Procurement vs. Purchasing: Key Differences + Processes

When businesses need to acquire goods or services—whether it’s custom merchandise for clients or accounting software for operations—the way they manage these acquisitions can significantly impact efficiency across all departments. 

Consider how custom merch design studio Telescope works with clients to create unique gifts for its clients, customers, or employees. It starts with the goal of understanding who the gift is for, what it will be used for, and what the merch should convey—whether it’s a funny hat to wear on Zoom calls or a heated mug with custom branding for corporate gifting. Then, Telescope helps choose these unique gifts based on budgets and timelines, checks quality, manages fulfillment and delivery, and creates long-term plans for ongoing merch creation and distribution.

This comprehensive approach to acquiring goods exemplifies the broader concepts of procurement and purchasing. Although often used interchangeably, the two terms have critical distinctions. Procurement involves sourcing the necessary goods, services, and raw materials to operate your company long-term. Purchasing, on the other hand, is just the immediate, transactional aspect of the procurement process—creating a purchase order, receiving shipments, and issuing payments.

Understanding the differences between procurement and purchasing—and how they work together—is essential to optimizing your operations. Let’s dive in.

What is procurement?

Procurement is the strategic process of researching, negotiating, and acquiring goods, services, or raw materials necessary to run a business. Its focus is on longer-term operational needs and competitive positioning.

An ecommerce merchant sourcing products, a manufacturer obtaining materials for production, and a service-based business securing third-party software all rely on procurement to meet their needs. Manufacturing businesses often have a procurement team or manager who is responsible for the strategic sourcing of raw materials, expensive equipment, or large recurring orders. In smaller companies or ecommerce brands that don’t manufacture themselves, procurement may be the purview of managers and leaders of various departments, ranging from product to IT. Procurement specialists analyze market conditions, assess risk, and create supply ecosystems for your business. By taking a strategic approach, businesses can find the best suppliers, negotiate the best terms, and build long-term relationships.

There are three main types of procurement that businesses use:

• Direct procurement. Direct procurement refers to sourcing the materials, machinery, or items that directly contribute to an end product. For example, an ecommerce merchant selling phone accessories engages in direct procurement when it partners with a phone case manufacturer or a supplier of product packaging materials for in-house order fulfillment.

• Indirect procurement. Indirect procurement involves sourcing goods necessary to run your business that don’t go directly into an end product. For example, the phone accessory merchant uses indirect procurement to source office supplies for its business.

• Services procurement. Services procurement entails hiring a third-party provider who offers the necessary services a business needs to operate. For instance, the same phone accessory business might engage in services procurement if they hired a third-party logistics (3PL) provider to handle order fulfillment.

Procurement process

The entire procurement process involves several key steps, each designed to ensure that businesses acquire goods and services efficiently and strategically. Although the process differs based on specific needs, the following steps provide a general guide:

• Identify your business needs. Assess your specific needs and find procurement solutions to address them. Ask questions like: “What is the problem I need to solve?” and “How will a new product, service, or material fix that problem?”

• Create a purchase requisition document. Create a formal purchase request document that you can share, so stakeholders (e.g., department head, manager, CEO, investor) understand the purpose, budget, and timeline of an acquisition.

• Research potential partners. Identify potential suppliers, like manufacturers, wholesale suppliers, or service providers, that offer what your business needs. Research online, read customer testimonials, and compare offerings and pricing differences.

• Send request for quotation (RFQ) documents. Send request for quotation (RFQ) documents to potential partners outlining the services or goods you need and requesting pricing.

• Evaluate your options and negotiate rates. Negotiating contracts and choosing the best partner is a huge step in the procurement process. Beyond price, your goal is to choose the partner that will create the most long-term value. Identify your top priorities—whether that’s product quality, customer service, reliability, or shared core values—and partner with a provider that checks those boxes.

• Manage your supply chain. Supply chain management is another key aspect of procurement. Coordinate the ongoing and timely delivery of goods or services to your business. Procurement software can help get the ball rolling on this; for complex ongoing procurement, you may want to hire procurement managers who can oversee the entire supply chain process from start to finish. 

• Build ongoing relationships with suppliers. Foster strong supplier relationships with regular, clear communication and evaluation metrics. Building trust with your supplier can help with risk mitigation and even lead to pricing discounts.

What is purchasing?

Purchasing is the immediate process of acquiring goods or services. It specifically involves creating and fulfilling purchase orders as well as making payments. For example, if an ecommerce merchant selling phone accessories buys phone chargers in bulk from a wholesale supplier, it’s engaging in the purchasing process.

Unlike procurement, purchasing only focuses on the immediate purchase transaction between a buyer and seller. In this way, it functions as one of the key phases of the procurement cycle.

Purchasing process

Since this process only involves the actions around purchasing activities, it’s simpler than procurement. Here are the key steps:

• Create a purchase order (PO). Generate a PO that commits to buying a good or service from a supplier. This should include information about payment terms, delivery dates, buyer and vendor details, and a purchase order number for tracking.

• Receive goods or services. After the supplier accepts your PO, they will deliver your order, whether these are completed goods, raw materials, or services like software subscriptions.

• Verify the order and invoice. Perform a three-way match to confirm the accuracy of orders by checking the information on your purchase order against the invoice and goods received note (or GRN, a document used to confirm the receipt of delivered items).

• Make a payment. Once you’ve confirmed the accuracy of your order, issue the agreed-upon payment to the supplier.

Procurement vs. purchasing: What’s the difference?

Purchasing is a subset of the procurement process that includes a limited set of activities: sending a purchase order, confirming these orders, and handling payment processing. The procurement process is more comprehensive and involves detailing your needs, researching partners, creating RFQ documents, the actual purchasing process, and developing ongoing supplier relationships.

Not every item a company buys needs to go through the entire procurement process. A small candle-making business with only three or four employees may purchase office supplies, furniture, and computers for the team without developing a relationship with the supplying company—simply reading reviews and buying the products online or from a physical store. Procurement is typically reserved for expensive, recurring expenses or goods that contribute to the end products a business sells. So the candle-making business would likely go through the procurement process for buying wax and essential oils from a supplier, vetting for considerations like quality, supplier performance, location, continued vendor relationships, and ability to scale.