Supply Chain vs. Procurement: Understanding the key differences

As a business owner, you’ve probably noticed that certain terms and phrases like to come together in pairs. Research and development. Accounting and finance. Sales and marketing. 

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We’d like to add another pair to that list of examples: Supply chain and procurement, which are often mentioned in the same breath—and sometimes used interchangeably with one another—despite critical differences that exist.

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The fact of the matter is that while procurement and supply chain management are related to one another, they serve different functions within a business. If your goal is to make your business as efficient and productive as possible, it’s important that you understand these differences. 

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Below, we define both procurement and supply chain management, breaking down the scope of each function and outlining key steps in each process. We also highlight the differences you need to know about, while exploring the ways that the two functions intersect with—and even support—one another. 

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Defining supply chain management

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In order to understand supply chain management, we first need a clear sense of what constitutes a supply chain. 

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What is a supply chain?

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Simply put, a supply chain is a network made up of everyone involved in getting your product or service into the hands of your customers. It includes: 

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• Suppliers, who produce and provide the raw materials or components necessary to create your product or service

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• Manufacturers, who turn these raw materials and components into the finished product or service

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• Logistics providers, who transport raw materials to manufacturers, and finished product to distributors 

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• Distributors, who provide finished product to retailers, typically in a wholesale fashion

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• Retailers, who actually sell the product to consumers, through either internet or brick-and-mortar operations

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• Customers, who buy and use the finished product or service

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What is supply chain management?

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With this in mind, supply chain management refers to various processes that a business takes to—quite literally—manage each step of this network. Typically, supply chain management is broken into five key phases:

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1. Planning: Identify and manage all of the resources—including data, materials, components, equipment, logistics, and labor—your business needs to meet consumer demand. 
2. Sourcing: Select the suppliers who will provide the raw materials and components that your business needs to actually produce your product or service. This includes procurement, receiving, and inventory management of both raw materials and components as well as finished product.
3. Manufacturing: Establish the processes necessary to transform the raw materials and components into the finished product. This will include manufacturing the product, conducting quality control, and packaging the product. 
4. Delivery and logistics: Coordinate various logistics providers who will actually fulfill (distribute and transport) your product to retailers and customers.
5. Returning: Establish processes and networks capable of accepting returned products, whether they be unwanted, defective, or outdated.

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In each of these processes, supply chain management is responsible for optimizing and streamlining each step of the process as much as possible to increase efficiency and reduce costs. It is also responsible for identifying potential risks that threaten the stability of your organization’s supply chain, and taking steps to mitigate these risks in order to avoid disruption and make the supply chain more resilient.

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What is procurement?

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Procurement refers to the processes a business must complete in order to acquire or procure the goods, services, data, or works that it needs to operate, typically from external sources. Anything a business needs to generate its product or service, procurement is responsible for securing. 

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But that doesn’t mean that procurement is only responsible for “buying” things. Procurement is a much more strategic process which, like supply chain management, is typically broken out into a number of distinct phases:

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• Identifying needs: Determining what goods (raw materials, components, supplies), services, and external labor your business requires

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• Supplier/Vendor selection: Researching and assessing potential vendors and suppliers to provide each identified need. This includes evaluating vendors on cost, capabilities, reliability, and other factors. It can also include contract negotiation. 

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• Purchase order: Generating a purchase order (PO) which details the deliverable—including the quantity, prices, and timeline for delivery—and sending it to the selected suppliers.

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• Receiving: Accepting delivery of the ordered goods or services, and inspecting them for both quantity and quality to be sure that you’ve received what was ordered. 

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• Invoice processing: Reviewing the supplier’s invoice for accuracy and correcting any discrepancies.

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• Payment: Moving the invoice through your organization’s payment and approvals process in a timely manner and ensuring the supplier is paid in full and on time.

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• Supplier/Vendor management: Ongoing management of vendor and supplier relationships and contracts. 

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Throughout each of these phases, procurement must also keep an eye out for potential risks that threaten to disrupt the flow of goods and services into your business—and put measures in place to deal with these risks should they arise. 

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Key differences between supply chain management and procurement

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Using the above definitions, it’s easy to see how procurement and supply chain management differ in key ways:

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Scope: broad vs. narrow

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Supply chain management is broad in scope. It’s concerned with everything from the sourcing of raw materials to manufacturing to logistics and delivery and everything in between. From the moment your product or service is first birthed as an idea until the moment it is in the hands of your customer, supply chain management is involved.

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Procurement, on the other hand, is much more narrow in scope—though no less essential. Its primary concern is sourcing the materials, goods, supplies and services your business needs to operate.

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With this in mind, procurement aligns with the planning and sourcing processes of supply chain management, and can be thought of as one small part of that broader strategy.

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Focus: input vs. output

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Procurement is, generally speaking, focused on inputs. Its key function is to identify and secure what your business needs in order to ultimately produce your final product, but it is not itself involved in production or delivery. 

