The difference between Purchasing and Procurement Processes
Reviewed and edited by: Rachael Renovah
Many people mistakenly use the terms purchasing and procurement interchangeably when conversing with others. However, despite their similarity, those two terms are quite distinct, each with their own set of tasks to cover, the people involved, and their key objectives.
What is Procurement?
Procurement is the strategic process of sourcing, negotiation of contracts and acquiring of goods, raw materials, services or work from external sources.
Why is Procurement important?
An effective procurement strategy helps the company on several fronts.
- Save money by reducing the cost of raw materials.
- Identifying a better source of supply.
- Certifying a supplier’s quality.
What is Purchasing?
Purchasing is a transactional process when companies perform activities like ordering, expediting, receiving, and fulfilling payment. Purchasing is a subset of the procurement function. A purchasing process is generally executed on a transactional basis with little to no strategising involved.
Why is Purchasing important?
The purchasing team helps an organisation on several fronts:
- Ensure timely delivery of materials or services from vendors.
- Generate and track purchase orders and ensure that promised deliveries are received in full.
- That services and goods are being paid for on time.
A Procurement Workflow
Understanding the procurement process helps all stakeholders be aware of the many moving parts involved in the overall process, as well as allow the identification of potential issues and roadblocks.
A typical procurement process flow consists of 10 main stages:
Procurement Process Step 1 - Needs Recognition
The primary step in the procurement process is to identify the need for a product or service. Regardless of whether the purchase is a recurring or new one, needs are to be analysed, and the availability of goods or services in the department should be double-checked before requesting to purchase. Depending on the type of needs, multiple departments, and management teams could be involved in a discussion to assess the business’s necessity of goods or services to ensure that purchasing it would benefit the company.
Procurement Process Step 2 - Purchase Requisition
The various departments would submit a purchase request to the procurement team. If the application is approved by the procurement team, it will be turned into a purchase order (PO). After the purchase order (PO) is raised, it is then forwarded to the finance team to receive budget approval. If the purchase order (PO) is rejected, it gets returned to the procurement team with the reason for rejection; the procurement team will review it before submitting the purchase order again.
Procurement Process Step 3 - Sourcing
There are two steps to this next stage: researching and identifying of existing or new vendors within a market. After the budget is approved, the procurement team would need to decide where to get their goods or services from through researching existing or new markets to identify suitable suppliers. For recurring purchases, some companies have an approved vendor catalogue, which is a list of vendors who have successfully made it through the previous selection criteria and are being identified as the suitable suppliers. For new purchases, companies would need to create a vendor list. Request for quotations (RFQs) would then be sent to vendors within a vendor list to receive quotations.
Procurement Process Step 4 - Tender Evaluation
After receiving the bids from vendors, the procurement team will then assess the supplier’s quality of products or services, fulfilment capabilities, timescales and other financial details.
There are nine steps in the tender evaluation stage in total:
- Compare vendor’s prices and cost.
- Evaluate fulfilment capabilities.
- Request a sample of goods or perform site visits to observe their services
- Assess the quality of product or service.
- Compare product or service to other vendors.
- Perform finance and credit checks.
- Perform a vendor audit by hiring a third party to assess the organization’s quality control, its costs and benefits, its cybersecurity protection, or other aspects.
- Evaluate costs.
- and lastly, selection of the preferred vendor is done.
Procurement Process Step 5 - Contract Negotiation
Once the procurement team has selected a vendor, they would move on to contract negotiation concerning specific terms like delivery time and price etc. The purchase order (PO) is then forwarded to the vendor. A legally binding contract is then sent right after a vendor accepts and acknowledges a purchase order (PO).
Procurement Process Step 6 - Receive Goods or Services
The vendor delivers the promised goods or services within the set deadline. After receiving it, the purchasing team will examine the order and notify the vendor of issues with the received goods or services. The purchasing unit will match against three components to verify that the delivery is complete and accurate:
- Purchase orders
- Packaging slips
- Vendor invoices
The procurement team will communicate with vendors if there are any discrepancy to solve the problem.
