Purchasing and procurement

Differences between purchasing and procurement

Purchasing refers to all the activities involved in acquiring the goods and services needed to run a business. Purchasing therefore includes selecting suppliers, negotiating and managing contracts, etc. Sometimes the purchasing department places the initial order.

The aim of the purchasing function is therefore to acquire goods and services at the best possible cost and quality.

Procurement, on the other hand, has a more tactical function: it aims to ensure that the goods purchased (by the purchasing function) will be available at the right time and in the quantities requested. In other words, procurement focuses on the logistical and operational aspects of the flow of goods. It includes: stock management, receiving goods, monitoring deliveries, replenishment, etc. In many companies, it is the procurement function that places the regular orders with suppliers, according to the conditions determined by the purchasing function.

So these two functions are different, they don't meet the same objectives and they don't use the same methods, yet they complement each other.

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The main stages in the purchasing process

Whether you're an experienced entrepreneur or just starting to build your inventory, each step of the buying process is crucial to keeping your business running smoothly.

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1. Define your needs

The first step in the purchasing process is to clearly define your business needs. This involves identifying the products or services you need to support your operations and achieve your business objectives. It is essential to take into account the specific requirements of your business as well as the preferences of the stakeholders involved.

The specifications is a key document in the purchasing process. It formalizes your company's specific needs by detailing technical specifications, quantities, quality standards, delivery times and special conditions. It may also include environmental, social or regulatory criteria.

2. Choosing suppliers

Once you have clearly defined your needs, you will then need to determine a panel of suppliers who can meet your specifications.

How do you go about this? By means of research, trade shows, recommendations, or from your internal database (in particular the supplier's past performance).

These suppliers will have to be qualified according to your company's purchasing strategy.

3. Launch the consultation

You have now established a shortlist of suppliers, so you need to start the negotiation phase with them.

To do this, you need to launch a consultation, also known as a call for tenders. This is a request for quotations from the selected suppliers, together with the company's specifications, so that you can compare their offers and make the best choice for your company. It's important to bear in mind that the aim of this relationship is to be a long-term one.

4. Negotiate

Now that you've chosen your supplier, it's time to start negotiating with them.

First of all, when a supplier makes you an offer, don't rush into it and be prepared to make a counter-offer, so that you get the best possible contract.

Here are a few tips to help you negotiate successfully:

• ‍Prepare thoroughly beforehand: you need to know the market, your company's exact requirements and the supplier's capabilities.‍
• Prioritize a win-win approach: during your negotiations you must communicate openly and respectfully. Make reasonable demands and be prepared to make concessions, the aim being to maintain a beneficial long-term relationship with your suppliers.‍
• Use the competition as leverage: don't hesitate to use other existing offers to negotiate better terms. You need to show that you have other options.

But be careful: the most important thing is that the supplier meets your requirements as closely as possible, and not just in terms of price.

5. Managing the supplier relationship

To manage a supplier relationship successfully, it is essential to establish clear communication and choose reliable partners. A relationship based on trust and win-win negotiations are essential to ensure long-term collaboration.

When drawing up the contract, the conditions for assessing compliance with commitments should be specified, particularly in terms of quality, logistics and services. The conditions under which the contract can be terminated should also be set out, to protect the company in the event of failure to meet initial promises or expectations.

Performance indicators can be used to monitor compliance with these conditions.

Evaluating supplier performance helps to guarantee the quality of products or services and to ensure that deadlines are met: it is the purchasing function that decides whether the supplier remains a long-term partner or whether you should seek out a new supplier.

After evaluating suppliers, you will therefore be able to:

• Identify reliable suppliers
• Reduce the risk of interruptions in the supply chain
• Optimize purchasing costs by reducing losses due to defective products or delays.

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Key performance indicators you should know

Here are 4 key indicators you need to know to monitor their performance:

Supplier delivery time: This indicator corresponds to the average number of days between order placement and delivery:

• Sum of delivery times in days for orders / number of orders

Rate of compliance with deadlines: This rate expresses the comparison between the number of deliveries made on time and the total number of deliveries:

• (Number of deliveries on time/total number of deliveries) * 100

Service rate: This rate indicates the ratio of the number of parcels received to the number of parcels ordered:

• (Number of parcels received/Number of parcels ordered)* 100

Non-compliance rate: This indicator expresses the proportion of non-conforming products delivered in relation to the total number of products delivered:

• (Number of non-conforming products/total number of products delivered) * 100

The main activities of the procurement function

The procurement function is generally responsible for placing orders on a day-to-day basis, but on the basis of agreements negotiated by the purchasing function.