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Conversely, supply chain management is much more concerned with output. After all, sourcing raw materials is just one small part of managing the supply chain; manufacturing, delivery, and returns processing together make up more than half of the entire supply chain management process. 

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Objectives: capital vs. operational efficiency

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While both supply chain management and procurement have an objective of increasing efficiency, they differ in the type of efficiency that they are focused on producing.

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Procurement is largely focused on capital efficiency—ensuring that your business is putting its cash flow to work in the most efficient manner possible. This often includes:

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• Evaluating potential suppliers by cost

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• Ensuring that your business is getting the most value for spend

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• Negotiating contracts to secure lower pricing when possible

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• Continuously looking for cheaper alternatives 

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Supply chain management, on the other hand, is more focused on generating operational efficiency—finding ways to reduce friction, use fewer supplies, and generate less waste while manufacturing and distributing your product. This may involve:

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• Streamlining your manufacturing processes to reduce production timelines and materials costs

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• Implementing new technologies, such as automation, to support production and distribution

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• Engaging in long-term planning to identify other opportunities for your business to become more efficient

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How procurement intersects with the supply chain

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Despite these differences, procurement and supply chain management are inexplicably linked to one another, intersecting at key points.

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Because procurement occurs in the earliest steps of the supply chain management process, it essentially supports the rest of the process, making both production and distribution possible. Without effective procurement measures, your business wouldn't have the materials, supplies, and third-party services that it needs to operate.

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Likewise, when procurement prioritizes selecting a diverse network of suppliers and vendors—even going so far as to build redundancy into the system—it can lead to a more resilient supply chain capable of weathering disruption.

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To ensure that your procurement and supply chain management teams are working together efficiently, it's important to facilitate collaboration. 

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You can achieve this by improving and encouraging interdepartmental communication and planning, especially for long-term initiatives—such as when you are launching a new project or branching into a new market. Likewise, increasing data transparency within your organization through de-siloing and centralization efforts will make it more likely that both teams can identify the trends, patterns, and other insights capable of driving your business forward. 

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Real-world examples and case studies

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As a business, one of your primary goals should be to keep your supply chain running smoothly. Implementing efficient procurement processes is an important part of making that a reality. Below are a few case studies highlighting the influence of procurement on your supply chain.

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Software and technology

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Crowdbotics, an AI-powered app development platform, had a procurement problem. The company regularly contracted other firms to work on projects that would span months. But an opaque invoice management system, largely reliant on spreadsheets, made it difficult to know when a firm was approaching their spending caps—which could risk important work grinding to a halt. Implementing a more transparent procurement process made it easier for Crowdbotics to track spend and know when spending caps were being approached, protecting the company’s entire supply chain from disruption. 

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Construction and engineering

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Viking Well Service, a trucking and rig service company serving the oil and gas industry, needed a steady flow of parts so they could repair trucks and other critical equipment. But the company didn’t have an established procurement process; when parts were needed, employees would simply go and buy what was needed. This made it difficult to track spend and know how much was left on an open purchase order. By integrating their procurement and expense management processes, Viking was able to consolidate systems, increase transparency, and have a clearer sense of the budgets necessary to keep the business running. 

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Nonprofit

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Nevada Partnership for Homeless Youth (NPHY) provides support to thousands of homeless teenagers, providing them everything from bus passes to hygiene products to gift cards for local restaurants. A largely manual procurement process dependent on checks and emails meant that purchase orders often got lost or completed incorrectly. This could lead to a delay in the sourcing of critical supplies that the organization needed to effectively work toward its mission. By centralizing their procurement process, NPHY was able to streamline approvals in order to facilitate more efficient transactions—leading to reduced friction, increased transparency, and better compliance. 

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Empower more effective procurement and supply chain management with Ramp

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Procurement and supply chain management each play an important role in keeping your business running. While they may not be one-in-the-same, they are closely related, and improving your procurement process can lead to a more resilient, efficient, and effective supply chain. One way you can achieve this is by investing in a procurement software that helps you streamline your entire process. 

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With Ramp’s procurement solution, you can:

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• Build custom intake forms to collect the information you need on requested spend

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• Collaborate with stakeholders to ensure you have all of the documents and forms necessary to process a request

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• Build automated approval workflows that route requests to approvers once necessary conditions have been met

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• Issue purchase orders or virtual cards from approved requests

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• Match invoices to the corresponding PO for increased transparency

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Weary of adding another point solution into your financial stack? Don’t be. With Ramp’s all-in-one platform, it’s possible to unify procurement with other key processes like expense management, vendor management, accounts payable, reporting, and more. Greater integration of all of these processes means you have a clearer view of exactly how your business is spending money—and how you can potentially find ways to cut back and save. 

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Ready to learn more about how Ramp’s procurement software can help you create a more resilient supply chain for your business? Watch our Intro to Ramp Procurement Webinar, or get started with a free demo today.  

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