What is the Difference Between Procurement and Purchasing

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Bringing full understanding to the much confused terminology of procurement and purchasing

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Slide1:

What is the Difference Between Procurement and Purchasing? Dr. Oyewole o. sarumi

Introduction :

Introduction Many people use the terms purchasing & procurement interchangeably , but despite their similarities they do have different meanings. Let’s clarify any confusion on the difference between procurement and purchasing. Procurement involves the process of selecting vendors, establishing payment terms, strategic vetting, selection, the negotiation of contracts and actual purchasing of goods. Procurement is concerned with acquiring (procuring) all of the goods, services and work that is vital to an organization. Procurement is, essentially, the overarching or umbrella term within which purchasing can be found.

The Difference:

The Difference Procurement is the wider aspects related to the activities associated with the provisioning of equipment, products and services encompassing policy and strategy development and implementation, provisioning strategies and demand management etc. Purchasing is the procedural aspects related to competitive processes and the methods employed to actually purchase equipment, products and services.

Slide4:

While procurement is more of technical than commercial, purchase is a purely commercial activity in business . Similarly, a supplier is far more than a vendor. Most purchasing professional don’t realize the difference. A supplier can also be a direct vendor or can appoint vendors (being a supplying vendor for vendors, with or without stocking materials with them). Thus these terms confuse common users. Core suppliers are the ultimate source for procurement and are beginners in a supply chain.

The importance of strategy:

The importance of strategy Because procurement is an umbrella term that includes several core business functions it should be considered a core part of any organization’s corporate strategy. Our friends at entrepreneurial-insights.com have published a great explanation of 4 aspects of corporate strategy. Those aspects are: Company Identity, Market Placement, Company Capabilities and Management Issues.

Slide6:

Company identity : What does our company do and stand for? What beliefs inform our business model? Market placement : Who are our customers? What do they want? What do they believe in? Company capabilities : What are our strengths and weaknesses? Do our strengths support our long-term goals? How do we want to grow? Management issues : Do we need to hire/develop talent to lead us to our goals? Does the company have the resources needed to achieve our goals ? NOTE: This breakdown is preffered because procurement touches each of these components.

Justification:

Justification Procurement and company identity can be intertwined. If your business is building (or has built) its identity around an environmentally conscious ethic, than your procurement strategy should reflect that decision. Policies should be in place to ensure you are sourcing from companies with similar ethics, or that you are sourcing materials that are not environmentally hazardous. Your market placement should reflect your branding. Customers are without a doubt, attracted to the philosophies and practices a business uses, and often seek companies whose values reflect their own. Your company’s capabilities and management issues, should also reflect that branding. You must have the right people in place to put into action the beliefs/philosophies you want your business to be governed by .

Steps in the procurement process :

Steps in the procurement process Aligning your procurement function with your corporate strategy is only one part of the ultimate goal of procurement. Goods and services also need to be purchased. The process of purchasing these good and services is known as the  Procure-To-Pay Cycle . The entire Procure-To-Pay Cycle can be an involved process with numerous steps :

Slide9:

Identification of Requirement Authorization of Purchase Request Approval of Purchase Request Procurement Identification of Suppliers Inquiries Receipt of the Quotation Negotiation Selection of the Vendor Purchase Order Acknowledgement Advance Shipment Notice Goods Receipt Invoice Recording 3 Way Match Payment to Supplier

Slide10:

Although this list is extensive, the nature of your specific business will determine the extent of the Procure-To-Pay cycle you use. For example, if your work in a large, multinational corporation, you may have to undergo a more involved “Identification of Requirement” phase. On the other hand, if you work in a small firm, that stage may be quick and simple. Understand the scope of your business and tailor as needed. Using  purchase orders  (especially those generated by an  e-procurement  solution such as Procurify ) is critical, regardless of the size of your organization. Don’t simply use your credits card(s) and save the receipts. Don’t rely on emails which are hard to track .

The purchasing process :

The purchasing process Purchasing is a subset of procurement. Purchasing generally refers simply to buying goods or services. Purchasing often includes receiving and payment as well. Within the overarching Procure-To-Pay Cycle, the steps specifically related to purchasing are : Purchase Order Acknowledgement Advance Shipment Notice Goods Receipt Invoice Recording 3 Way Match Payment to Supplier

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Unlike the entire Procure-To-Pay Cycle, the steps explicitly related to purchasing should not be tailored to suit the size and scope of each individual business. These are fundamental steps of good purchasing and should be employed routinely as a best practice in all businesses.

