings Opportunities

Equipped with spend insights, procurement can pinpoint areas to drive efficiencies - consolidating vendors, renegotiating contracts, substituting products/services - to capture bottom-line savings.

Implement Controls

Procurement should establish policies and procedures to standardize purchasing activities across the company and provide necessary oversight for improved compliance and cost control.

Create Transparency

Centralizing purchasing data provides procurement with real-time visibility into transactions enterprise-wide. This allows for informed decision-making to support corporate strategy.

Choose Procurement Software

Automating procurement and purchasing workflows streamlines processes for greater visibility, control, and cross-functional collaboration for both functions through a shared connected system.

Conclusion

While procurement and purchasing are intrinsically linked sourcing processes, recognizing how they differ strategically and operationally is key for finance leaders to optimize value. By harnessing their symbiotic potential and augmenting execution with purpose-built technology, both functions can better support overarching business goals. The future of efficient buying necessitates this differentiated, yet unified approach.