When it comes to acquiring goods and services for business functioning, the terms “purchasing” and “procurement” are often used interchangeably, these are often mistaken as the same thing. Those two words, however, have their differences in terms of objectives, the people involved, tasks covered and goals achieved for the organisation.
The question we should ask is, what if your organisation is unable to differentiate these two terms?
It can have a significant impact on your cost savings objectives and potentially your organisation’s bottom line. If you or your team members are still struggling to tell the difference, it shouldn’t be a concern as we have listed the differences between procurement and purchasing to solve your problem or any uncertainty on these two terms.
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What is Procurement?
Procurement refers to the process of sourcing, selecting, and acquiring the goods and services that a company requires from the vendor through direct purchase, competitive bidding or tendering process to fulfil its business objectives. Implementing an effective procurement strategy can save your company money and also ensure supplier quality, efficiency and timeliness. Procurement can be direct or indirect in nature.
Purchasing, on the other hand, is the process of how goods and services are ordered. Unlike procurement, it is a simpler process of purchasing commodities where it starts and ends with placing and receiving an order. Tasks such as ordering, raising purchase orders, receiving and arranging payment are involved in purchasing. Thus, purchasing is a subset of the broader procurement function.
What is the difference between indirect and direct procurement?
Both direct and indirect procurement are crucial to a business’ growth. By understanding the similarities and differences between the two, it helps your business to plan for an effective supply chain and spend management policies.
So what are the differences between the two?
Direct procurement when put simply, is the acquisition of goods, materials and/or services for production. Examples of direct procurement could be raw materials, machinery and resale items. These purchases are made frequently and in large quantities to drive your company’s external profit and continuous profit growth.
Indirect procurement, on the other hand, is the act of sourcing and purchasing materials, goods or services necessary for internal use. This includes things like utility bills, logistics, technology and facility management. In other words, indirect procurement is required to keep your day-to-day business alive. Indirect procurement usually involves up to 27% of the overall revenue of a business.
A lack of visibility in indirect spend brings forth a significant challenge. You cannot control what you cannot see, and you might not have the processes in place to measure the amount of money you are spending on indirect purchases. Investing in the right tools will help your company to reduce cost, improve process efficiency, and extract greater value from everything from office supplies to industrial machinery.
If you are keen on improving your company’s indirect spend, it is time for you to invest in the right e-Procurement software solution.
The 7 Key Steps of a Procurement Process
Every business has a procurement process that is unique to them and transparency is important in every step of the process. Although the procurement process of companies differs from each other, it usually involves several elements, which are determining procurement requirements, raising a purchase order, receiving an invoice and order, and fulfilling payment among others.
To provide better clarity of it, we have come out with the steps involved in procurement.
- Identify goods or services needed
The process starts when any of the business units of your organisation requires goods or services. In terms of these requirements, it can be internal materials needed to operate the business or external materials that the company will sell. Setting a budget is also required at this stage. By doing this, you can have better visibility of all spend required in your business. - Vendor selection
Your procurement team will then identify potential vendors by evaluating them and finally selecting the most qualified supplier for the requirements. During the decision-making process, reputation, cost, speed of service and reliability all need to be examined. This is because it could impact your whole organisation negatively if you choose to partner with the wrong vendor or supplier. The vendor who offers maximum value and the best market pricing earns the deal. - Submit purchase requisition
After the selection, the team that requested the order will create a purchase requisition document and submit it to the procurement department for review and approval. This document can be in a written or electronic form and comprising all the key information required such as quantity, price and vendor information to procure the right goods or services. - Generate purchase order
Once the purchase request has been approved, your finance department will then issue a purchase order (PO) to the selected vendor. This document informs the vendor that the purchase request has been accepted and they can proceed with the request.
In today’s digital era, POs are usually created using electronic purchasing systems or an easy-to-use Procure-to-Pay software, which allows companies to easily create their PR and also auto-initiated PO creation upon approval. POs are considered legally binding documents if there are no contracts involved. - Receive invoice and order
After the vendor accepts and acknowledges a purchase order, he will submit an invoice to your company. An invoice describes exactly what the order includes and offers verification of the payment agreement between your business and the vendor. It will also issue a payment deadline where you need to submit payment before the deadline, otherwise, a penalty will be levied.
Normally, companies offer a “30 days of credit notice”, which gives the purchaser a leeway to make the payment. Then, the vendor will send over the purchased goods or services requested. At this time, you have the chance to notify the vendor of any issues with the good or service.
