In managing a business, cash outflows are crucial to plan, manage, and track. This means that procurement and purchasing must be carried out carefully and cannot be done haphazardly.
Procurement and purchasing are terms often used interchangeably, but they actually represent two different financial processes. Understanding the difference between them can help a business achieve greater success.
Procurement vs. Purchasing
The main difference between the two is that purchasing focuses solely on order costs and ways to reduce them, whereas procurement emphasizes overall value creation and the total cost throughout the purchasing cycle.
In short, procurement is a broader term that encompasses purchasing activities and ultimately aims to manage supplier relationships, mitigate risks, reduce costs, and ensure contract compliance.
Here’s a more detailed explanation of procurement and purchasing.
What Does Procurement Mean?
Procurement is the comprehensive process of acquiring the goods and services a business needs to operate effectively.
This process goes beyond simply buying goods; it involves planning, evaluating options, and ensuring that every purchase adds value to the company.
The steps in procurement can vary depending on the size and industry of the business, but they typically include the following.
1. Identifying Internal Needs
This first step involves determining the goods and services the business requires, which includes assessing current operations and analyzing historical data.
Additionally, collaboration with teams from other departments is needed to identify gaps and accurately forecast requirements for upcoming production.
The easiest way to do this is by asking employees to create Purchase Requisitions (PR) whenever they need a product or service.
2. Researching the Market and Selecting Suppliers
Once the organization’s needs are clear, the next step is to choose from existing suppliers or look for new vendors. The goal is to find those that best match the evolving needs of the business.
3. Sending Out an RFQ or RFP and Choosing a Supplier
To evaluate potential suppliers, the procurement team typically issues a Request for Quote (RFQ) or Request for Proposal (RFP), also commonly referred to as a Request for Offer.
These are used when suppliers have a clear offer for the required products or services and to compare prices. They are also used to evaluate quality, delivery schedules, innovative solutions, and service requirements.
4. Negotiating Terms and Signing the Contract
This step is crucial because it means the procurement team is ready to collaborate with the supplier to agree on key details such as price, delivery schedules, payment terms, and warranties.
This process can take anywhere from a few days to several weeks, depending on the complexity of the agreement and the number of parties involved.
5. Creating and Approving the Purchase Order
A Purchase Order (PO) is a legal document outlining the details of a purchase, including quantity, price, payment terms, and delivery schedule. This is where the approved PR is converted into a PO after the contract has been signed.
6. Receiving and Inspecting Delivered Goods
When the order arrives, the receiving team verifies that the correct quantities and types of goods have been delivered while checking for any visible damage or defects.
If there are discrepancies, such as missing or damaged items, the procurement team will work with the supplier to resolve the issue.
7. Processing Invoices and Making Payments
The next step is for the finance team to review the invoices sent by the suppliers. The goal is to ensure that the invoices accurately reflect prices, quantities, and other terms, such as taxes or shipping fees.
The team will also check whether the invoice matches the goods receipt and the approved purchase order to confirm the details.
Also read: What Is an Invoice: Its Functions, Types, and Elements
8. Pencatatan
This is done to keep purchasing organized and ensure that everything is properly documented, including tracking orders, invoices, contracts, and receipts.
Regularly recording everything helps prevent overspending, ensures everyone follows company policies, and makes audits easier.
9. Evaluating and Building Supplier Relationships
Supplier evaluation typically involves reviewing key performance indicators (KPIs), such as delivery times, product quality, and price accuracy.
Additionally, factors such as profit margins and contract compliance are also taken into consideration.
Understanding Purchasing
Unlike procurement, purchasing is the transactional aspect of directly acquiring the goods a business needs.
This process typically involves well-defined routine purchasing activities, such as placing orders, processing payments, and ensuring that goods or services are delivered as agreed.
The purchasing process typically includes the following steps.
1. Creating a Purchase Requisition (PR)
The process begins when a team submits a purchasing request with details of the required items, quantities, and desired delivery dates.
This document provides the initial information needed to start the purchasing process and helps prevent errors or misunderstandings regarding employee requests.
2. Approving the Purchase Requisition (PR)
The approval process ensures that the requested expenditure is authorized and aligns with the organization’s budget and company policies, such as procurement guidelines or spending limits.
That’s why purchasing requires approval from authorized personnel, such as department heads, finance managers, procurement managers, or C-level executives.
3. Issuing the Purchase Order (PO)
Once the purchase requisition is approved, a PO is created and issued, specifying the items, quantities, agreed prices, and delivery terms.
However, some companies or businesses may start the purchasing process directly with an order, without going through the requisition step.
4. Receiving the Order
When the ordered goods are delivered, the receiving team inspects the order and compares it with the purchase order.
This step includes verifying that the correct quantities have been delivered, checking for any damaged or defective items, and ensuring that the goods meet the agreed-upon specifications and quality standards.
5. Verifying Invoices and Performing Matching
After the goods or services are received and verified, the supplier sends an invoice. The finance team then performs matching by comparing the invoice with the purchase order and the receipt documentation.
This is done to ensure that the quantities, prices, and agreed-upon terms, such as discounts or additional charges, are consistent across all documents. If everything matches, the invoice is approved for payment.
6. Making the Payment
Next, the finance team checks whether the payment terms, such as discounts or penalties, have been met. Then, the team ensures that the payment method is appropriate for paying the supplier.
After the payment is made, the transaction is recorded in the company’s financial system and communicated to the supplier.
Key Differences Between Procurement and Purchasing
After reading the explanations above, you may now better understand that although procurement and purchasing operate within the same context, they are not the same.
Here are some of the key differences between the two.
1. Purpose
Order costs are the focus of purchasing, whereas value creation and Total Cost of Ownership (TCO) are the focus of procurement.
Thus, the primary goal of purchasing is to minimize order costs, whereas procurement has broader objectives such as risk mitigation, contract compliance, cost savings, ongoing supplier relationships, and more.
2. Relationship with Vendors
One of the main tasks of the procurement team is to build long-term, collaborative relationships with suppliers. In contrast, the purchasing team typically works only with existing suppliers and is less focused on relationship building.
3. Price and Value
“Procurement focuses more on the value that the acquired goods or services bring to the organization, especially in the long term. In contrast, purchasing is concerned with the cost or price tag of the desired materials.
4. Proactive vs. Reactive Approach
Procurement takes a proactive approach, whereas purchasing is more reactive. This means that the procurement process requires much greater planning and strategy before, during, and after acquiring the needed materials.
5. Transactional vs. Relational Process
Unlike procurement, which aims to develop long-term, mutually beneficial relationships with suppliers, purchasing focuses on transaction efficiency rather than relationship building.
6. Process Sequence
Procurement has a far more complex process sequence than purchasing, involving everything from identifying needs to sourcing, contract finalization, and record maintenance.
In contrast, purchasing is largely a three-step process involving ordering, expediting, and payment.
7. Risk Evaluation and Mitigation
Because purchasing is purely transactional, this process does not accommodate risk identification and mitigation. As a result, businesses may face various supply chain risks when dealing with vendors or suppliers.
Meanwhile, procurement incorporates risk identification as a core function, ensuring compliance guidelines are enforced among all stakeholders.
Also read: Limited Edition Strategy – Benefits, Challenges, and Tips for Success
That’s an explanation of procurement and purchasing, each of which has a distinct meaning. For those who find it challenging to keep track of their business cash flow, you can simply use the Labamu app.
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You can customize the report details you want to view, such as the profit and loss report. Additionally, the report can be downloaded to your preferred device in Excel format, making it easier to analyze.
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