Looking for ways to improve cost saving strategies in procurement? Find out how purchasing software can facilitate and enhance your procurement...
Procurement and purchasing: What's the difference?
Procurement and purchasing are terms that are often used interchangeably when describing how a business acquires goods and services. However, both terms refer to two distinctly different functions that focus on short and longer-term goals.
Purchasing refers to processes and transactional activities, while procurement focuses on strategic product sourcing and the negotiations involved in acquiring goods and services. While some might say there’s little difference between these two functions and using one term over the other but failing to know the distinctions between them can cause your business to overlook key factors that can have an impact on your bottom line.
Together these key functions fall under the procure-to-pay cycle; here is a breakdown of how they support operational needs and strategic goals.
What is procurement?
Procurement is the proactive strategy of sourcing the goods and services a business needs from third-party vendors. This can be done via multiple purchasing methods, such as by direct or indirect purchasing, competitive bidding, or a tendering process.
Being a value-driven function aimed at longer-term goals, procurement encompasses best practices that will improve supplier relationships, increase buying power, and ensure contract compliance.
Procurement processes typically involve:
- Assessing the market
- Identifying business needs and approving or contracting the right suppliers for these company requirements
- Negotiating favorable terms and pricing
- Managing supplier contracts and compliance
- Maintaining strong supplier relationships
- Strategically selecting the right volume and quality of goods and services
- Creating and implementing effective internal procurement policies and processes (e.g., purchase requisitions and approvals)
- Preventing rogue spend
What is purchasing?
Purchasing refers to the transactional process within the procurement function: a reactive process of buying goods and services when a need arises. This short-term fulfillment function is focused on the price of an item rather than its value to the business. It involves managing the immediate, day-to-day transactions that your business is making and includes activities like:
- Receiving a purchase requisition
- Evaluating RFQs
- Creating purchase orders
- Goods receiving and three-way matching
- Invoice approval and recording
- Paying for goods and services
What’s the difference between procurement and purchasing?
To help you distinguish the focus of these functions, let’s cover exactly how they differ in their end goals.
Procurement refers to the strategic sourcing of goods and services to gain a competitive advantage and the most value for your business over time. For instance, total cost of ownership (TCO) and cost avoidance are important pillars of procurement since they consider not just the price of the item, but also the cost of its use over its lifetime. This calculation of value also factors in indirect costs due to:
With a broader scope, procurement covers the steps before, during, and after a purchase.
Purchasing is equally important; this subset of procurement is primarily focused on short-term goals and verifying that business transactions are meeting the right:
- And place
In short, procurement and purchasing support one another in driving an effective procure-to-pay process that creates long-term value while ensuring transactional efficiency that enables you to get goods and services on time, and at the best price.
Excel in procurement and purchasing with a procure-to-pay solution
Regardless of the size of your organization, procurement and purchasing functions comprise multiple steps and parties, from requesters and approvers to vendors. If performed manually, workflows can become disjointed and inefficient, with a lack of visibility that impacts your organization’s potential to save.
Alternatively, some organizations choose to use their ERP’s standard or add-on functionality to manage these functions. However, these modules rarely have the flexibility, simplicity, or scalability to transform these processes into efficiency and cost saving generators for your business.
A purpose-built procure-to-pay solution enables organizations to manage procurement and purchasing processes and cycles effectively - from the initial purchase requisition creation to receiving, and accurate posting of data to the financial system for payment.
But with so many solutions on the market, what functionality should be prioritized when considering a procure-to-pay solution?
The answer depends on your company’s unique needs. In small to medium-sized businesses, it’s important to ensure that short and longer-term goals are not compromised by resource deficits. If no procurement department exists, this function often falls under the finance team’s purview. An automated procure-to-pay solution is needed to provide the framework for efficient procurement and purchasing processes and policies, with proactive spend controls to deliver the visibility and savings needed to manage and grow a profitable organization.
Meanwhile, large enterprises with higher volumes of purchases, and a complex network of suppliers could benefit from increasing their buying power through solutions that enable strategic sourcing and the ability to track and benchmark supplier performance metrics to drive their corporate strategy forward.
Achieve procurement and purchasing synergy
Organizations of all sizes can agree that procurement and purchasing play important roles in a business. From equipping a team to operate effectively, to managing the processes involved in acquiring and buying goods and services, to the time and costs (present and future) associated with these items will have an impact on the way a business operates, scales, and profits. How you achieve these short and long-term goals is worth careful consideration. Solutions like Fraxion can help you achieve this procure-to-pay efficiency with a comprehensive suite of features.
If you’re currently held back by manual, paper-based processes or legacy systems, these all too familiar mistakes could be your reality - read this blog to discover how you can avoid costly procurement mistakes.
Get in touch with us to discuss your procurement and purchasing needs.