Procurement, Purchasing and Sourcing— What’s the Difference?
Procurement, purchasing and sourcing— what’s the difference?
by Salim Khalife, Founder & CEO
Terms like procurement, purchasing, and sourcing are often used interchangeably. Purchase orders and requisition documents are another set of similarly confused terms. And furthermore, there are even compound versions like purchase requisitions and procurement orders. While the terminology is all related, each has a distinct meaning, and a working understanding of the distinctions helps us gain a better understanding of the overarching procurement cycle. We’ve also dropped in a quick set of reference statistics about each term to help illustrate its importance to the organization.
What is Procurement?
Procurement is the business function concerned with acquiring (procuring) the goods and services that are vital to an organization. So, procurement is essentially the umbrella term under which you’ll find purchasing, sourcing, requisitions and purchase orders.
Procurement involves a number of steps, with each step in the procurement process presenting both risks and opportunities for efficiency gains. To add another term to the mix, the process of purchasing goods and services is often referred to as the Procure-to-Pay Cycle. The commonly acknowledged major steps in the cycle include:
- Needs recognition
- Requesting goods and services
- Review and approval
- Purchase order
- Receipt of goods or services
- Receipt of invoice
- Pay invoice
Why is Procurement Important?
A well-designed procurement process helps an organization:
What is Purchasing?
Purchasing refers to the portion of the procurement cycle that is actively engaged in buying a product or service from a supplier. Think of purchasing as the transactional portion of procurement. If procurement is the subject, then purchasing is the verb. Tasks that directly relate to the process of how goods and services are ordered are purchasing while activities such as strategic sourcing and vendor contract negotiation constitute procurement.
Why is Purchasing Important?
Purchasing is a subset of procurement where the savings can really add up:
- Save money by organizing, consolidating and optimizing purchases.
- Increase visibility with requisitions and purchase orders that organize, identify and track purchase requests.
- Boost efficiency with tools including guided buying catalogs, mobile requisitions and automated approval routing.
What is Sourcing?
As the term implies, sourcing is concerned with finding the best supplier for goods and services. Sourcing is the subset of procurement that comes before any purchases are made. Here we can tack on another term: strategic sourcing. Strategic sourcing generally refers to a process of developing supply channels at the greatest value, not just the lowest purchase price. While it might sound simple, it is a broad and far-reaching subject. It’s noteworthy that there are certification programs and even degree programs available to teach the specifics of strategic sourcing.
Why is Sourcing Important?
Sourcing adds value to the procurement cycle:
Is it a Purchase Order or a Requisition?
These two terms are often used interchangeably, but they serve different purposes and are used in different stages of the procurement cycle.
- Requisitions are internal documents. A requisition is a form that an internal department or individual submits listing items it wants to order from an outside vendor. Once these requests are approved, the organization issues purchase orders to suppliers for the requested goods or services.
- Purchase Orders are official documents issued to your suppliers, and when accepted form legally binding contracts. Purchase orders detail the items a purchaser agrees to purchase at a certain price point. Among other information, the purchase order also outlines the delivery date, shipping arrangements and payment terms.
Whatever we call it — it adds value
While correct terminology is important, what’s more important is the understanding of the vital role procurement and its related sub-components play in the success of an organization.
Research shows that companies with high performing procurement organizations have profit margins 15% higher than the average company. Deloitte has found that strategic sourcing and procurement improvements can yield savings of 5-20% across multiple categories.
Becoming a high performing procurement organization first requires an understanding of how the elements of procurement work together and how each contributes to the overall success of the procurement function.
About the author:
Salim Khalife is the founder, president and CEO of Paramount WorkPlace, a technology company that develops, sells, and supports advanced web-based and mobile requisition, procurement, and expense software solutions for mid-market organizations. The company introduced its first cloud-based SaaS requisition application in 1997 and continues to innovate and expand its partnerships and integrations ever since. Learn more at www.paramountworkplace.com.