Purchasing versus Procurement?
Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager
In 2012, a consulting client hired me for the purpose of professionalizing their purchasing department. Except for capital expenditure (CAPEX) authority exercised by executive management, there was no purchasing structure – everyone and anyone bought anything they wanted, irrespective of authority so the result was an expensive mess. Predictably, a disaster developed involving an unqualified supplier that cost them a major customer and millions in losses.
The client was a profitable $1 Billion (US$) a maritime services company with a maritime oil field services unit. It competed with giants in the industry who were also clients so while I was familiar with the challenges of their industry. One of their initial questions concerned the difference between “purchasing” and “procurement”. Since they were only remotely acquainted with the purchasing profession and their customers were demanding compliance with their systems, the matter required immediate attention.
Definitions from various authorities yield almost as many definitions as authorities. Most insist that procurement is an overarching term encompassing sourcing, negotiation, contract & supplier management. While this is generally true in current practice, there is no hard rule. In the manufacturing sector, epitomized by Toyota procurement refers to direct spend for manufactured items and purchasing encompasses all indirect spend.
In the oil & gas sector, the definitions are opposite those of manufacturing. Purchasing traditionally refers to goods and services consumed in exploration and production of wells. This practice follows the U.S. tax code which allows 100% deduction of all goods and services in the year consumed. This means labor, fracking fluids , cement and steel casings, rig rental, fuels and utilities, mud logging, consulting fees, and so forth. Procurement refers to CAPEX items such as well heads, line heaters, tanks, and other items that are not consumed and generally available for resale and reuse. These items can be depreciated under the tax code, not deducted.
So what is the purchasing/procurement professional supposed to believe?
I advise most clients to use the terms interchangeably unless their customers have definitions they demand be propagated down throughout the tiers of suppliers. As we have seen, industry standards vary, so advice in these sectors is to follow the conventions of that industry.
There is no uniformity and you can find varying definitions but these definitions are in common usage.
Procurement Procurement is the overarching function encompassing the activities and processes to acquire goods and services. In some cases, related activities such as strategic sourcing and supply intelligence are included in the definition. Many definers see purchasing as a subset of procurement. Others exclude Sourcing but include the short and medium term issues of supplier management. The in vogue trend is to use the term Procurement to cover all supplier management activities.
Purchasing Purchasing encompasses the process of ordering and receiving goods and services. It is a subset of the wider procurement process. Generally, purchasing refers to the process involved in ordering goods such as request, approval, and creation of purchase order documents. In common practice, purchasing includes sourcing, negotiation, and supplier/contract management. It necessarily involves supplier qualification and evaluation systems.
Sourcing Sourcing is the strategic management of external resources, which necessarily includes sources. It is often envisioned as the strategic management of the supply chain to ensure adequacy of resources and quality of sources for the long term.
So that settles the question, right?