Understanding the Functions of purchasing :

Understanding the Functions of purchasing To understand better what the role of the purchasing department is, consider some functions it performs.

1. Procuring Materials:

1. Procuring Materials One role of the purchasing department is to procure all necessary materials needed for production or daily operation of the company or government organization. For a manufacturing company, this might include raw materials such as iron, steel, aluminum or plastics, but it also might include tools, machinery, delivery trucks or even the office supplies needed for the secretaries and sales team. In a retail environment, the purchasing department makes sure there is always sufficient product on the shelves or in the warehouses to keep the customers happy and keep the store well-stocked. With a small business, it is especially important to keep inventory ordering at a reasonable level; investing large amounts of capital in excess stock could result in storage problems and in a shortage of capital for other expenditures such as advertising or research and development. Purchasing also oversees all of the vendors that supply a company with the items it needs to operate properly.

2. Evaluating Price:

2. Evaluating Price A purchasing department also is charged with continuously evaluating whether it is receiving these materials at the best possible price in order to maximize profitability. This can be challenging for a small business that may purchase in lesser quantities than a larger vendor and which thus may not receive the same type of bulk discounts. A purchasing department in a small business needs to shop around to find the best vendors at the most reasonable prices for the company's particular size orders. Purchasing department staff may communicate with alternate vendors, negotiate better pricing for bulk orders or investigate the possibility of procuring cheaper materials from alternative sources as part of their daily activities.

3. Paperwork and Accounting:

3. Paperwork and Accounting Purchasing departments handle all of the paperwork involved with purchasing and delivery of supplies and materials. Purchasing ensures timely delivery of materials from vendors, generates and tracks purchase orders and works alongside the receiving department and the accounts payable department to ensure that promised deliveries were received in full and are being paid for on time. In a small business, this means working closely with the accounting department to ensure that there is sufficient capital to buy the items purchased and that cash is flowing smoothly and all payments are made on time.

4. Policy Compliance:

4. Policy Compliance The purchasing department also must ensure that it is complying with all company policies. For example, in a small business, individual staff members may communicate with the purchasing department about purchasing needs for things such as office supplies or computers. Before making a purchase, the purchasing department must ensure that it heeds the proper protocols for purchase and budget approval and must ensure that any items are purchased in accordance with the overall purchasing policy of the organization .

Some Practitioners Views on Procurement and Purchasing:

Some Practitioners Views on Procurement and Purchasing

Mani K. Nair, Edayapurath:

Mani K. Nair, Edayapurath Procurement is the techno commercial process preceding purchase rather than using as a tool of aid to trade. Modern procurement process involves in post purchase activities also to streamline Supply chain operations and management. Procurement does not necessarily lead to purchase directly and at many occasions not leading to business. Many of us don't care to understand legal bindings in a trade while purchasing. The business software’s curtailed or avoided certain non-monitory commercial activities which do not directly affect the trade and thus most new generation specialists do not see any differences between procurement and purchase. Procurement is assuring the availability of required materials in short notice. It is also a signalling to all material providers about the incoming demand forecast

Slide20:

Procurement is the process of identifying the right source of supply for the right material to be delivered at right time at right cost. Major procurement process commonly evolved are (1) Identify - proper material from reliable and legal sources and enquire backup supplies - (2) Ascertain - check & ensure quality, supplier capacity with legal and financial reputation before buying or contracting, check contents or sub-components, related hazards, legal certificates - (3) Evaluate - compare materials with moving market prices (4) Ensure - Compliance and conformity. (Need to explain in details with case study and examples.) There are many big projects delayed unduly, suspended or abandoned without materializing due to lack of procurement intelligence wisely applied to it, resulting in huge financial losses and environmental disasters.

Slide21:

Purchasing is purely a commercial activity covering necessary documentations to affect a trade process to result physical delivery of intended material to buyer or its appointed agent using various components of supply chain, while quotes or bids are related to check leverage of current market rate and availability to affect purchase. There are many procedures in purchasing which will vary from country to country involved in the trade as well as movement of materials.

