What is Procurement v Purchasing

Supply Chain Secrets

7 Jan 202007:53

Summary

TLDRIn this insightful video, procurement expert Trent Morris explains the distinction between procurement and purchasing, using the analogy of buying a car. Procurement involves researching the market and identifying needs, akin to deciding on the type of car to buy. Purchasing then steps in to negotiate and secure the best deal, akin to the actual car purchase. Morris also discusses the relationship between the two functions, their roles within a business, and offers advice on entering the procurement field, highlighting its value and career prospects.

Takeaways

🔍 Procurement and purchasing are not interchangeable terms; procurement involves researching and understanding market needs and supplier capabilities before making a purchase.
🚗 The analogy of buying a car was used to differentiate the two: procurement is like researching the type of car you want, while purchasing is negotiating the deal and buying it.
🏢 Procurement often guides the purchasing process, with purchasing being a subset that follows the framework established by procurement.
💼 In smaller businesses, procurement and purchasing might be handled by the same person, but in larger organizations, they are typically separate functions.
📝 Procurement is responsible for setting up contracts, while purchasing officers execute the buying process based on those contracts.
🔑 Category management, sourcing, and supplier relationship management are three distinct parts of the procurement function, each with its own focus and responsibilities.
💡 Category management involves understanding what will be spent and how, sourcing is responsible for establishing the supply, and supplier relationship management ensures supplier performance.
🛍️ Direct spend refers to the product sold to the market, indirect spend includes everything else used to get the product to market, and IT and information services are often considered separate categories due to their complexity.
📊 The reporting structure for procurement can vary, with some organizations placing it under the Operations Director and others under the CFO, depending on the nature of the spend.
💼 Procurement can be a rewarding career for those interested in supply chain management, with opportunities to engage with suppliers and ensure value for money.
🚀 For those looking to enter the field of procurement, having relevant experience in areas like logistics can provide a solid foundation, and expressing interest to management can be a good first step.

Q & A

What is the primary difference between procurement and purchasing?
-Procurement involves the process of researching and understanding what is needed in the market, including the type of product, its features, and suppliers, without necessarily making the purchase. Purchasing, on the other hand, is the act of negotiating the deal and actually buying the product based on the information gathered during the procurement process.
Can the terms 'procurement' and 'purchasing' be used interchangeably?
-No, they cannot be used interchangeably as they refer to different stages in the process of acquiring goods or services. Procurement is the strategic phase of identifying needs and researching options, while purchasing is the execution phase where the actual buying takes place.
What is an example of how procurement and purchasing differ in a real-life scenario?
-An example given in the script is buying a new car. Procurement would be the initial research into the type of car needed, its features, and comparing different manufacturers. Purchasing would be the subsequent negotiation for the best price and terms with the chosen dealership.
What roles has Trent Morris held that make him an expert in procurement?
-Trent Morris has held various roles in operational positions involving purchasing and has worked in procurement roles for large companies like Beam Suntory and Coca-Cola Anatol, where he was responsible for group logistics.
How does procurement guide the purchasing process in an organization?
-Procurement sets up the contracts and defines the terms and conditions for the purchase. A purchasing manager or officer will not buy anything unless the contract has been established by the procurement team first, indicating that procurement guides and precedes the purchasing process.
In smaller businesses, can procurement and purchasing be the same function?
-In smaller businesses, procurement and purchasing might be combined into one function, often managed by a senior person such as a director, who decides on suppliers and negotiates terms, with an administrative person or purchasing officer executing the actual buying.
What is the relationship between procurement and the CFO in an organization?
-Procurement often reports to the CFO in many organizations because it involves managing the company's spending and ensuring value for money. However, the script suggests that procurement logically straddles operations and finance, needing to engage with all parties to govern spending effectively.
What is category management, and how does it differ from supplier relationship management?
-Category management is part of the procurement function that involves understanding what will be spent and how, and then handing off to a sourcing team to establish supply. Supplier relationship management, on the other hand, ensures that the supplier performs according to the company's requirements after the supply has been set up.
What are the three broad categories of spend typically managed by procurement?
-The three broad categories are direct spend, which includes products sold to the market; indirect spend, which covers everything else used to get the product to market; and IT and information services, which are often separated due to their complexity and the need for specialist knowledge.
How can someone get into a career in procurement?
-An easy way to get into procurement is to express interest to your management team and seek opportunities to transition from a related field where you have experience. For instance, Trent Morris transitioned from logistics into procurement after gaining over 15 years of experience in the former.
Why might procurement be considered a good career choice according to the script?
-Procurement can be a good career choice for those who enjoy supplier relationship management, engaging with people, and ensuring the company gets value for money. It offers a strategic role in the business with a focus on optimizing spending and supplier performance.

Outlines

00:00

🛍️ Understanding Procurement vs. Purchasing

The video script discusses the distinction between procurement and purchasing, using the analogy of buying a new car. Trent Morris, an expert in procurement with experience at Beam Suntory and Coca-Cola, explains that procurement involves researching the market, identifying needs, and selecting suppliers, which is akin to deciding what type of car to buy based on various factors. Purchasing, on the other hand, is the act of negotiating and finalizing the deal once the procurement process has determined what is needed and from whom. The script also touches on the potential overlap of these functions in smaller businesses and the importance of procurement in guiding the purchasing process.

