Procurement vs. Purchasing vs. Supply Chain Management

Logistics can be confusing. Procurement and purchasing — what’s the difference? And how are they related to the supply chain? That’s what we’re going to tackle in this article.

Procurement First, Purchasing Follows — And They’re Both Within the Supply Chain

The best way to understand the difference between procurement and purchasing in a business is to consider the process involved in buying a car, says Trent Morris. He’s a procurement consultant with more than a decade of experience, so if anyone’s going to be able to give you a solid definition, it’s him.

Let’s start with procurement. If you’re going to buy a new car, you usually decide what you want before you step out into the street. You consider, for example, the number of seats you want in the vehicle and whether you want a four-wheel drive, a sedan, or an SUV.

Then you start looking at all the manufacturers and what they have to offer. Once you have done that, you move into getting prices on the vehicles.

This first part, where you are doing research into the industry, that’s procurement. Procurement is understanding how much you want to spend, the type of car you want, and how many seats you need. It’s looking at what’s available on the market, the different suppliers, what their products are like, whether they match your needs — it is not actually buying the product.

Once you know what you want, you go out and find what you want for the right price. This is purchasing. But it’s not only the price. Sometimes it’s the service capability of the dealership. It could be the after-purchase service or the warranties that you are after. But all of those things become purchasing as opposed to procurement.

Purchasing is considered a subset of procurement, and we generally use it for the transactional aspect of buying goods and/or services. It can be anything from creating a purchase order through to managing payments. In smaller businesses, procurement and purchasing might be considered the same thing.

Supply chain management covers both procurement and purchasing, which are part of the supply chain. The supply chain encompasses much more than just purchasing or procurement — it starts with the sourcing of raw materials and finishes with the end consumer. Somewhere in the middle of the supply chain journey you’ll find procurement and then purchasing, which are both considered to be important parts of supply chain management.

The Link Between Procurement and Purchasing

As mentioned above, we would suggest that purchasing is a subset of procurement, in as much as procurement serves to guide the purchasing process.

A purchasing manager or purchasing officer typically won’t buy anything unless the contract has been set up by procurement, so in that way procurement and purchasing are linked.

Sometimes these functions are decentralised — an operations team may look after purchasing if you’re talking about widgets or something like that, but if you are talking about something more indirect, like travel, that may be governed by a centralised body.

In a small business, usually, it’s going to be a senior person or a director saying, “We’re going to buy our widgets from this supplier,” and negotiating the supply and prices and so on, and then an admin person or someone in purchasing actually does the buying.

Procurement typically has the authority on behalf of the business to engage with suppliers to make deals. The person who is executing those deals is the purchasing officer and would typically be a more junior resource in the business. Now, let’s look at another aspect of procurement.

Category Management

If you look at procurement as a function of the business, typically it will look after three separate parts of the business. In simple terms, category management is the understanding of what you’re going to spend and how you’re going to spend it.

The way it works is as follows: a category manager would hand off to a sourcing team, and the sourcing team would go out and set up the supply. They would then hand off to a supplier relationship management team, which would make sure the supplier is performing according to the requirements of the contract.

Typically there are three categories at a very senior level:

• Direct spend: This is the product sold to the market, such as raw materials, hardware, and components. In the fast-moving consumer goods (FMCG) space it could be the ingredients of the liquids, the tins, the bottles — anything that touches the product.
• Indirect spend: This includes everything else that is used to get the product to market, either from a supply perspective or a demand perspective. This could include office furniture, equipment and supplies, computers, and expenditure on maintenance and services needed for day-to-day operations.
• IT and other information services: This is a complex environment on its own and requires specialist knowledge.

The Chain of Responsibility

Now we come to the all-important question: where should procurement report within the business structure? There are two possibilities.

• When the vast majority of a company’s spend is in the direct space, procurement would typically report to the Operations Director, who would want to understand the requirements around the capital employed, etc.
• In a lot of organisations, however, procurement reports to the Chief Financial Officer.

Logically, the reporting responsibility straddles both of these teams. But who procurement reports to is not as important as the fact that it is required to engage with all parties to ensure that the money is being spent well and the business is getting the value for money that it wants.

Getting a Job in Procurement

An easy way into procurement is simply to stick your hand up and say to the management team, “I’m interested in procurement.” But make them understand that you want to go in at a point where you have had some experience.

Another way would be to come in at a more junior level, maybe through a graduate programme. We have a more in-depth article about all the roles available in procurement, but let’s take a quick look at the various jobs that are available in procurement.

1. Chief Procurement Officer

The CPO has overall responsibility for the purchase of components and equipment, and for all procurement contracts. The team under the CPO will negotiate the prices, terms of delivery, and technical specifications of the contracts.

2. Procurement Analyst

The person holding this post is expected to forecast future costs of materials based on historical purchasing costs — in other words, be an expert in data analysis. He or she should keep tabs on what is being spent, what materials are being bought, and who is supplying these materials.

3. Supplier Relationship Manager

As mentioned above, the Supplier Relationship Manager will make sure the supplier is performing according to the requirements of the contract. Ideally, the person holding this post should enjoy engaging with people and helping to get the best out of them.

In a Nutshell

The difference between procurement and purchasing can be understood using the analogy of buying a car. Procurement is looking at the market, all the different brands and their features, and which brand you might want to buy; purchasing is going out, negotiating the deal, and buying the product. They both make up integral parts of the supply chain, and logistics companies like ours specialise in supply chain management — making sure the whole process runs smoothly.