What is procurement? Isn’t it the same as purchasing? There is a lot of confusion in the business world when considering procurement and purchasing. Procurement involves the process of acquiring goods or services from start to finish, from finding suppliers to negotiating contracts to signing the first PO. Purchasing, on the other hand, simply refers to the ordering and receiving of goods or services.
One can’t purchase if they have not followed the procurement process first. Purchasing, however, may also be part of the procurement process.
Why Is Knowing This Difference Important?
Let’s say that your business needs to have some toilet paper restocked in your bathrooms. You know that you can purchase these supplies at the local grocery store because you’ve shopped there before. That previous experience is procurement. The act of going to the store to purchase the toilet paper can be defined as purchasing or part of the procurement process. That final act depends on one’s personal perspective.
But why settle for paying retail unless you have an immediate toilet paper emergency? Now let’s say that you’ve got 3 weeks to stock up your supplies of toilet paper. You’ll want to find the best possible price for the best quality toilet paper your budget can afford, right? This means you’ll might take the following actions.
- Research toilet paper suppliers online.
- Negotiate pricing for bulk toilet paper supplies.
- Compare and contrast pricing structures for short-term and long-term arrangements.
That entire process is procurement. It is something tangible that you actively pursue from an external source.
Internal Payments Are Not Actually Procurement
Imagine that your business has a division that actually makes toilet paper. Let’s say that it is the softest, 6-ply toilet paper that the world has ever seen. Your business sells this toilet paper for $4 per roll because it is so awesome. This is the toilet paper that you want in all of the company bathrooms, so you speak to your toilet paper manufacturing division about providing an internal supply.
Although the actions between departments would follow the procurement process, it is not procurement because you are not receiving your toilet paper from an external source. Procurement only happens when you secure goods and services from a third party.
What about wholly owned subsidiaries? This is the one complication in the procurement process. Now let’s say that the toilet paper manufacturing process is operated under a dba and runs under a different branding flag in your community. It may or it may not be procurement in this instance. It depends on these factors.
- Are employees paid by the dba toilet paper manufacturing brand or the home brand?
- Does the home company have full control of the business or is it independently operated?
- Does the toilet paper manufacturing division have its own policies and procedures that operate independently of the home operation?
If there is home company influence over the dba, then it isn’t technically procurement. If both agencies operate independently of one another, however, then it is not unreasonable to consider the actions of securing 6-ply toilet paper for every bathroom an act of procurement.
Why Should Procurement By Emphasized?
Now let’s say you have a toilet paper emergency and you run to the local store to pick up a package. When you get there, you’ll find that some rolls are priced at $0.50 per roll, while others are priced at $2 per roll. Which ones do you purchase? When there is a process of securing goods at the best possible cost in terms of quality and quantity, and time for some products, then this is actually procurement that is happening – even though the individual is in the act of purchasing.
Procurement doesn’t have to be direct as described above. It can also be indirect in nature. What if the toilet paper rolls in a bathroom won’t accept the new toilet paper, for example? What if the rolls are just too large? You’ll need to secure new toilet paper holders or provide maintenance on the existing ones to accommodate the new product. This would be considered indirect procurement in relation to the products that have already been secure.
Procurement is about finding the best possible product at the best possible price. Purchasing means to authorize the payment for these goods or services. By understanding the difference, it becomes a lot easier to define job functions and ultimately save some cash.