Although “purchasing” and “procurement” are used interchangeably in organizations and online resources, these two terms have different meanings. More importantly, the two concepts call for individual approaches. Knowing their differences may mean the difference between saving a few dollars this quarter and building a truly resilient strategy long-term.
What are the differences between purchasing and procurement, and how should you apply techniques to ensure you’re balancing short-term savings goals against long-term procurement benefits?
Let’s cover the finer points of purchasing vs. procurement, and discover how each plays a role in the long-term financial health of your company. The first step is getting a clear definition of each term.
The difference between purchasing and procurement
Purchasing is the act of buying supplies for your business. It deals with the transactional portion of the procurement process, from the identification of a needed product to the payment for its delivery. A purchasing strategy deals with several things:
- Purchase requisition to define the type, quality, and quantity of a needed product
- Price comparison and competitive analysis of the deal
- Negotiation of price and terms
- Shipment tracking, receiving, and reconciliation of the order
- Invoice processing and payment to the supplier
Purchasing is one aspect of the total procurement process that deals with the logistical and accounting processes for getting what your company needs.
Procurement is, according to Thomasnet.com, “an all-encompassing strategic array of processes that includes both purchasing and sourcing.” Sourcing is the process of selecting a vendor, either through an e-procurement platform or a bid process. Procurement policy covers the following aspects:
- Optimization of supplier relationships
- Third-party risk management
- Supply chain management and inventory control
- Competitive market analysis and benchmarking
- Contract negotiation
- Sustainability and resiliency
- Supplier management and lifecycle evaluation
A procurement strategy takes into account not just, “What am I buying and for how much?” but also, “Who am I buying it from, why them, and how does that relate to the current market?”
Having defined these concepts, it should be clear that purchasing and procurement aren’t “either/or” practices, but a collection of activities that work together to save the business money, build resilience, and drive value creation through the procurement function.
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An effective purchasing strategy can save your business money
A purchasing strategy defines how your company buys things. Its primary goal is to reduce the bottom line and maximize cost savings by reducing inefficiencies, establishing approval workflows, and forming a tactical buying plan to get desired results. By implementing requirements and processes around purchases, you can lower costs and avoid many common money leaks in the short term.
One of the goals of a purchasing strategy is to codify clear rules for stakeholders to follow when buying goods and services. Doing so can reduce overall tail spend and eliminate instances of maverick spend.
- Tail spend is the concept that 80–90% of spend will be taken up by 10% of vendors, usually in bulk purchases, while the remaining 10–20% of spend is taken up by 90% of vendors, usually in one-off situational purchases. It creates a tail shape when graphed.
- Maverick spend, which refers to purchases made outside the established approval workflow, can be a huge issue for companies of all sizes. CIPS reports that maverick spending can make up 80% of a company’s total spend.
If your finance department consistently has trouble keeping tail spend in check or tracking down maverick spend—usually indicated by the inability to match spending to purchase orders or invoices—it may be time to implement a purchasing strategy.
Using a well-crafted purchasing strategy, a finance or procurement team can analyze tail spend in the context of sourcing and vendor development. They can ask and start to answer questions like, “Is the tail spend partially a result of a vendor not fulfilling our employees’ needs?” They can then identify if they need a new vendor, if they need to adjust a contract with an existing vendor, or if they need to improve internal processes.
An effective procurement strategy can make your business more resilient
A procurement strategy goes further than defining how purchases are made. It determines the sourcing strategy for choosing vendors, establishes business goals for buying, and uses strategic sourcing techniques to build and maintain a resilient supply chain network.
The key concept here is “network.” Procurement positions the company as part of an interconnected ecosystem of upstream and downstream suppliers, reliant on partnerships to drive initiatives forward. This is both internal (for instance, a strong partnership between finance, procurement, and manufacturing to improve production time frames and reach desired goals) and external (building a global sourcing network that coordinates between external stakeholders such as logistics partners, distributors, and end users).
Steps for building a strong procurement strategy
The procurement strategy for every organization looks a little different. Developing the right mix of controls and long-term techniques should be an ongoing priority for your procurement team, with well-defined business goals and total quality management leading the way.
When you want to establish or improve your procurement strategy, use these steps as a guide:
1. Identify internal needs
You need to know where you’re starting from—identify the current issues with your procurement process. Poor visibility, increased tail spend, maverick spend issues, or supplier risk incidents are all common reasons companies choose to establish or improve procurement policies.
Ask yourself some questions to identify gaps:
- Do you have a clearly defined purchasing process for stakeholders?
- Are you using budgets and purchasing guidelines effectively?
- Are you buying from a preferred list of suppliers and/or a competitive supply market?
- Have you sufficiently mitigated third-party risk with suppliers?
- Can you effectively track spending and tie it to POs and invoices?
- Do you need to improve initiatives like green purchasing or sustainable procurement?
2. Establish goals and KPIs
Based on your answers to the previous questions and an evaluation of your currently available procurement data, you will surface goals and objectives to prioritize in your strategy. Clearly outline a short list of business needs and priorities, and identify the key performance indicators (KPIs) to track your success.
3. Build and implement a plan
Establish a purchasing and approval plan that supports your business objectives. This plan should include the following elements:
- Approval workflows and purchasing thresholds for each type of procurement
- Guidelines or policies to encourage desired purchasing behavior in your stakeholders
- Standards for quality of goods and services, and compliance parameters for suppliers
- Departmental requirements for bid evaluations and contract negotiations
- Lifecycle evaluation policies for suppliers
4. Evaluate and refine
After building and launching your procurement strategy, conduct regular evaluations to improve and refine your policies. Use the data from tracked metrics to determine the success of your plan and adjust it accordingly. Include stakeholders in the evaluation through employee surveys to gain insight into how the new procurement policies work from a buyer perspective.
5. Employ technology
Increasingly, leading organizations are using digital procurement tools to establish their supply chain networks. These digital tools have introduced an era of automation that makes it much easier to put a procurement strategy into place and definitively track its impact on things like tail spend and maverick spend.
According to Boston Consulting Group, “Firms that use digital [tools] to manage tail spend can cut their annual expenditures by 5% to 10%, on average.” With a tool like Order, a good procurement strategy can address the short-term issues handled by a purchasing strategy, while also instilling a network-based perspective that can build long-term resilience in the face of uncertainty.
A procurement strategy needs a procurement tool
Cutting expenditures, finding better prices, and building resilience are only the tip of the iceberg when it comes to the benefits that the right procurement software can provide. Using Order, companies are streamlining and automating their strategic procurement practices, centralizing contract management, improving cost savings and cost reduction, building better procurement roadmaps, and using data to drive decision-making.
If you’re ready to join these forward-thinking companies in implementing a next-generation procurement strategy, schedule a demo of Order today.