What is Procurement v Purchasing

Summary

In 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.