Increase Profits. What is the difference between purchasing and procurement?

Businesses often use the terms ‘purchasing’ and ‘procurement’ to mean the same thing, but there are distinct differences that separate those with noticeably higher profits from those who struggle to gain control over their supply chain.

What is purchasing?

 

Purchasing refers to the buying of goods or services. Essentially purchasing has a passive connotation implying ‘purchasing’ is a transactional function with little or no negotiation capacity. Moreover, Purchasing does not consider the strategic importance of managing relationships with suppliers or partners and the value it can return. As a smaller business this is likely to be enough, but as you grow, the need to increase the effectiveness of the supply chain becomes an opportunity to increase profits and get more value from supplier relationships.

 

What is procurement?

 

If you google ‘What is Procurement?’ you’ll see a variation on “the process of obtaining goods or services for business purposes”.  This severely undervalues the contribution of procurement as a profession and fails to highlight the key influence to increasing profit and build stronger supplier relationships. Proper procurement is intrinsic to the strategic preparation, process and delivery of all products and services required for the business to be successful. Procurement really becomes a transformational function when involved in the budget setting process for an organisation and stakeholders will experience procurement as an aide to a successful programme of work.

Procurement offers a solution for the less glamourous requirements of an organisation (utilities and tail spend items) through to the important functional requirements with high cost attached: global travel, communications and IT. Having governance and a Procurement Plan aligned to the strategic direction of the company will ‘hard bake’ solutions into the company that mitigate risks.

Recently, GDPR was a great example of a significant regulation that placed a burden on business in the EU and acted as an important, but unwelcome, distraction. With a strong Procurement Plan, GDPR is a topic easily and comprehensively dealt with in the supply chain. More current still, Brexit can be better prepared for with a proper Procurement Strategy.

How can procurement help my company?

 

  • Building positive supplier relationships will cut costs as negotiations for goods and services will be more manageable

 

  • Effective procurement makes for clearer financial forecasts

 

  • Make provisions for unexpected costs, such as instability and shortage of supplies

 

  • Adds a competitive edge to your company, as you can invest the money saved into business improvements or leaner commercials, striving to be the best in the market

 

  • Focus your people on growing the business and their primary tasks, not sourcing

 

You can see that acknowledging the vital differences between purchasing and procurement can bring significant competitive advantages. Often, when considering how to out perform the competition, businesses consider sales strategies and product improvements, but the secret that few will tell you about is their Procurement Strategy. Often times, implementing procurement is the equivalent value of significantly increasing sales.

 

Procurement As A Service

 

Now you’re thinking: A qualified (Chartered Institute of Purchasing and Supply) and experienced procurement professional will be expensive and counterproductive; you’ll also be wondering whether you have enough work for them. These are just some of the key questions you should consider, but here’s where there is an increasing number of businesses providing Procurement As A Service (PaaS).

It’s a highly cost effective and valuable way to design, implement and maintain procurement in your business without recruiting, training, investing and managing it as an internal function. It’s also a discipline that requires continuous learning.

If you’ve read this far, you’ll now understand that Procurement matters and has significant impact. It’s an indispensable tool for companies that are actively looking to cut down on costs, forecast future spending and stick to their allocated budgets. Just the smallest of changes to your business strategy can prove successful.

Take action: Reach out and talk to us at Novo-K about how we’ve helped other organisations to take advantage of our SMARTsupport to make procurement a reality without high cost investment.

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