Organizations and online resources often use “procurement” and “procurement” interchangeably, yet they mean different things. More crucially, these concepts require unique approaches. Understanding Procurement vs Purchasing could mean the difference between saving a few bucks this quarter and establishing a robust long-term strategy.
What are the distinctions between purchase and procurement, and how can you balance short-term savings with long-term procurement benefits?
Let’s compare purchase and procurement and how they affect your company’s long-term finances. First, define each term.
Purchasing vs. procurement
Purchasing
Buying business supplies is purchasing. From finding a needed goods to paying for delivery, it handles transactional procurement. A purchasing strategy includes:
- Determine product kind, quality, and quantity through purchase request.
- Conduct price comparison and competitive analysis.
- Negotiating price and terms
- Shipment tracking, receipt, and order reconciliation
- Processing and paying supplier invoices
In the procurement process, purchasing handles logistics and accounting to provide your organisation what it needs.
Procurement
Thomasnet.com defines procurement as a strategic process that involves both purchase and sourcing. Selecting a vendor using an e-procurement platform or bid procedure is sourcing. Following are procurement policy aspects:
- Optimising supplier relationships
- Manage third-party risk
- Inventory control and supply chain management
- Benchmarking and competitive market analysis
- Negotiating contracts
- Resilience and sustainability
- Lifecycle evaluation and supplier management
Defining these terms should make it apparent that purchasing and procurement aren’t “either/or” processes, but a set of activities that operate together to save the firm money, develop resilience, and create value.
A good purchasing plan can save your company money.
A purchasing plan guides your company’s purchases. The goal is to decrease inefficiencies, establish approval workflows, and create a tactical procurement plan to maximise cost savings and lower the bottom line. Implementing purchase rules and processes can cut prices and prevent short-term money leakage.
A purchasing strategy aims to provide clear guidelines for stakeholders to follow when buying products and services. This can cut tail expense and remove maverick spend.
- Tail spend is the idea that 10% of merchants take 80–90% of spend, usually in bulk purchases, while 90% take 10–20%, usually in one-time situational purchases. It graphs as a tail.
- Maverick spend—purchases outside the clearance workflow—can be a major issue for firms of all sizes. CIPS says maverick expenditure can account for 80% of a company’s spending.
If your finance department struggles to control tail spend or maverick spend (typically evidenced by the inability to connect spending to purchase orders or invoices), a purchasing plan may help.
A finance or procurement team can analyse tail spend for sourcing and vendor development with a good purchasing strategy. Can they inquire and answer, “Is the tail spend partially a result of a vendor not fulfilling our employees’ needs?”.
A good buying plan can strengthen your company.
Procurement strategies go beyond buying patterns. It chooses vendors, sets business goals for buying, and uses strategic sourcing to construct and maintain a resilient supply chain network.
The important word is “network.” Procurement positions the organisation as part of an ecosystem of upstream and downstream suppliers that depend on partnerships. This can be internal (a strong partnership between finance, procurement, and manufacturing to improve production time frames and reach goals) or external (building a global sourcing network to coordinate logistics partners, distributors, and end users).
Tips for a solid procurement strategy
Every company has a different procurement approach. With clear business goals and overall quality management, your procurement team should constantly develop the right controls and long-term methods.
Follow these steps to create or improve your procurement strategy:
1. Determine internal needs
Start by identifying your procurement process challenges. Poor visibility, increasing tail spend, maverick spend, and supplier risk occurrences are major reasons firms develop or strengthen procurement procedures.
Questions to discover gaps:
- Is your stakeholder purchasing procedure clear?
- Using budgets and purchase guidelines effectively?
- Do you buy from preferred suppliers or a competitive market?
- Have you sufficiently mitigated supplier third-party risk?
- Can you link spending to POs and invoices?
- Does green purchasing or sustainable procurement need improvement?
2. Set KPIs and targets
Your strategy goals and objectives will emerge from your answers to the preceding questions and procurement data analysis. Make a short list of business needs and priorities and choose KPIs to measure your success.
3. Plan and execute
Make a purchase and approval plan that helps your business. This plan should include these elements:
- Purchase approval workflows and thresholds by kind
- Guidelines or regulations to encourage stakeholder purchases
- Supplier compliance and product quality standards
- Departmental bid evaluation and contract negotiation requirements
- The supplier lifecycle evaluation policy
4. Assess and improve
Review your procurement plan often after launch to improve and refine it. Calculate plan success using tracked metrics and adjust accordingly. Employee surveys can help stakeholders understand how the new procurement policies affect buyers.
5. Use tech
Leading companies are building supply chains with digital procurement solutions. Automation from these digital technologies makes it easy to implement a procurement strategy and track its influence on tail spend and maverick spend.
Boston Consulting Group says, “Firms that use digital [tools] to manage tail spend can cut their annual expenditures by 5% to 10%, on average.” A solid procurement strategy can address short-term concerns with a purchasing strategy and instill a network-based viewpoint that can build long-term resilience in uncertain times.
