The procurement field involves an end-to-end process which includes buying, negotiating contracts, finding suppliers, and several other in-field job scopes that go hand-in-hand with each other.
Part of this process includes procurement and purchasing.
A common problem is that procurement and purchasing often get confused and used interchangeably by one another. But, these two processes serve different purposes within the procurement process
What is Procurement? And what exactly is Purchasing?
To begin, let's view the common general definitions for these words.
WHAT IS PROCUREMENT?
Procurement can be defined as a sequence of tasks tied with buying products or services. It is an umbrella term that covers tasks that happen pre-, during, and post-purchase of goods and services.
A procurement process is a cradle-to-grave approach that starts from identifying needs and finishes only when that need is fulfilled, or no longer exists.
An end-to-end procurement process should consist of the following steps, where you should:
- Look at the market
- Spot potential suppliers
- Create a list of approved vendors
- Understand internal needs
- Create a purchase order
- Request proposals and evaluate quotations
- Choose an ideal supplier to negotiate with
- Receive goods and perform quality checks
- Develop and manage contracts
- Obtain invoice approvals and fulfill payment terms
- Establish a good rapport with the supplier(s)
From the step-by-step list above and the definition, we can get a rough idea of what the procurement process is.
To put simply, it is a start-to-end process of understanding what you/your company needs, and fulfilling those needs through suppliers.
Simple and straightforward. So what about purchasing?
WHAT IS PURCHASING?
Now that we know what procurement is, let's understand what purchasing is.
Purchasing can be said to be one of the activities involved in the procurement process. It is a simple transaction where one party pays for and receives goods or services. A simple example would be, businesses making purchases of office supplies, and/or tables. A transaction for goods needed by a company; simple and to the point.
However, for a majority of the time, little thought is put into purchasing strategy. But what's in a purchasing strategy?
The list below breaks it down into 5 aspects.
ASPECTS OF PURCHASING STRATEGY
1. Order Placement:
Typically, goods and services are ordered as needed. Purchasing reactively comes with many money-wasting issues.
As such, purchasing only when needed without approved purchase orders (PO) can be said to be mistakes made by businesses with a lack of foresight and control of the budget.
2. Supplier communications:
Having steady and reliable communications with a company’s suppliers helps in reducing the time spent on purchasing.
As there is a known source of specific goods in contact, the need to search for another when the next round of purchases occurs is removed.
However, it should not lead to the purchasing manager to be complacent in finding new suppliers and options, with better value.
3. Track record of goods received:
When purchasing, a useful and easy strategy is to have protocols for recording and tracking purchases.
In simpler terms, having/giving a receipt for the agreed transaction will help both the business and supplier keep the deal in check.
4. Invoice receipting:
For most businesses, invoices are usually sent to the accounts payable (AP) team. Accounting software can help to ensure that the major part of the work is digital.
5. Supplier payment:
Businesses that have late payments, over-payments for items not delivered, and duplicate payments, typically don’t have the 3-way matching to verify the invoice against the PO and packing slip in place.
With no consideration of a proper purchasing strategy, businesses are left vulnerable to threats such as fraud, overpayment and other forms of money wastage.
What is a good strategy though? Let's take a look into some factors to consider in making a strategy, as well as the importance of it.
First off, let's consider some corporate-related factors before going into procurement strategies.
What does your business do?
What beliefs inform your business model?
Who are your customers?
What do they want?
What are your strengths and weaknesses?
How do you want to grow?
Do we need to hire/develop talent to lead us to our goals?
Does the company have the resources needed to achieve our goals?
These corporate factors relate back to procurement. For example, if your business is growing, then your strategy should show it too. New agreements with suppliers should help your business in the growth stage, rather than hinder them.
With how fast information is traveling, potential customers might hear about your intent to grow through a larger strategy. Depending on how a business handles it, this could help snowball the growth of the business and, attract and secure more customers.
If you have been in the procurement field, you may have experienced a variety of troubles and annoyances. Maybe the workflow changes too often, maybe it takes too much time to procure some goods or services.
It might also prove to be difficult to find the vendors you want, or new vendors to help supply for a new business need. These common problems are usually:
1. Challenges in Mitigating Risk
One major challenge in the procurement process is supply risk. Some other types of risks include but are not limited to, delivery risks, potential fraud, cost, quality, and market risks.
There are even risks painful enough that procurement leaders lose sleep on such as compliance risks like anti-corruption and policy adherence.
Risks are basically everywhere and will require constant vigilance which is why it poses a problem. Some risks are easier to mitigate, and some risks can only be kept to a minimum and not fully mitigated.
2. Dark Purchases
When a purchase is made outside of the procurement process, it falls under the area of dark purchasing. This kind of uncontrolled spending will ultimately cost businesses a lot.
Dark purchasing occurs when items purchased cannot be justified by either capital outlay or material inventory.
The resulting loss of control and revenue from dark purchases are always being tackled by many organizations, be they big or small.
3. A Lengthy Process Cycle
Usually, businesses develop a sense of urgency to procure products and services due to the procurement being done at the last minute.
As such, companies would have to wait longer for the lead times and procurement cycles to finish. Commons reasons for delays in the procurement process are listed below:
Delayed preparation of technical specifications/TOR/SOW
An overlooked procurement schedule
Having an extended timeline to submit bids/proposals
The evaluation process failing to begin on time
Contract negotiation setbacks
4. Inaccurate Data
Accurate and reliable data is needed so that organizations are able to make sound decisions in procurement.
Excess inventory, inventory shortages, and other additional procurement problems have a potential impact on an organization's bottom line when based on inaccurate data.
5. Lack of Strategic Procurement
Businesses are beginning to realize the need and benefits of having a strong procurement strategy in place, due to the process becoming more collaborative and strategic.
That said, the challenge for companies comes from fully understanding the implications of strategic procurement as well as implementing it within the units of their organization.
6. Issues with Suppliers
Supplier management remains one of the greatest challenges in procurement. The whole process is filled with complications; from identifying the best-suited supplier, to tracking the performance of vendors, and ensuring quality products are in steady supply.
Let's recap. Procurement is a process of buying products and services, from surveying the market to finalizing a chosen vendor to buy from.
Purchasing is the activity within procurement where the transaction between buyer and vendor happens.
We've also gone over aspects to consider in your procurement strategy and problems within procurement.
To help address some of the problems in procurement, companies like SAP Ariba, and ORACLE address certain through cloud technology.
SAP Ariba offers procurement solutions addressing procure-to-pay, procure-to-order, and cataloging problems.
ORACLE offers a streamlined method to help your source-to-pay processes through social collaboration and automation, while gaining higher margins and controlling cost.
These are just some of the procurement solutions provided by these companies, who offer a large array of tools for other needs in supply chain management and much more.
Hopefully, you have found this article, do check out our blog to gain more information on procurement.