Procurement Process Step 7 - Invoice Approval Payment
After that, the invoice will be forwarded on to the finance department to sort out payment matters.
Procurement Process Step 8 - Record Keeping
Once payment is made, the auditor in the finance team would make a record of the transaction for auditing purpose. All appropriate documentation from a purchase order (PO) to approved invoices are stored in a centralised location. Companies may find themselves in trouble if this isn’t in check.
Procurement Process Step 9 - Result Analysis
Lastly, the procurement team will evaluate the supplier’s performance, resolve supplier issues (if any), monitor product performance in the market, maintain vendor relationship and produce KPI reports for vendor review purposes. It is important to maintain a good relationship with vendors as it has been associated with yielding lower cost prices and in turn, a higher profit margin for the organisation.
Procurement Goal
The main goal of procurement is to increase an organisation’s profitability by strategising the procurement process. This is especially important for companies who are new to the market. As new companies do not have much purchasing power, it is important for them to purchase the best priced goods or services to save cost for their company through strategizing the procurement process.
The Purchasing Workflow
Purchasing is essentially a subset of procurement; it takes on a more operational role.
The purchasing team would only be involved in:
- Step 3 – Sending out request for quotations (RFQs) to vendors.
- Step 4 – Contacting the vendor after the vendor is selected.
- Step 6 – Receiving the goods and do a 3-way match of the product to ensure that it meets the organisation’s expectations.
- Step 9 – Generating a report for procurement’s team’s further evaluation on the performance of the product or service.
The Goal of Purchasing
Similarly to the procurement’s goal, the role of the purchasing team is to streamline the process flow by ensuring that goods or services are delivered on time and of good quality, without much need for strategising.
Who is involved in the Procurement Process?
In a procurement team, the procurement manager is usually in-charge of sourcing for new suppliers, new markets and negotiating favourable terms. Their main tasks involve strategising activities, devising saving initiatives and overseeing operational activities like purchasing.
In smaller companies, however, the procurement manager often takes on the responsibility of purchasing managers to perform purchasing duties too.
Who is involved in the Purchasing process?
In a purchasing team, the purchasing manager is responsible for more operational activities such as making sure that purchasing requests are filled – both goods and services are purchased by purchasers and delivered by suppliers. They are usually more concern with deliverables being on-time and of high quality at the lowest cost.
Other teams, like the finance and supply chain team, are also involved in the process. The finance team manages the budget and process payment for goods or services delivered. The supply chain team would then be responsible for storing and/or distributing it.
Why is it important to understand the difference between Procurement and Purchasing?
Over the years, there has been a rapid rise in procurement within businesses globally, as observed from the graph above. There is a steady increase in the cost of tenders awarded by the government from 2016 to 2018. Studies have also shown that organisations spend two-third of their revenue on procurement – highlighting the importance of the role procurement plays.
Furthermore, with the CoVid-19 pandemic taking its toll on businesses, and further shrinking the economy between 4% to 7% this year, it is now more essential to maximise profit margins and improve efficiency to stay cost-competitive. Mapping out your procurement procedures might just help your business identify key areas that may require automation or modification, and, ultimately, improve performance.
As more organisations start procuring, knowing the difference between purchasing and procurement can help optimise roles and operations efficiently.
Real Estate Procurement
Procurement in the real estate sector has also observed an increase in the cost of tenders from 2017 to 2019.
Did you know that some traditional real estate procurement processes can take up to 3.5 months long?
With technological advancement in today’s world, companies are now opting for less time-consuming processes with the help of digital tools, inaugurating the world of e-procurement.
E-procurement tools help reduce transactional costs by up to 80%, saving cost associated with paper-based systems, time reductions and increased supplier selection which increases the opportunity of purchasing goods/services below market price. Amongst other added benefits of e-procurement are the reduced transaction time and broader vendor selection: thus allowing a varied option of quotations and a better understanding of the market and its rates.
To try out a real estate procurement solution, check Singapore’s latest B2B platform – Really. With new swanky features designed with our state-of-the-art dashboard for vendors and property partners.
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