Procurement 101Procurement vs Purchasing – What’s the difference for your business?
Looking for a way to optimize your supply chain management?
Wondering what procurement is all about, and how exactly it’s different from purchasing?
You’re in the right place!
- How is procurement different from purchasing?
- What are the strategic similarities and differences between procurement and purchasing when it comes to supply chain management?
- What are the advantages of an e-procurement management solution?
To get a better picture of how procurement and purchasing are related yet different, it’s important to start by understanding that purchasing is only one aspect of the wider procurement system.
Let’s take a look in more detail.
Purchasing refers to buying any good or a service. It includes activities such as ordering, expediting, receipt of goods, and payment to suppliers.
But on the other hand, procurement is the whole system of how you get that good or service, and it can also involve actions such as renting or bartering for goods.
Procurement begins when one of your employees has a need (which is the identification of a requirement), to when this need is fulfilled.
Procurement can involve a lot of negotiation. During the whole process, there can be a lot of back and forth between you and your supplier.
It can also lead to long-term contract agreement or a one-time purchasing deal.
In the end, purchasing is buying a product while procurement also includes all the activities associated with acquiring this product. It’s a more proactive approach.
What are the strategic similarities and differences between procurement and purchasing when it comes to supply management?
If you’re still having trouble visualizing the differences between procurement and purchasing, it’s because they both have different means to the same end.
At the end of each, you will end up getting a product that your business needs. But you will have taken a very different strategic approach depending on your choice.
You may already be familiar with the purchase-to-pay cycle:
- You create a purchase order to send to the supplier, then you follow where your item is with a shipment notice.
- After several days you receive your goods.
- Later, you receive an invoice indicating the payment amount due for the delivered goods.
- It’s now time to make sure that everything is fine with a 3-way match, comparing your purchase order, the supplier’s invoice, and the receiving report – followed by payment to the supplier.
And you’re done!
Purchasing is a “short-term goal” action.
But what if you want to better identify the needs of your business, select the right suppliers to fulfill these needs, or even want to negotiate to further your relation with your supplier and get better deals?
Having a good supplier relationship always pays off!
Procurement strategy includes the purchase-to-pay cycle, but it also includes other steps that make procurement more proactive, relational and strategic.
The first step is the identification of a need. Depending on the size of your business this phase can be more or less complex. But it will always end up in a purchase request.Then this purchase request is either approved or denied based on different factors such as the type of request, the cost, the product, and allowable budget.
You can also check to see if you have other open purchase orders, so you can identify if there are any similar orders from other departments or employees in the company.
Then comes the most important phase of a procurement cycle – the sourcing which is identifying and evaluating potential suppliers.
ReferenceForBusiness describes it this way:
“Buyers have a number of places to go to locate sources of supply, some obvious and some indirect.”
In many cases, a request for quotation (RFQ) is sent to one or more suppliers to receive more details about what the supplier can offer to you and your business.
You might even go through a full negotiation phase to end up with a contract that really suits the needs of your business.
In the procurement cycle, it is important to manage those contacts and establish a good supplier relationship.
To make it more fruitful and constructive. Once the contact sign, you can send your first purchase order.And you know what comes next.It’s the purchasing part of the procurement process.
Now that you fully understand the differences between procurement and purchasing, the next step is analyze how you can optimize your supply chain management.
You’re looking for a solution that can support your entire procurement workflow. If you’re looking to optimize your supply chain management in the 21st century, you’re looking for an e-procurement management solution.
In 2007, a research report about the adoption of e-procurement in Hong, Kong, Angappa Gunasekaran and Eric Ngai claimed that:
“E-procurement solutions make purchasing activities more effective in terms of both time and cost. It is changing the way businesses purchase goods.”
Why? Because time is a valuable resource – for both you and also for your employees.
To save time, you’re looking for a way to centralize all the procurement processes and workflow. You don’t want to be wasting your time fetching documents here and there, you want real-time procurement record keeping.
With an e-procurement solution for your business, your employees can submit their needs through a purchase requisitions system. It also allows you to configure detailed approval workflows.
One of the main advantages of including an e-procurement management software in your strategy is to maintain cost control. Having the right right tools, including a budget planner you can verify so that purchases align with estimated expenditures is a must.
This is how purchasing is effectively managed inside of a procurement strategy!
With a simple purchase order software solution that’s included in many e-procurement systems, you also have the ability to create flexible purchase order forms. They can include your company’s logo and automated PO numbers. And you want to keep track of the purchased items you receive across all of your inventory distribution locations.
Don’t forget, procurement is about negotiation and nurturing your supplier relationships to get the most out of them.To support and maintain an effective supplier communication plan, you can for example give your suppliers the option to include delivery notes with their shipments inside the same software.
And, of course, last but not least, you’re probably looking for a way to improve invoice automation. With an automatic 2 or 3-way match invoice processing tool, your can maintain perfect synchronicity between invoices and accounts payable.
E-procurement solutions should have all of these features in order for you to improve your supply chain optimization. While evaluating your options, consider trying out Tradogram – a simple, flexible, and affordable way to manage procurement comfortably.
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