- Pay for goods or services
After confirming the goods or services received, the payment process commences. In the accounts payable process, a three-way matching procedure is carried out to match the invoice against the approved PO and the delivery details for the order. If the terms are aligned and accurate, the finance department will send payment to the vendor within the specified timeframe.
- Record for audit
All steps above need to be documented for audit purposes. There will be a central location where all invoices, orders and other accompanying documentation are stored. It provides evidence for auditors to make a conclusion about the achievement of the overall objective.
Why Does Your Business Need An E-Procurement System?
Today, procurement managers wear multiple hats and handle a variety of tasks- from recognising the need for a product or service to vendor management and processing of payment. A day is never dull in the procurement department. Therefore, many organisations are moving to a cloud procurement system like ADAM because it allows them to minimise inefficiencies and streamline end-to-end procurement workflows. No data will be lost and items can be raised, approved or rejected immediately by stakeholders.
Below are the reasons why your company should automate the procurement management process:
- Improved efficiency
Traditional procurement is time-consuming since every step of the process involves a person. With an online procurement system, you can easily manage PO-related activities since everything can be saved and stored electronically. For example, it frees up your employees’ time by eliminating unnecessary tasks which allows them to focus on other core tasks.
- Your Data Within One Platform
The traditional way of procurement takes a tremendous amount of effort to monitor the records and keep track of the archived ones. Older documents are often lost too. With a single, unified platform that includes all relevant functionality at its core, your company can enforce compliance in procurement across all departments by making it easier and faster for employees to make purchases and get swift approvals for the same.
- Better supplier and vendor relationships
If you are still using the traditional paperwork method, urgent purchasing will not be done easily. The urgent requirement will be delayed for a while by time spent, different department dependency and the slow response of approvers/suppliers. With automation, you can approve purchase orders and invoice swiftly. This means that you can access it anywhere, anytime and on any computing device such as phone, laptop or tablet. Therefore, you can make payments on time and build better relationships with your suppliers and vendors which will benefit you in the long term. Find out more on how ADAM can help your company to enhance supplier relations here.
- Increase Spend Visibility
Since several parties like end-users, procurement departments, finance departments, approves and suppliers are involved in the procurement process, this will lead to a loss of control and less visibility on the expenses. Using procurement automation software makes it easier for your company to write and analyse reports where you can ensure that your procurement procedures comply with your policies. It is also easy to track prices of goods and services procured because of price transparency within the system where you can compare deals from different vendors or suppliers.
- Reduced Errors
When the number of data increases, errors and omissions can easily occur. It will lead to inaccurate information that can cost you deals, customers and vendor relationships. But with procurement software, record-keeping is simpler where electronic paperwork is streamlined and much easier to check for errors. It minimises the chaos made by paperwork. Additionally, past orders are more easily referenced, where you can compare orders to ensure new ones are accurate.
What’s Next? The Future of Procurement
Procurement is more than just the purchasing of goods, services, or works from external sources. Now, a procurement department is mandated to execute three main functions:
- Manage your organisation’s spending
- Support operations
- Protect your organisation from risk.
According to the American Society for Quality (ASQ), 15% of an organisation’s expenditure is spent on purchasing poor quality products or services. Strategic planning is necessary for your company to procure these items at the best possible cost, meeting your quality, quantity, location and time.
Most businesses digitalise their procurement by adopting e-Procurement systems, especially in the world today where remote working may be a requirement. It is critical to ensure that the workflow is not interrupted. Imagine your company is still adopting a traditional offline procurement process where your employees can’t do anything during this pandemic period and your company is losing money!
Fortunately, ADAM helps to digitise your source-to-pay process and offers solution-driven features to make your procurement journey more efficient.
Looking for software that strengthens your company’s procurement process and minimises the chance for errors and fraud? Sign up now for a free demo to see how ADAM can streamline your business’s procurement process and in turn, save costs.
FAQ
Procurement is the process of purchasing goods or services and it is usually referring to company spending. It requires preparation, solicitation and payment processing, which usually involves multiple departments within a company.
The procurement team’s role is to negotiate deals and look for the best providers which can deliver significant value to the company. They help their business units find the right goods and services while adhering to the company’s internal policies.
Procurement is recognised as a strategic function that aims to increase the profitability of the company. It is seen as assisting in the streamlining of processes, the reduction of raw material prices and costs, and the identification of better supply sources.
Procurement management is the strategic approach to managing and minimizing organisational spend. It entails obtaining high-quality goods and services from preferred suppliers within a set budget and on or before a deadline.
