Procurement and Purchasing In Supply Chain Management

Supply chain management is an extensive process that comprises various small and vital parts. Procurement and purchasing are two crucial parts of this process. Usually, both these terms are mixed up by people because both functional areas correlate and intersect.

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You may initially confuse how these terms as they are so interlinked with each other.

The primary purpose of supply chain management is to smooth the production process from purchasing raw material to the final product’s manufacturing.

In simple words, procurement and purchasing are the starting points of any organization’s supply chain management process.

Procurement – A Fine Process of Finding Feasible Supplier and Resources

Let’s dig a bit deeper to discover what exactly procurement is.

It selects the feasible supplier and resources for acquiring products and services required to complete the manufacturing process. This process aims at minimizing the cost of raw materials and other services without compromising quality.

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Generally, the procurement process begins before making the final purchase. For effective results, management has to consider various factors while selecting the vendors or suppliers. They have to consider the business model, size of an organization, budget, etc.

How To Get Maximum Benefit From The Procurement Process?

However, the procurement process varies from company to company based on structure and size. But if you follow the typical steps mentioned below, you can get the maximum benefit from the procurement process.

●     Identify The Needs

The procurement process starts with the generation of demand from any department of an organization. At this step, organizations identify the needs for that demand and assess the importance of the product.

This demand could be for the routine material or can be for a new item that is not used before in the organization. Usually, department heads send the inventory manager’s needs and if that product is not available in the stock. They send to the procurement department or executives the request to start procurement for that product.

●     Generate Purchase Request

After analyzing the need for any product or service, the inventory department makes a purchase request. Usually, this request goes to the procurement department, and financial controllers review the proposal .

Upon accepting the purchase request, this request is automatically converted into a purchase order and forwarded to the procurement department to start the process.

In case the request is denied by the management, it returns to the person who generates it, along with the reason for rejection.

●     Supplier Verification and Selection

It is the most critical step and the top priority of every organization to get goods and services at a minimal cost. That’s why the procurement department is crucial in an organization.

After receiving the purchase request, they start getting quotations. Meanwhile, they launch the supplier verification process to know its reputation and capacity as well as capabilities.

At this step, procurement managers have to make some significant decisions. They have to perform price negotiations, know about the minimum order quantity, compare the quality with price from different suppliers, settle payment terms, and few others.

However, some organizations keep the catalog of suppliers and vendors easy for the procurement department to quickly find the best supplier.

●     Order Goods

After completing the negotiation and verification process, the order goes to the selected vendor or supplier.

Usually, the procurement department involves purchase staff at this stage. They contact the supplier and ensure the order’s acceptance and ensure the expected delivery date.

All the terms & conditions come with the purchase order provided to the supplier, together with the price & total amount.

The purchase department remains in contact with the supplier until the goods arrive within the organization’s premises.

●     Receive & Verify Goods

On the delivery date, purchase personals are responsible for receiving the goods and verifying the stock as per the purchase order.

They have to check the products in terms of quantity and quality. If any defect, they reject the entire shipment or can accept the partial delivery and mention the delivery order’s problem.

Usually, the purchasing department completes the verification process using a three-way verification process.

For example, they can match the purchase order, packaging slips, and supplier invoices to ensure the correct delivery. It helps to detect any problem on the spot rather than creating a dispute later on.

●     Payment And Recordkeeping

After receiving and verifying the goods, purchase personals are responsible for arranging payment to a supplier as per decided terms and conditions.

Furthermore, the procurement department also manages the purchase and payment-related record keeping. They have to complete the voucher and all the supporting documents for accounting and tax purposes.

Role Of Purchasing In Effective Procurement Process

While talking and knowing about Purchasing, it is essential to note that purchasing is a subset of the procurement process.

It usually starts at the time of placing an order to a supplier. As we mentioned earlier, the purchasing department is responsible for receiving the goods and arrange for payments.

The following are the responsibilities that any purchasing department carries out in the whole process.

●     Ensure the acceptance of purchase order by the supplier

●     Make a physical visit to suppliers place to ensure the quality of goods in the manufacturing process

●     Continue constant communication with the supplier to ensure on-time delivery

●     Receive the products as per the specifications and quantity mentioned in the purchase order

●     Verify the price and quality of goods

●     Make payments to suppliers

How To Distinguish Between Procurement And Purchasing

Usually, many people take procurement and purchasing in the same context, especially in small organizations. Because they have to work with limited resources and a shortage of employees is one of the significant reasons to combine both processes.

In short, in unorganized or small organizations, the purchasing department must complete the procurement process.

They are solely responsible for assessing the needs, contacting the supplier, acquiring quotations, doing negotiations, and all the other steps required to complete the purchase process.

However, there is an apparent difference between these two terms. Procurement is a strategic process.

Organizations adopt this process to get goods available at a low cost. The procurement department is responsible for searching, negotiating with suppliers, and selecting the most cost-effective supplier.

While the purchasing department has to contact the supplier suggested by the procuring department and ensure the supply of goods, they have to ensure the delivery of products as per prescribed terms and conditions at a specified time.

The Effect of Information Technology on Procurement and Purchasing

Technology has a revolutionary effect on different matters of our life. Bu, the commercial sector is on the top of beneficiaries of the latest technologies. 

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Many organizations take advantage of information technology to reduce costs and enhance their profits.

The following are the main benefits of using information technology in the procurement and purchase process.

●     Data Collection

The procurement department has to face many challenges in the procurement process, and data collection is one of them.

Usually, after generating the demand and approval of purchase requests, procurement personnel should contact various suppliers. If they have to find the suppliers from scratch, it is a tedious and time-consuming process.

Information technology helps collect the data in a centralized platform that helps analyze the supplier behavior. It also enables the procurement officers to compare prices, quality, payment terms, and many other things to select an efficient supplier.

●     Global Procurement

Global procurement is one of the most attractive features of E-procurement applications. It compares the cost of goods purchased from local suppliers with international suppliers.

Procurement officers can get global suppliers’ gross value, including freight charges, customs charges, insurance, and any related cost.

It is easy for the management to compare the price and quality of goods supplied by local and international suppliers. They can select the more cost-effective supplier and in favor of the organization.

●     Improved Operational Performance

Automation in the procurement process provides several benefits for organizations to reduce operational costs. It lets the management assess the delivery time and track RFX events and track purchase orders.

However, the management can manually function, but it will take a lot of time and resources to execute.

●     Reduce Errors

The integration of information technology in organizations reduces the need for paperwork in all departments. It is easy for organizations to save the information electronically.

It helps reduce paper cost and make it easy for the employees to find the previous records and suppliers’ data.

It is also beneficial to reduce the risk of human errors while comparing past orders.

Conclusion

Organizations need to understand the difference between procurement and purchasing. Because organizations have to pay a substantial amount to acquire goods and services, it reduces the cost if appropriately implemented.

Automation in the procurement process provides additional benefits by improving the collaboration between different departments and executive management.