Procurement plays a strategic role because it has a direct impact on:

• ‍The company's profitability: Optimum supply management helps to reduce storage costs, avoid stock-outs and ensure that operations run smoothly.‍
• Customer satisfaction: By guaranteeing that products or raw materials are always available, it helps to satisfy customers by meeting delivery deadlines.‍
• Competitiveness: Good supply management reduces costs while improving the company's flexibility and responsiveness to demand.

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Key stages in the supply chain

1- Forecasting requirements

Procurement is based on a rigorous analysis of future requirements for raw materials, finished products or components.

This forecast is based on:

• Sales and production history.
• Seasonal cycles or market trends.
• Current or forecast customer orders.

A good forecasting system makes it possible to accurately determine the quantities to be ordered, thereby reducing storage costs and avoiding stock-outs.

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2- Order management

Once the requirements have been identified, order management begins. This includes:‍

• ‍Launching replenishment orders: based on stock levels and forecasts, orders are placed with suppliers.‍
• Tracking orders: this involves monitoring deliveries of orders in progress to ensure that products reach customers on time.‍
• Coordination with internal departments: This involves working with the production, sales or distribution teams to ensure that the goods ordered match operational requirements.

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3- Stock management

Stock management is a crucial component of the procurement function. It consists of:

• ‍Controlling stock levels: maintaining sufficient but not excessive stock to avoid unnecessary storage costs.‍
• Optimizing replenishment: triggering replenishment orders according to predefined thresholds (minimum stock or safety stock) in order to avoid stock shortages.‍
• Carrying out inventories: physically checking stocks periodically to ensure that they correspond to the quantities recorded in the IT systems. To find out more about stocktaking: https://www.stockpit.app/blog-en/how-do-you-take-inventory-and-how-much-time-should-you-really-devote-to-it

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4- Receiving goods

Once the goods have been ordered and delivered, several steps are necessary:‍

• ‍Receiving and checking: checking the quality, quantity and conformity of the goods received against the order.‍
• Storing: arranging products efficiently in warehouses or shops to facilitate their use or dispatch.‍
• Managing returns or complaints: if products are faulty or non-compliant, procurement ensures that they are returned or replaced.

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5- Supplier management

Purchasers maintain close relations with suppliers in order to:

• ‍Manage orders and monitor deliveries: the procurement function must place orders and ensure that products or services are delivered within the agreed deadlines, while communicating with suppliers to resolve any logistical problems.‍
• Quality control on receipt of goods: checking that products received meet specifications and dealing with suppliers in the event of non-conformity or complaints.‍
• Continuously evaluate supplier performance: regularly monitor and evaluate suppliers according to criteria such as quality, delivery times and responsiveness, in order to adjust or strengthen collaboration.

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Key performance indicators you should know

The smooth running of the procurement function is measured by various key performance indicators. Here are 4 important ones:

Stock turnover rate: this measures how often stocks are renewed over a given period.

• Turnover / Average stock at selling price

Breakage rate: this indicator measures the frequency with which the company runs out of stock.

• Number of orders not filled due to stock shortages / Total number of orders.

Average supply time: this indicates the average time taken between placing an order and receiving the goods.

• Sum of lead times for each order in a given period / total number of orders in the same period.

Supplier compliance rate: this indicator measures the ability of suppliers to meet deadlines and quality standards.

• (Number of compliant deliveries / Total number of deliveries) * 100

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How often should these indicators be measured?

The frequency of these measurements will depend on the nature of your business: however, generally, indicators will be evaluated on a monthly basis.

With Stockpit, you have access to a wide range of features designed to optimize the management of your operations. Among other things, you can:

• Easily create and receive orders for your suppliers, simplifying your procurement processes.
• Benefit from automatic, real-time stock status updates, giving you constant visibility of inventory levels across your various warehouses.
• Quickly generate delivery notes when preparing your orders, guaranteeing smooth and accurate management of your shipments.

Try it for free!

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