Procurement vs. Purchasing: What Are the Differences?
By Indeed Editorial Team
Updated December 1, 2022 | Published June 22, 2021
Updated December 1, 2022
Published June 22, 2021
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Businesses often use goods and services from outside vendors to complete daily operations. The process of obtaining these goods and services can include many steps, including procurement and purchasing. Although they're similar, learning how the two concepts differ can help you more effectively manage a business' operational requirements.
In this article, we define procurement and purchasing, examine the differences between them and explain the required processes for each.
What is procurement?
Procurement is a long-term plan for strategically sourcing and acquiring materials or services from an outside party. It's a strategic process, meaning it involves a careful analysis of internal and external data to inform decision-making. This plan includes establishing and maintaining relationships with vendors who can deliver high-quality supplies when the business needs them, minimizing cost and risk and working to ensure the company receives value for its purchases.
The goal of a company's procurement department is often to acquire everything a business can use to operate at a fair price. There are two types of procurement, each focusing on different needs, including:
Direct procurement: This focuses on acquiring the things a business needs to produce its goods, such as raw materials. Direct procurement for a computer company, for example, may require microprocessors, plastics, metals and other such materials since these are necessary for manufacturing computers.
Indirect procurement: This focuses on products that support non-production operations, such as office supplies and furniture, vehicles, equipment and other items that indirectly facilitate the business's activities and functions.
What is purchasing?
Purchasing is a component of the procurement process that relates to the transactional activities between an organization and its vendors. These specific activities include writing and submitting purchase orders, receiving invoices, receiving orders and fulfilling payments. The key focuses of purchasing are acquiring specific goods or services in a specified amount or quantity at agreed-upon prices and in certain timeframes.
The steps of the purchasing process include:
Procurement vs. purchasing
While these two processes can be similar, there are some key differences between them, including:
Procurement is a broader process that addresses the strategic goals of an organization. It involves more steps and seeks to create helpful circumstances with its focus on the relationship between the organization and the vendor. Purchasing is a part of procurement and is a short-term activity repeated as necessary as a function of the larger process. Its focus is on the transactional exchange between parties rather than on the relationship between them. For example, procurement could include researching suppliers or any additional steps a company takes to maintain vendor relationships outside of the sale.
Procurement is an ongoing proactive process that focuses on the long term. Businesses can use the relationships established through procurement to create better products or provide superior services, thus giving them a competitive advantage. Purchasing is more of a reactive process, responding to internal needs by finding solutions that meet the requirements of quality, quantity and cost. In this way, a company can constantly work on procurement while only focusing on purchasing when it requires more material or product.
Value vs. price
Procurement and purchasing emphasize distinct qualities of the goods and services a company seeks and purchases. Procurement emphasizes the value of these purchases, meaning that it seeks to improve the organization's ability to fulfill its functions and meet its goals in a way that minimizes cost, maximizes profit, increases efficiency and helps to establish dependability. Purchasing's emphasis, though, is specifically on price. The idea is to fill needs at a manageable cost, and this makes up a small contribution to the value they can provide to the organization.
Related: What Is Raw Materials Cost?
These two processes can provide an organization with different benefits. Procurement is useful for addressing concerns before, during and after purchases. For instance, when identifying needs, procurement can address the spending activity of each department in an organization. The procurement manager can evaluate the necessity of certain expenditures and help streamline the needs of the entire organization in doing so.
The purchasing process is less useful than it is functional, as it's a fairly straightforward process of interacting with vendors. It can help to reveal potential areas of improvement, though. For example, if vendors experience delays in payment, you might assess the processes of the company's finance team for gaps. Also, if the company's quality assurance team finds deficiencies in materials, this could signal the need to find new vendors or to examine shipping methods that could damage goods.
Since purchasing is often a step of procurement, it can be helpful to understand the process of the latter. You can follow these steps to complete the procurement process for a business:
1. Identify departmental needs
The first step is to determine what goals the business wants to meet and what materials or services are necessary to meet those goals. This may involve interdepartmental discussion to determine the needs of the groups within an organization. For instance, a new clothing manufacturer with departments for marketing and production may identify unique needs for each. The production side may require machinery and fabrics, while marketing may require computers, telecommunications equipment and sources for market research.
2. Research and select vendors
Once you identify company goals, you can seek vendors, conduct research and make selections. It's important to investigate every aspect of potential vendors, including the extent of their offerings, their prices, the speed and efficiency of their communication and their reputation. After you've completed research, you can compare the vendors on your list and select those that you think can provide the most value to the organization. The last stage of vendor selection is communication with the chosen vendors to negotiate terms and complete agreements.
3. Submit purchase requisitions
A purchase requisition is a written document that internally requests goods or services. For each department, the purchase requisition can include identification of the party requesting procurement, a description of the goods or services the department requested, the quantity or amount they require, information about the vendor and the cost. Normally, the procurement manager and finance department approve requisitions. Upon approval of the purchase requisitions, the finance department generates purchase orders and shares them with the associated vendors. Purchase orders communicate to the vendors that they can begin their processes for fulfilling the orders.
4. Review invoices and pay vendors
Shortly after you share the purchase orders, you can expect invoices from the vendors. These invoices describe order details, the agreed-upon price and a deadline for payment. It's a good idea to review the invoice details in case you need to change the order. Depending on the details of the contract, the company's finance department pays the vendors for their services either before or after receipt of the orders.
5. Inspect what you received
Once the company receives its orders, consider inspecting the materials or otherwise reviewing the experience with each vendor. If a vendor provided high-quality materials or services, you may decide to continue a business relationship with them. Otherwise, you can start the process again for establishing a relationship with another vendor.
Explore more articles
- Value Stream Management vs. Mapping: What's the Difference?
- How To Count Cells With Text in Excel (Plus Tips)
- What Are Containers? A Definitive Guide
- Q&A: What Is Reinforcement Learning?
- How To Make a Booklet in Word (With Steps and Tips)
- What Is a Product Business? (Definition, Steps and Tips)
- All About Nurse Practitioner Programs for Non-Nurses
- What Is Leadership Communication? (Plus Best Practices)
- What Is Organic Synthesis? A Definitive Guide
- How To Successfully Find a Blogging Style For Your Brand
- What Is a Content Hub?
- The Four V's of Big Data (Definitions and Applications)