05:02

📈 Procurement's Role in Business Structure and Career Opportunities

This paragraph delves into the reporting structure of procurement within a business, highlighting that it can vary from reporting to the Operations Director in businesses with significant direct spend to the CFO in other organizations. The speaker suggests that procurement should ideally engage with all parties to ensure value for money. The script also explores career opportunities in procurement, with the speaker recommending that interested individuals express their interest to their management team and consider entry points such as logistics or graduate programs. The analogy of buying a car is reiterated to summarize the difference between procurement and purchasing, with procurement being the market research phase and purchasing being the actual purchase negotiation and execution.

Mindmap

Keywords

💡Procurement

Procurement refers to the process of acquiring goods, services, or works from an external source, typically through a tendering or bidding process. In the video's theme, procurement is the initial phase where research is conducted to understand market availability, supplier options, and product specifications. It's exemplified when comparing it to the early stages of buying a car, where one considers the type and features of the vehicle before making a purchase.

💡Purchasing

Purchasing is the act of buying goods or services, often following the procurement process. It involves negotiating terms, finalizing prices, and executing the transaction. In the context of the video, purchasing is likened to the actual buying step in the car-buying analogy, where one selects a specific car model and negotiates the deal based on the research done during procurement.

💡Trent Morris

Trent Morris is an expert in procurement with experience in various roles related to both procurement and purchasing. His insights in the video provide a clear distinction between procurement and purchasing, drawing from his professional background working for companies like Beam Suntory and Coca-Cola Anatol. His expertise is central to the video's exploration of the differences between the two concepts.

💡Category Management

Category management is a strategic approach within procurement that involves organizing products or services into categories and managing them as a group to optimize business results. In the video, it is one of the three main functions of procurement, alongside sourcing and supplier relationship management, and is crucial for understanding spending patterns and making informed decisions.

💡Supplier Relationship Management (SRM)

Supplier Relationship Management is the process of building and maintaining relationships with suppliers to ensure they meet the company's requirements. In the video, SRM is distinguished from category management and sourcing, focusing on the ongoing performance and collaboration with suppliers after the initial procurement and purchasing processes.

💡Direct Spend

Direct spend refers to the costs directly associated with the production of goods or services that a company sells. In the video, it is one of the three types of categories discussed, including ingredients, liquids, tins, and bottles in the FMCG space, which are essential for the product reaching the market.

💡Indirect Spend

Indirect spend encompasses all the other costs that are not directly linked to the production of the product but are necessary for the business operations, such as marketing or administrative expenses. The video explains that indirect spend is a category managed by procurement to ensure efficient use of resources.

💡Operational Roles

Operational roles in the context of the video refer to positions within a company that are involved in the day-to-day activities of purchasing, such as buying materials or services needed for production. Trent Morris mentions having been involved in purchasing within operational roles, indicating hands-on experience in the purchasing process.

💡Strategic Sourcing

Strategic sourcing is the process of finding and selecting suppliers that can provide goods or services at the best overall value to the company. In the video, it is part of the procurement function, where the sourcing team sets up the supply after category management has determined the needs.

💡CFO

CFO stands for Chief Financial Officer, who is typically responsible for managing a company's financial risks and ensuring the company's financial stability. The video discusses that procurement often reports to the CFO, highlighting the importance of procurement in financial decision-making and value for money.

💡Career in Procurement

A career in procurement involves working in the acquisition of goods and services for a company, often requiring skills in negotiation, market research, and supplier management. The video suggests that procurement can be an engaging career path, with Trent Morris sharing his positive experiences and advice on how to get started in the field.

Highlights

The difference between procurement and purchasing is discussed in the context of buying a new car.

Procurement is likened to the research phase before buying a car, considering needs and options.

Purchasing is compared to the actual negotiation and buying process after the research is done.

Trent Morris, an expert in procurement, shares his experience from roles in operational purchasing and strategic procurement.

Procurement involves understanding the market, suppliers, and products available, aligning them with company needs.

Purchasing focuses on securing the best deal and service once the procurement process has identified what is needed.

In smaller businesses, procurement and purchasing might be combined, but in larger organizations, they are distinct functions.

Purchasing is typically a subset of procurement, with procurement guiding the purchasing process.

Procurement sets up contracts, and purchasing officers execute those contracts to make purchases.

Category management, sourcing, and supplier relationship management are three distinct parts of procurement.

Category management involves understanding spending and how to allocate it effectively.

Sourcing teams are responsible for establishing the supply agreements with vendors.

Supplier relationship management ensures suppliers meet the performance requirements set by the company.

Direct spend refers to the cost of products sold to the market, while indirect spend covers everything else used to get the product to market.

IT and information services are often considered a separate category due to their complexity and need for specialist knowledge.

Procurement's reporting structure can vary, sometimes being under Operations Directors or CFOs, depending on the company's needs.

Procurement is a strategic function that should engage with all parties to ensure value for money.

Trent Morris suggests that procurement is a rewarding career, especially for those interested in supplier relationship management.

Getting into procurement often starts with expressing interest and leveraging relevant experience in related fields like logistics.

For those starting fresh, entry into procurement could be through junior roles or graduate programs.