Procurement vs. Purchasing: What’s the Difference?
Procurement is all about strategy and purchasing is all about the exchange. (That’s the short answer, just in case you’re here because you Googled us looking for the answer to your Management 101 exam.)
For the rest of you, I’ll draw it out in a little more detail. Now, procurement and purchasing are related processes, but (despite what some of you are probably thinking) there’s more than just a semantic difference between them. I’ll admit, with smaller organizations the procurement and purchasing processes can tend to run together (I’ll get more in-depth about that later), but as your company grows the difference will grow with it.
And just to be clear, you should be aware that procurement isn’t limited to the private sector. Businesses issue procurements, yes, but governments, non-profits, and other organizations do too. Where there’s something that needs to be done, there will be procurements.
For Starters: From Strategy to Exchange
First off, let’s flesh out that short answer a little bit, shall we? A more substantial answer would be that procurement is the overall process of selecting goods and services and exchanging value for them, while purchasing is the actual exchange with the actual supplier. A little like the way a square is always a rectangle but a rectangle isn’t always a square. Purchasing is always part of procurement, but just because you’re working on procurement doesn’t mean you’re working on purchasing.
Another way of looking at it is to remember that procurement is all about strategy. Procurement is about making sure you know how the purchase will fit into your company’s long-term vision for the future. It means taking into account your company identity, market placement, company capabilities, and management issues. It means budgeting, putting out tenders, and evaluating bids as they come in. With procurement, you’re taking a huge number of factors into account.
That’s just not the case with purchasing. By the time you’ve entered the purchasing process, you’ve decided on a supplier and you’re working with much more concrete negotiations. You’re not worried about things like “What effect will this purchase have on the company by next winter quarter?” You’re focused on a few simple (but very important!) particulars: things like negotiating a price, scheduling and setting delivery dates. When you’re purchasing, you’ve pretty much already made all the complex decisions, and it’s time to make sure everything goes right.
How About an Analogy?
If this is making it sound too complicated, maybe a little example can clear things up. Imagine it’s Friday evening, and a couple decides they want to go out to eat. Now, you know how it can be when you’re trying to pick a restaurant, right?
A: “I’m fine with anything. Really, let’s go wherever you want.” B: “How about that new Italian place over on Fourth Street?” A: “Oh. Well, I just had Italian for lunch, but we can go there if you really want to…” B: “No, it’s fine. How about that Thai place you like so much?” A: “You know, I’d love to, but I just went to the doctor just yesterday, and she told me I can’t have any spicy foods for at least a week, so…” B: “How about sushi? You love sushi.” A: “I don’t know, I’m really not feeling it today…” B: “Well, where do you want to eat?”
With procurement, you’re making sure the eventual purchase (or in this analogy, restaurant) fits in with your company’s strategic interests. The real difficulty of the process comes here because this is where you’re trying to balance a million different strategic factors that may or may not (read: usually don’t) coincide.
By the time you’ve selected a bid (chosen a restaurant), you’re ready to work out the specifics. That’s where purchasing comes in. In our analogy, this is where you order your food, sip your drink, and enjoy yourself a nice meal.
The Difference of Scale
Now, I mentioned earlier that smaller companies can tend to let procurement and purchasing run together, so let’s talk about that a little: one reason for that is that with smaller companies, the same person is often in charge of both processes. In a larger company, the procurement process is likely to be divided up among any number of people, so there’s much less risk of any part of the process not getting its due diligence. So with smaller organizations, in particular, it’s crucial to take into account the variety of strategic factors that go into procurement.
With larger organizations, you can see some of the practical effects of the difference between procurement and purchasing. The procurement department will be responsible for the entire tender process, clearly identifying company needs and issuing the tenders to get them met. They will be responsible for controlling costs and evaluating bids as they come in. Procurement will take charge of communication between departments, and most importantly, procurement will often have the final say in any purchasing decisions.
Purchasing, on the other hand, will mostly be responsible for dealing with the supplier. They take care of hammering out the concrete details, like negotiating the final price and setting out delivery dates. Purchasing will report to procurement, and procurement will always have the last word on purchases.
Just remember that the main thing you need to know is that procurement is concerned with strategy, while purchasing is all about actually performing the transaction. It’s important to recognize that this is more than just a difference of words: this is a difference of processes. If we’re not methodical about our procurement, and if we’re not careful to keep the two processes from running together, it can lead to mistakes that can severely hurt the bottom line.
In Conclusion: Procurement Matters
One last thing: there can be a real temptation to think of it as a sort of abstract process, while it’s purchasing that’s “the real thing.” It’s an easy prejudice to develop. After all, purchasing is where the money changes hands and your company actually gets the goods or services, right?
It definitely makes sense that we might feel this way. However, it’s important to remember that procurement is not only a larger process, but it’s also an activity that’s more central to the success of your organization. Procurement incorporates the purchase into a strategic vision for the future of your company, and that’s something no good company can afford to be lax about.
Put it this way: a shoddy purchase is a one-time deal. Shoddy procurement practices can eat away at a company’s competitive ability. I know it’s an old cliché, but failing to plan really is planning to fail.
So plan your procurements carefully.