Difference Between Procurement, Purchasing, and Sourcing

Procurement, purchasing, and sourcing are often used interchangeably, but they refer to different aspects of acquiring goods and services. This can lead to confusion, especially for those new to the field. Hence, understanding the difference between the three terms is important.

This article aims to clarify these terms and explain their unique roles in the business process. This article will provide you with a clear understanding of what's procurement, purchasing, and sourcing.

What is procurement?

Procurement is the overall process of acquiring goods, services, or works from an external source. It involves identifying what the business needs, finding the best suppliers, negotiating terms, purchasing the goods or services, and managing the supplier relationships.

Key steps of procurement

• Identify goods and services required by the business.
• Create a formal request for the required items.
• Review and approve the request by the appropriate authorities within the organization.
• Find and evaluate potential suppliers, which is called sourcing.
• Issue a purchase order to the selected supplier. This step comes under purchasing.
• Receive and inspect the items to ensure they meet the required standards.
• Receive the invoice from the supplier.
• Approve and pay the supplier’s invoice.

Importance of procurement

Procurement is a strategic function that plays a crucial role in the success of a business. Here are some reasons why procurement is important:

• Effective procurement processes help businesses track and control their spending, ensuring that they are getting the best value for their money.
• By having a structured procurement process, businesses can reduce the risk of errors and prevent fraudulent spending.
• A well-managed procurement process ensures that all steps, from requisition to payment, are smooth and efficient, saving time and resources.

Now that we know what procurement is, let’s look at the purchasing details.

What is purchasing?

Purchasing is a subset of procurement. It specifically refers to the process of buying goods and services. While procurement encompasses the entire process of acquiring goods and services, purchasing focuses on the transactional aspect — the actual act of buying.

Key steps of purchasing

• Create a purchase requisition by generating a formal request for the goods or services needed.
• Have the requisition reviewed and approved by the relevant authorities within the organization.
• Convert the approved requisition into a purchase order and send it to the chosen supplier.
• Ensure the ordered items are delivered and inspect them to confirm they meet the specified requirements.
• Compare the supplier’s invoice with the purchase order and the receiving report to verify accuracy.
• Once verified, approve the invoice for payment.
• Complete the transaction by paying the supplier according to the agreed terms.
• Document the purchase in the company’s financial system for accounting and auditing purposes.

Importance of purchasing

Purchasing is a vital function within the procurement process for several reasons:

• Efficient purchasing processes help businesses get the best prices and terms, leading to significant cost savings.
• By formalizing the purchasing process, businesses can track spending more accurately and ensure compliance with budgets.
• Boost efficiency with guided buying catalogs, mobile requisitions, and automated approval routing. These tools streamline the purchasing process, making it faster and easier for employees to get the goods and services they need.

We’ve covered the purchasing aspect. Now, let's explore sourcing and its role within the broader framework.

What is sourcing?

Sourcing is a critical component of procurement that involves identifying, evaluating, and selecting suppliers to provide the goods and services a business needs. The goal of sourcing is to find the best suppliers in terms of quality, cost, reliability, and service.

Strategic sourcing goes beyond just finding suppliers. It involves a systematic and data-driven approach to optimize a company's supply base and align sourcing strategies with business goals. Strategic sourcing aims to build long-term relationships with suppliers, ensuring consistent quality and value.

Key steps in sourcing

• Research and find suppliers who can meet the business’s needs.
• Assess the suppliers based on criteria like quality, cost, reliability, and service.
• Choose the best suppliers and establish agreements with them.
• Discuss and agree on the terms of the relationship, including pricing, delivery schedules, and payment terms.
• Continuously evaluate the suppliers to ensure they meet the agreed standards and terms.

Importance of Sourcing

Sourcing plays a vital role in the procurement process for several reasons:

• By carefully selecting and maintaining relationships with suppliers, businesses can ensure they receive high-quality goods and services when needed.
• Clear agreements with suppliers help prevent disputes and ensure that both parties understand the terms and conditions of the transaction.
• Businesses that collaborate closely with their suppliers can innovate more effectively and respond to market changes more swiftly, giving them a competitive edge.

We've discussed the fundamentals of sourcing. Now, let's see how procurement, purchasing, and sourcing interrelate in practice. Let’s break it down.

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Relationship Between Procurement, Purchasing, and Sourcing

Understanding the relationship between procurement, purchasing, and sourcing is essential for comprehending how these functions interconnect and contribute to a business’s success. Here’s an explanation of how they work together:

• Procurement plans and oversees the entire acquisition process, ensuring alignment with business goals.
• Sourcing identifies and selects the best suppliers, forming the foundation for effective procurement.
• Purchasing executes the procurement plan by managing the day-to-day transactions, ensuring goods and services are acquired as needed.

Here's a table highlighting the key differences between procurement, purchasing, and sourcing:

Example to explain procurement, purchase, and sourcing

Let’s take a scenario in which your company needs to buy new laptops for the employees in the IT department. This is how it will be done:

Sourcing: The procurement team researches and evaluates various laptop suppliers based on cost, delivery time, warranty, and support services. After comparing options, they select Supplier A for offering the best value and a 2-year warranty.

Procurement: The IT manager identifies the need for 20 laptops and submits a formal request for approval. The procurement team negotiates a 5% discount with Supplier A and issues a purchase order once the request is approved.

Purchasing: The purchase order is sent to Supplier A, who delivers the laptops. The IT department inspects the laptops, and the finance department processes the invoice and records the payment in the financial system.

Conclusion

Procurement, purchasing, and sourcing, while related, serve different roles in the acquisition process. Understanding these differences helps in streamlining processes, improving efficiency, and achieving better financial outcomes.

How Ramp can help

• Capture every detail of procurement requests upfront with embedded AI.
• Set up threshold tolerances to get alerted on invoice variances and overbilling.
• Automate the procure-to-pay process and prevent out-of-policy spending.
• Capture all spend requests in one place for better visibility and control.
• Streamline procurement discussions by centralizing communications with stakeholders within Ramp.
• Build automated approval workflows that integrate with your existing tools.
• Get a consolidated view of every request and purchase order, and sync with accounting systems.

Take control of your procurement process with Ramp Procurement.