I’ve heard “purchasing” and “procurement” used synonymously more times than I can count. Though these terms refer to concepts in the same realm, it’s important to understand the nuance between the two when “nerding out” in functional discussions (Oh… Am I the only one who does that?). All kidding aside, the distinction is important enough that the Chartered Institute of Procurement and Supply (CIPS) changed the “P” in their acronym from “Purchasing” to “Procurement” in 2014. Using the right term in your discussions is a question of credibility with other procurement professionals when trying to drive points home.
Defining the Terms
I define procurement as the complete set of strategic, tactical and operational processes that companies use to optimize supply outcomes for needed external goods and services. This includes:
- Spend Analysis & Sourcing
- Negotiation & Contract Management
- Operational Purchasing (Procure-to-Pay)
- Accounts Payable
- Vendor Data & Performance Management
- All other processes supporting procurement activities
Purchasing, on the other hand, is a reactive, transactional process which starts with a requisition and finishes with invoice payment to a supplier. This includes:
- Stock Purchases (Inventory)
- Non-Stock Purchases (Expense)
- Subcontracting
- Consignment
- Etc.
Essentially, a company can purchase without procuring (although I would argue that it shouldn’t!) but the opposite is not possible .
To further help illustrate the distinction, CIPS highlights that procurement aims to provide the following benefits to the business:
- Security of supply
- Lower costs
- Reduced risk
- Improved quality
- Greater added value
- Increased efficiency
- Innovation
In contrast, purchasing simply aims to get the right good or services to the right place at the right time at a reasonable price.
Why Does It Matter?
If your company has a “purchasing” function instead of a “procurement” function, it says a lot about the relative importance attributed to the function within the organization. This has an effect on employee, potential hire, supplier and industry perceptions of your procurement maturity level.
Additionally, if you’re to have any success establishing a clear and effective corporate procurement policy, defining terms is critical. Rules can only be effectively defined and subsequently enforced if a common language between you and your stakeholders exists. If they are to remain engaged and view procurement as a valuable function, you need to make it easy for them to come into your world.
Purchasing is about transactions that get you what you want when you need it. Procurement is about building long term, win-win relationships with partners to get the whole supply chain performing at the next level; it’s about maximizing value creation for the company.
To start procuring instead of purchasing, all you need to do is start exploring the “why” behind purchasing decisions in addition to the logistical “how”? If you’re already doing this, start integrating the word that demonstrates it into your organization (naming conventions, roles, vocabulary, etc.).
The rest will follow.
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Does your company have a “purchasing” or a “procurement” function? Do you feel it reflects the overall functions’ maturity? Are you thinking about the “Why” behind your buying decisions? Let me know in the comments.
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Last Updated on January 18, 2021 by Joël Collin-Demers
2 thoughts on “What’s the Difference Between Purchasing and Procurement? Why Does It Matter?”
Have read your interesting post on Purchasing / Procurement and have only one comment… there is mention of the following, “Purchasing is a process, procurement is a function” (below your diagram), yet ‘purchasing’ is cited as/associated to a function and ‘procurement’ as/to a process within the post?
i.e.
1) I define procurement as the complete set of strategic, tactical and operational processes that companies use to optimize supply outcomes for needed external goods and services.
2) If your company has a “purchasing” function instead of a “procurement” function, it says a lot about the relative importance attributed to the function within the organization.
3) Does your company have a “purchasing” or a “procurement” function?
Good catch Mario.
My intention in the article is to differentiate between a “business function” (such as the sales department, accounting department, HR department, etc.) and a process. I didn’t take the time to define these terms in the article so I may have used a shortcut for the point #1 you identify as I consider that procurement is a set a processes and a business function.
For me, a business function is an organizational structure element that enables the grouping of a collection of processes under a single umbrella. Usually, this grouping of processes would be governed by a single functional leader (i.e. CPO – Chief Procurement Officer). That is why I refer to procurement as being both a function and a set of processes.
Hoping this brings a bit more clarity to the point I was trying to make.