Building a robust supply chain and management system is integral to making a business successful and profitable. Every company that has a product in the market deals with traders for the supply of goods and services. These goods are utilized to make the product, and the product is sent for sale. The two words that come up often in this context are procurement and purchasing. While these terms are often used interchangeably, resulting in the two terms being confused with one another, there's a significant difference in the way they work in an organization.
What is procurement, and how does it differ from purchasing?
Procurement involves purchasing goods, but it's not limited to the purchase of the product. That might have confused you, but it only signifies the complexity of the procurement process. In simpler terms, procurement is a process that governs an organization's purchasing decisions.
The method of procurement has nine steps that are listed as follows:
- The team identifies the goods or services that a company needs.
- A request is sent to the procurement team specifying the number of goods, their price, and their time of delivery.
- The procurement team then assesses the request and chooses a suitable supplier.
- The cost and other terms of the contract are discussed with the supplier, and negotiations are made.
- Post the negotiation, an order to purchase the goods or services is sent to the supplier.
- The supplier sends the goods to the company, and the company inspects the quality of the goods when it receives them.
- The company then prepares an invoice and compares it with the purchase order (sent in step 4). The invoice confirms that the goods received abide by the specifications made in the purchase order.
- The payment is made once the invoice is approved.
- The specifics of the entire process are recorded for future reference.
What separates procurement from purchasing is its intent. While a purchase is made mainly to fulfill a company's demands and needs, procurement involves comparing all available options and selecting the fairest deal. In other terms, purchasing is principally done to keep the expenses at their minimum, regardless of the quality of the product. At the same time, the process of procurement is more focused on acquiring the best quality product in the approved budget.
Additionally, procurement is a proactive process that focuses on building long-term trade relations with the suppliers, while purchasing simply aims to fulfill the needs of the business, usually without considering trade relations. In the long term, the correct execution of procurement would result in a stronger brand identity and reputation.
Another distinction between procurement and purchasing is that a procurement plan arises proactively to identify and collect goods to meet demands, whereas the need to purchase only occurs as a response to a deficit in supply.
On a surface level, we can reasonably agree that purchasing is a subset of procurement, while procurement is a broader term that encompasses sophisticated processes. Although procurement is a time-consuming and strategic process, it can ultimately benefit the company by keeping the cost of purchasing high-quality goods low.
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