Procurement vs Purchasing vs Supply Chain Management – business people tend to use these terms interchangeably. While they are related and are all part of a company’s finance or accounting function, there are differences.
Let’s understand each one and the differences between them in more detail.
What exactly is Procurement?
Simply put, procurement is an overarching term for the series of steps that your organization performs to acquire the goods and services it needs to operate.
The actual steps – referred to as the Procure to Pay cycle – will vary from one organization to another depending on its size, industry and particular requirements.
The overall Procure to Pay cycle includes:
- Identifying the need,
- Selecting and negotiating with trusted suppliers,
- Approving the purchase and issuing a PO,
- Receiving an invoice and making payment,
- Accepting delivery,
- Auditing e.g. 3-way matching, and
- Record keeping.
Read more: Streamline your procurement process.
Procurement is, thus, a blanket term that includes multiple internal processes such as purchase requisitions, purchase orders, and invoice approvals.
What is procurement’s role?
Procurement is a strategic function for the company because it cannot operate and produce its products without the necessary goods and services. This kind of operational disruption can have a disastrous effect on sales and profits.
Traditionally, procurement’s top priority is to secure materials at the lowest possible cost under the most favorable terms possible. To do that, procurement must find and manage relationships with a reliable network of suppliers, ensure quality standards are met, process invoices and pay suppliers and mitigate risk such as maverick purchases.
Nowadays, procurement’s priorities have grown to encompass corporate initiatives like social responsibility and sustainability. This isn’t purely out of a desire to behave in an ethical manner. Corporate scandals such Nike sourcing from sweatshops or Volkswagen’s emissions scandal spread rapidly, quickly erode customer trust and have the potential to drastically affect the bottom line.
“Procurement is a strategic set of activities and protocols designed to extract the maximum value out of purchasing. Purchasing is the transactional component – the act of buying.”
Where does purchasing fit?
Purchasing is a component of procurement. It’s a simple, transactional task – in contrast with procurement’s strategic aspects – that’s literally about buying goods and services. Typically, receiving and payment are also part of the purchasing process.
That doesn’t mean purchasing is unimportant. Within the overall framework of procurement, the steps in a purchasing process are:
- Sending a PO to the supplier
- Accepting and auditing delivery of goods
- Receiving an invoice
- Making the payment
For a very small business, purchasing might be as simple as calling Staples and ordering a box of pens and some whiteboard markers.
In most cases, the steps involved in purchasing are standard good practices that all businesses should follow. There’s no reason to tailor these practices to the size or industry of a specific business.
For example, no matter the size of your business, you shouldn’t use a credit card and save the receipts. You’re better off using a well-defined, preferably automated purchase order process.
What is supply chain, in simple words?
Simply put, a supply chain is the entire network of entities a business works with to create its products and deliver them into the hands of the final customer.
Depending on the product, industry and sales channels, the supply chain could be enormously complex. It includes:
- Vendors: A [potentially global] network of suppliers who deliver the source materials that the business needs to manufacture its products e.g. lumber for furniture manufacturers, thousands of parts for an airplane manufacturer.
- Manufacturing: The business itself – the entity that actually manufactures the products.
- Distribution: The companies the business partners with to get its products to retail locations including transportation and warehousing.
- Retailers: The locations that sell the finished products.
- Customer: The end users who buy and use the products.
Supply chain management (SCM) is the process of eliminating supply chain disruptions. Essentially, it involves coordinating the flow of materials, information, and finance across business units of the company as well as across a network of partner companies.
As a result of globalization and technology, SCM is increasingly crucial. Companies with an efficient SCM strategy enjoy lower costs, higher profit margins and better collaboration both internally and externally. They are less likely to suffer from operational disruptions, excess inventory or an inability to meet customer demand.
Differences between Procurement, Purchasing and Supply Chain
Let’s say your business manufactures small kitchen appliances. You sell these to consumers through online channels as well as through a network of distributors.
Procurement vs supply chain: what are the differences?
The supply chain is the complete network of people, partners, raw materials, and tasks involved in producing and delivering the coffee makers, blenders and toasters you manufacture to your customers. It includes suppliers, manufacturing, distribution, retail etc. all the way to the employee at the cash register. Depending on industry, supply chains can be extensive and highly complex.
Procurement starts the supply chain and ends when the business has all the goods and services it needs to operate. It ensures you have a reliable supply of the materials you need – e.g. plastic, glass or electrical components used in a coffee maker – under the best possible terms from ethical suppliers. Depending on industry, the steps in the Procure to Pay (P2P) cycle vary.
Procurement vs purchasing: What are the differences?
Procurement is an umbrella term that includes purchasing as one of its components. Purchasing deals with the transactional tasks of buying and paying for the goods and services. Good purchasing processes are relatively standard across organizations independent of industry.
Given the complexities of procurement, purchasing and SCM, it’s easy to see why people get confused and use the terms interchangeably.
Companies that effectively manage these processes enjoy higher profit margins, fewer disruptions and increased customer satisfaction.
Modern software is available to help automate all parts of these processes. Digital processes drive operational excellence and prepare businesses for a data-driven future.