*http://www.felp.ac.uk/:

* http://www.felp.ac.uk/ The term 'procurement' covers, for all areas of an institution's non-pay expenditure, the entire process of acquiring goods and services from third parties. It includes identification of requirements, specifications, assessment of risks, management of tendering processes, ordering, contract award and management and monitoring of suppliers' performance.  The procurement process takes into account factors such as the cost over the life ( whole life costs ) of the good or service, and the quality necessary to meet users' requirements.  It is distinct from 'purchasing' goods and services, which refers to the specific activity of committing expenditure and which tends to focus on issues of price rather than of value. *From http ://www.felp.ac.uk/content/what-difference-between-procurement-and-purchasing

Slide23:

“ Procurement” is the overarching function that describes the activities and processes to acquire goods and services. Importantly, and distinct from “purchasing”, procurement involves the activities involved in establishing fundamental requirements, sourcing activities such as market research and vendor evaluation and negotiation of contracts. It can also include the purchasing activities required to order and receive goods For details on the Procurement process see The Procurement Process. Purchasing The term “Purchasing” refers to the process of ordering and receiving goods and services. It is a subset of the wider procurement process. Generally, purchasing refers to the process involved in ordering goods such as request, approval, creation of a purchase order record (a Purchase Order or P.O.) and the receipting of goods. Answer added by:  Mohammad Jadaan   Procurement Manager from: http://www.bayt.com/en/specialties/q/30384/what-is-the-main-difference-between-purchasing-and-procurement/

Slide24:

Procurement means a wide area where as purchasing is just a small part of it. Under procurement one has to do market research, vendor development, existing vendor evaluation, strategic negotiation, Releasing PO, receiving ordered goods/service, payment to supplier, whereas under purchasing, one has to float inquiry, collect quotation, make comparative statement, release order and receive ordered material. Answer added by:  Jyoti Negi   Purchase Officer from: http://www.bayt.com/en/specialties/q/30384/what-is-the-main-difference-between-purchasing-and-procurement/

Slide25:

Cagdas says: The word procurement has come to be referred to the set of activities that need to be performed to acquire the  right material from the  right vendor  at the  best possible rates  at just the  right time  to maximize benefits for the company. On the other hand, purchase is just the  transactional part  of the entire process called procurement. 

Slide26:

Alexander Kurunthottical   22+ Years of Procurement & Contracts Management says: Functionally, both terms are the same. The term 'purchasing' is prevalent in a 'manufacturing / private' set-up. Whereas, the term 'Procurement' is used by government agencies   

Slide27:

Procurement To define procurement broadly, “Procurement” is the overarching function that describes the activities and processes to acquire goods and services. Importantly, and distinct from “purchasing”, procurement involves the activities involved in establishing fundamental requirements, sourcing activities such as market research and vendor evaluation and negotiation of contracts. It can also include the purchasing activities required to order and receive goods. Purchasing The term “Purchasing” refers to the process of ordering and receiving goods and services. It is a subset of the wider procurement process. Generally, purchasing refers to the process involved in ordering goods such as request, approval, creation of a purchase order record (a Purchase Order or P.O.) and the receipting of goods. From - http ://purchasinginsight.com/resources/what-is/definition-of-procurement-procurement-vs-purchasing/

Conclusion :

Conclusion Because purchasing is a process within the overarching procurement process, both procurement and purchasing are often used interchangeably. In the business world, the practice of using similar terminology in either conversation or printed materials is routine, although it is often confusing and should be avoided .

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Procurement deals with the sourcing activities, negotiation and strategic selection of goods and services that are usually of importance to an organization . Purchasing is the process of how goods and services are ordered. Purchasing can usually be described as the transactional function of procurement for goods or services.

References Used:

References Used What is the Difference Between Procurement and Purchasing? By Matt Lim. Culled from http:// blog.procurify.com/2014/02/07/what-is-the-difference-between-procurement-and-purchasing/ Published Feb. 7, 2014 and retrieved Oct.12, 2015. What Are the Functions of a Purchasing Department in an Organization? Alexis Writing, Demand Media. Culled from: http:// www.answers.com/Q/Functions_of_purchasing#slide1 https://procureinsights.wordpress.com / http://purchasinginsight.com/resources/

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