Purchasing is not the same as procurement. Treating the strategy around these two distinct concepts like they’re the same could mean the difference between saving a few dollars this quarter and building a resilient business.
A purchasing strategy can be helpful in some situations, like shoring up cash leaks here and there, while a procurement strategy takes a more holistic approach to what is essentially the process of getting the supplies to run your business.
Harvard Business Review is a big fan of procurement strategies, saying that using one can ensure you’re “uniquely positioned to orchestrate long-term value-creating systems that can accommodate incompatible value holders, withstand exogenous shocks, share loads, and grow dynamically.”
In real people terms, using a procurement strategy leads to long-term, relationship-based thinking. This way of thinking builds the type of resilience that leads to growth even in the face of market disruption. Let’s dig into why.
The Difference Between Purchasing and Procurement
The difference in purchasing strategy and procurement strategy comes down to the difference between the concepts of purchasing and procurement. They may seem similar, but focusing on one concept or the other changes your business priorities.
Purchasing is the act of buying stuff for your business, focusing on the point of transaction. The act of purchasing is to essentially answer the questions of “What am I buying and for how much?” Strategic purchasing only accounts for selecting a product, its pricing, and the exchange of money, not the entire process of procuring something for your business.
Procurement is, according to Thomasnet.com, an “all-encompassing strategic array of processes that includes both purchasing and sourcing.” Sourcing is the process of selecting a vendor, which includes optimization of supplier relationships, risk management, supply chain management, market analysis, contract negotiation, and more.
A procurement strategy takes into account not just “What am I buying and for how much?” but “Who am I buying it from, why them, and how does that relate to the current market?” To pick one strategy over the other, you need to identify whether your business needs to save money using a purchasing strategy or build resilience using a procurement strategy.
An Effective Purchasing Strategy Can Save Your Business Money
A purchasing strategy defines how your company buys things. How your company buys things can include budgets by department, purchase approval methodology, and more. By implementing requirements and processes around purchases, you may lower costs and avoid most common money leaks in the relative short term.
Maverick spend, which are ad hoc purchasing decisions often made outside of a preferred supplier list, can be a huge issue for companies of all sizes. CIPS reports that maverick spend can make up 80% of a company’s total spend.
If the finance department consistently has trouble tracking down maverick purchases, usually indicated by the inability to match spend to purchases, it may be time to implement a purchasing strategy.
When implemented well, a purchasing strategy clamps down on things like maverick spend. One example of maverick spend could be the marketing department going outside routine procedures and over budget to order printed trade show collateral.
A purchasing strategy can formalize the process of buying quality goods, giving the finance or purchasing department recourse for pursuing total cost reduction and resolving issues like maverick spend. But this attitude is relatively short-term, looking to regulate moments where an employee “just needs to make this one quick purchase.” Because a purchasing strategy fails to take sourcing strategy into account, it can struggle with long-term issues.
An Effective Procurement Strategy Can Make Your Business More Resilient
A procurement strategy defines not only how your company buys things, but also which vendors you buy those things from, why those vendors are preferred (beyond just offering the best prices), and how to manage those vendor relationships. This additional context forces your business to think in more long-term ways and to consider itself as a part of a larger supply-chain network. According to Harvard Business Review, long-term relationship-based thinking is key to a resilient business.
Strategic procurement includes contract negotiation processes, the management of interpersonal relationships, and more. A broader perspective on the entire procurement process can build up your company’s resilience in the face of uncertainty and even become a competitive advantage.
With regard to maverick spend, a procurement strategy can help address the issue by getting at the root cause: uncontrolled long tail spend.
Tail spend is the concept that 80-90% of spend will be taken up by 10% of vendors, usually in bulk purchases, while the remaining 10-20% of spend is taken up by 90% of vendors, usually in one-off situational purchases. It creates a literal tail when graphed.
A long tail can be an indicator of maverick spend because it can be difficult to account for all those vendors and purchases manually. With a long tail, most of your business’s transactions are one-off, small purchases.
Using a procurement strategy, a finance or procurement team can analyze the tail spend in the context of sourcing and vendor development. They can ask and start to answer questions like, “Is the tail spend partially a result of a preferred vendor not fulfilling our employees’ needs?” They can then identify if they need a new vendor, if they need to adjust a contract with an existing vendor, or if they need to improve internal processes.
All of these considerations help ensure the process of acquiring something for your business takes into account your long-term business needs and your vendor relationships. This long-term thinking builds resilience against volatility like the COVID-19 pandemic.
Harvard Business Review explains that, in the light of COVID-19 and future unforeseen disruptions, “firms will need to shift their strategic [procurement] thinking from just-in-time to just-in-case.” Whereas a purchasing strategy focuses on enforcing processes around in-the-moment purchases, a procurement strategy focuses on the larger ecosystem, building processes around long-term relationships rather than individual items.
Which Strategy You Need Depends on What You’re Looking for
Your unique circumstances will dictate whether you need a purchasing or procurement strategy. In the end, though, most businesses would benefit from a good procurement strategy that focuses on purchasing and sourcing.
Use a purchasing strategy if you need to focus on fixing short-term money leaks, like maverick spend. Your focus will be more about how your employees use money and less about how your business fits within a larger network of suppliers, producers, and consumers.
Use a procurement strategy if your industry is facing significant disruption and you need to not only shore up short-term money leaks, but also build good vendor relationships. Your focus will broaden to consider internal processes and recognize the role your business plays in a larger network.
This “network” perspective is gaining importance as expectations placed on businesses start to shift:
- Concepts like green purchasing (i.e., sustainable procurement practices) are becoming more and more important to consumers.
- Supplier relationship management has been shaken up by concepts like the purchase-to-pay decision matrix, outsourcing, and disruptions in global sourcing.
- Internal processes are dominated by concepts like total quality management (TQM), where customer satisfaction is put at the center of the supply chain.
Harvard Business Review recommends this “network” perspective, saying that if businesses build “a system that creates value by improving relations [among all stakeholders], everybody wins. Thinking strategically about procurement makes that possible.”
Bringing the “network” perspective down to earth is the advent of new digital procurement tools, like Negotiatus. These digital tools have introduced an era of automation that makes it much easier to put a procurement strategy in place and definitively track its impact on things like tail spend and maverick spending.
According to Boston Consulting Group, “Firms that use digital [tools] to manage tail spend can cut their annual expenditures by 5% to 10%, on average.” With a tool like Negotiatus, a good procurement strategy can address the issues a purchasing strategy addresses, while instilling a network-based perspective that can build long-term resilience in the face of uncertainty.
A Procurement Strategy Needs a Procurement Tool
Cutting expenditures, finding better prices, and building resilience are only the tip of the iceberg when it comes to the benefits a procurement tool like Negotiatus can provide. Zeus Living reduced time spent ordering supplies from 5-7 hours to less than one hour, while BLANKSPACES was able to scale quickly by setting up procurement at new locations in only five minutes. Read more Negotiatus case studies here.
Innovative companies the world over use Negotiatus to implement their procurement strategy. You can do the same by scheduling a Negotiatus demo today.