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Purchasing is a simple and a concise term that will incorporate providing money for a product or goods. It can even be said that purchasing is a small and one of the aspect of procurement.

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Procurement encompasses end-to-end supply chain management strategies which includes negotiating contracts, sourcing, and acquiring services or work from external sources, goods, raw materials, then it will follow through to make sure contracts will be fulfilled according to the terms of the contract. The goal or the objective of the procurement are spending control, cost savings, and workflow efficiency.

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A simple and a concise term that will incorporate giving the money for a product or goods as stated earlier.

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A broader term that will include designing, processing, sourcing, negotiating and fixing the standards.

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Purchasing term generally will Incorporate purchasing or say buying of goods or an object, i.e. paying the money against the goods or the object.

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Purchasing is subset of the process of the procurement.

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Procurement generally will Incorporate the aspect of specifications contract, supplier market researc marketing, negotiation, value analysis, buying activities, and control of the inventory, the traffic, receiving and the stores.

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Procurement includes the term purchasing as part of its process as explained above.

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•Suppliers have substantial impact on a firm’s total cost

•Many product features originate from suppliers

•In manufacturing, purchased content can be more than 50% of revenues

•Avoiding costs through early involvement in product design stage

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Building strong relationships and driving innovation

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Building strong relationships and driving innovation

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•Traditional approach is to bargain hard for price reductions

•New approach is to conduct joint cost reduction with suppliers

•Both buyer and supplier must benefit

•Suppliers can contribute innovative ideas

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•Buyer focuses on core competencies and outsources non-core activities and materials

•The importance of Risk Management

•Need for ability to track materials back up through supplier’s supply chain

•Supplier quality -> product quality

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•Include suppliers early in product design process to take advantage of their expertise

•Early supplier involvement can lead to an average of 20% improvement on material costs, material quality, and product development times.

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•Growing recognition of Procurement’s contribution to firm’s profitability

•Continue to see Procurement responsibilities grow to include such things as P2P, BPO, Mergers & Acquisitions

•Formal Recognition of Certifications such as CPSM

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•Beginning of purchasing cycle

•Sources of need

+Annual or biannual planning process

+New product development process

+Operational needs

•Sometimes, actual needs are difficult to define clearly

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•Purchase requisitions and/or statements of work

•Forecasts and customer orders (e.g. from MRP)

•New product development teams

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•Description of required material or service

•Quantity required

•Estimated unit cost

•Operating account to be charged

•Date of requisition

•Date required

•Authorized signature

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•Existing supplier

+Familiarity and track record

+List of preferred suppliers

•New supplier

+Need to identify potential suppliers

+Need to evaluate and qualify

•Bidding vs Negotiating

•Request for quotation (RFX, RFQ, and RFP)

•Statement of Work (SOW), Specifications or Blueprints

•Supplier evaluation

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•Drafted after supplier evaluation and selection is completed

•Legally-binding document

•Visibility throughout company

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•Electronic vs paper documents

•Materials packing slip

•Bill of lading

•Receiving discrepancy report

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•3-way match required to pay invoice

+P.O.

+Invoice

+Receiving report

•Electronic funds transfer (EFT)

•Mostly done electronically today

•Information used to Analyze Actual requirements

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Invitation and description
General terms and conditions (GTC)
Pricing template
Pre-qualification requirements and questionnaire
Awarding selection criteria and weights

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Direct Procurement involves purchasing materials, parts, or products that directly go into the production of the goods a company manufactures or sells. These are tangible components that become an integral part of the finished product.

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Direct Procurement is closely aligned with the company’s core production activities. It is directly tied to the business’s manufacturing quantities, and any interruptions can significantly disrupt production.

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Direct Procurement includes raw materials such as metal for car manufacturing, cotton for clothing production, or ingredients for food processing.

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Direct Procurement often involves large budgets and long-term contracts, given the critical importance of these purchases for production. Procurement decisions are closely linked to forecasted production volumes.

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Direct Procurement is strategically significant because it impacts the cost of goods sold (COGS) and, therefore, the company’s profit margins. The quality of direct purchases also affects the quality of the final product.

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Direct Procurement often necessitates building strong, long-term relationships with suppliers, given the critical nature of the goods procured. Consistency in quality and timely delivery are paramount.

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Indirect Procurement relates to acquiring goods and services that facilitate an organization’s operations but don’t end up in the final product. These purchases support the day-to-day activities and infrastructure of the business.

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Indirect Procurement, on the other hand, supports business continuity but isn’t critical to the production process itself. It focuses more on operations, administrative tasks, and general company activities.

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Indirect Procurement covers areas like office supplies, software licenses, consulting services, cleaning services, and employee training programs.

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Indirect Procurement might involve more ad-hoc purchases and may not always be based on long-term contracts. The budgeting might be more decentralized, with different departments having separate budgets for their needs.

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Indirect Procurement, while sometimes seen as less strategically crucial, can cumulatively have a significant impact on operating expenses. Inefficiencies or wastages in indirect procurement can erode profit margins, albeit in a less direct manner.

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Indirect Procurement might involve a wider array of suppliers with varying degrees of relationship depth. Some might be long-term contracts (like software licenses), while others could be one-off transactions (like office furniture).

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Budget owners engagement is the most important and hence they are the most important stakeholders.

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Engagement with finance is required to understand budgets as well close coordination to ensure that negotiated savings are reflected in your income statement (Reduction in expenses leading to increased EBITDA)

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Ensure that all contracts adhere to corporate legal
 policies and contract risk is mitigated through proactive
 review of all key legal terms across various contracts.

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Management is always looking for visibility, procurement job is not just negotiating the savings but it is CPO’s (Chief Procurement Officer) job to ensure that the management understands value delivered by procurement. More important, the value needs to be presented in financial terms – for example how savings negotiated leads to better EBITDA margins