Purchasing and procurement both relate to the sourcing and purchase of products and services. Procurement, in its simplest form, involves buying things, but if you ask any business person the same question, the answer may not be that simple. Most business people will say that any procurement process involves a series of activities that are crucial for an organization to procure the best products or services at the best price. Since most organizations today end up spending a lot of their revenue on purchasing goods, effective management of the entire procurement process becomes vital for companies looking to sustain themselves in today’s economy. Procurement is, for many companies, the major reason behind their success and will continue to gain importance among businesses of all sizes in the years to come.
Since both purchasing and procurement deal with the acquisition of goods, most of us have started using the terms purchasing and procurement interchangeably. But despite their numerous similarities, they do have very different meanings. Procurement, as discussed previously, is a multi-faceted process and involves steps such as supplier selection, screening, negotiating payment terms, setting up contracts, and finally purchasing the desired goods at the best possible rates. Purchasing, on the other hand, is a smaller process within the overarching procurement process. It basically refers to the process of how products or services are ordered and can be described as the transactional facet of the overall procurement process. Now that you know the basic differences between purchasing and procurement, let’s walk you through some of the major differences between the purchasing and procurement process.
The Procurement Process
In any business scenario, procurement is deeply intertwined with several core business functions. It is therefore influenced by the businesses’ corporate strategy and its commitment towards aligning both functions. To establish an effective procurement process, follow the four steps given below:
Step 1: Establish your company’s identity and know more about your values and ideals
Establishing your company’s identity and values in procurement is vital. Define your core identity, values, and a code of ethics to guide your purchasing processes. Ensure all employees understand and embrace these principles through training and communication. Assess suppliers for alignment with your values, considering ethical practices and sustainability. Encourage suppliers to adopt similar codes of conduct. Prioritize transparency and reporting, regularly reviewing and improving your approach. Implement audits, and accountability measures, and engage with stakeholders to maintain alignment with your company’s values and ideals in the procurement process, ensuring responsible and ethical practices
Step 2: Think about market placement and whether you want to appeal to a large or specific client base
In the procurement process, it’s vital to consider your market placement strategy. Determine whether you intend to cater to a broad or specific client base. Aiming for a broad client base focuses on mass appeal and high sales volumes, while a niche approach tailors offerings to a specialized, smaller group. Each has its benefits, including economies of scale for the broad market and higher margins for the niche. Your choice should align with your business objectives, resources, and the nature of your procurement needs, shaping your procurement strategies accordingly.
Step 3: Assess your company’s capabilities and find out your major strengths and weaknesses
Assessing your company’s capabilities is a critical step in the procurement process. Identify your core strengths, which may include negotiation skills, supplier relationships, or advanced technology. Concurrently, acknowledge weaknesses like limited resources, lack of supplier diversity, or inefficient processes. Understanding these internal aspects helps in strategic planning, risk mitigation, and optimization of procurement practices. It also allows you to leverage strengths and address weaknesses to enhance efficiency, cost-effectiveness, and competitiveness in your procurement efforts.
Step 4: Iron out management issues before they start affecting the company’s productivity
Addressing management issues proactively is essential in the procurement process to prevent disruptions in productivity. By identifying and resolving potential challenges in leadership, communication, and decision-making early on, you ensure smoother operations. These issues could include unclear roles, lack of accountability, or inadequate communication between departments. By ironing out these problems, you promote efficiency, reduce delays, and maintain a seamless procurement process, ultimately benefiting the company’s productivity, cost-effectiveness, and overall success.
A key thing to note here is that the steps mentioned above are not separated from each other but are often closely entwined.
The Purchasing Process
When you think of purchasing and procurement, always remember that purchasing is a smaller part of the overarching procurement process. Since it involves the buying of actual products or services, it includes the transactional part too, which is receiving goods and the subsequent payment. In the overall procurement process, purchasing is only related to:
Step 1: Order acknowledgment
Acknowledging an order is an essential step in the purchasing process. It involves the formal acceptance of a purchase order by the supplier or vendor. The process starts with the buyer (the organization) issuing a purchase order (PO) to a supplier, which outlines the products or services to be acquired, the quantities, prices, delivery terms, and other relevant terms and conditions. Once the supplier receives the PO, they review it carefully before sending an order confirmation or acknowledgment to the buyer. This document serves as a formal acceptance of the PO and confirms the agreement to supply the requested products or services. It should match the terms and conditions outlined in the original PO.
Step 2: Shipment notices and receipts
Shipment notices and receipts are integral steps in the purchasing process. Shipment notices, often generated by suppliers, provide advanced notification to buyers about the impending delivery, including tracking details and expected arrival times. Upon receipt of the shipment, buyers generate receipts to confirm the delivery’s accuracy and condition. These documents serve as proof of successful delivery and are crucial for inventory management and payment processing. They help ensure that the ordered goods match expectations and are in good condition, preventing discrepancies and facilitating the efficient flow of products through the supply chain.
Step 3: Invoice recording
Invoice recording is a pivotal step in the purchasing process. After receiving goods or services, the buyer’s accounting department records the supplier’s invoice, verifying that the charges align with the purchase order and agreed-upon terms. This step also includes data entry into financial systems and validation of payment details. Accurate and timely invoice recording is essential for cost control, tracking expenses, and ensuring timely payments, ultimately maintaining positive supplier relationships and financial transparency within the procurement process.
Step 4: Supplier payments
Supplier payments are a critical component of the purchasing process. Once invoices are verified and recorded, the finance department processes payments to suppliers. Payments can be made via various methods, such as checks, electronic funds transfers, or credit cards, depending on the agreed-upon terms. Timely and accurate payments are essential to maintain strong supplier relationships, ensure a smooth supply chain, and uphold the company’s creditworthiness. Managing cash flow and adhering to negotiated payment terms are integral to successful supplier payments in the procurement process.
The steps discussed here shouldn’t be tailored to suit the scope of your business since the nature and size of your business do not influence them.
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