Procurement vs. Purchasing
Value vs. Cost – Supplier vs. Vendor
I’m sure you’ve heard the terms Procurement and purchasing, but do you really understand the difference the value one brings over the cost of another? Maybe you’re saying to yourself Procurement is just a ten dollar word for purchasing. Maybe you’re saying buying stuff doesn’t add value it just creates expenses. Well, you’re partially right. Buying stuff does create expenses if what you’re buying doesn’t help produce revenue (directly or indirectly) or you’re paying too much for it. Procurement provides the expertise to ensure the right goods and services grow your business and save money that would have otherwise been spent. These savings go straight to the bottom line; increasing margins, efficiency, and streamlining processes. Sound good? Keep reading!
It’s been my experience that most companies don’t realize the significant advantages that a Strategic Procurement Organization will make. If they did, every company of size would be operating in that capacity. In their mind a Procurement Organization, or should I say purchasing department, is a necessary expense to satisfy SOX, the Sarbanes-Oxley Act of 2002, or simply lift the burden off those who make or sell the stuff for the company. So if companies don’t realize the advantages of Procurement over purchasing, it must mean that decision makers just don’t understand the differences between the two and how a Best-in-Class Procurement Organization directly increases the bottom line whereas a purchasing group is typically just another cost center.
Let’s take “traditional” purchasing first. In simplistic terms, purchasing is the day-to-day tactical activity of a Buyer acquiring goods or services for the organization. They are informed of a requirement, they determine who can provide it and they order it. Very little, if any, analysis is done on the spend, the commodity/category, your business model, the market, or the VENDOR. And you can bet there is no real strategy in place for consistency, savings, quality, or customer service. More often than not the Buyer will come from somewhere else in the organization and lack the education or skill set to perform the necessary sourcing analysis as described above. Now that’s not to say the Buyer won’t have any process at all. Most often they get the requirement and contact their usual friendly vendor of choice. And here’s the best part; if you ask them why they use this particular vendor they will say something like; “that’s who we always use”, or “they have great service and good pricing.” Just don’t ask why the vendor is qualified or you might find out it’s because they provide doughnuts and Starbucks every Friday.
The Buyer can’t provide a better answer because they’ve never gone through a strategic sourcing process (more on that later). However, they may quote the requirement against a couple other vendors to prove their point. This is good, right? Not so much. Even if they do bid the requirement out they are doing one of two things and neither is cost effective or sustainable to the enterprise. They are either taking the lowest cost vendor (which they can’t objectively qualify since they have no objective baseline or “should cost” to go from), or they are using the information as leverage against their “usual” vendor. Let me make this perfectly clear… EVERYONE LOSES IN THIS SCENARIO!
The lowest cost vendor is usually the new guy trying to get in and establish themselves for a long term business relationship with you. He’s usually willing to take razor thin margins or even a loss, at first, to get in and get more business. This won’t last long as he recognizes this is your total strategy and he’s not gaining business. After all, he has his own margins to maintain. Prices will rise in very clever ways; discreet increases, poor quality, shipping/freight expense increases, customer service declines, or they just don’t deliver when you need it…and you just missed a shipment to one of your best customers!
On the flip side, your “usual” vendor doesn’t want to lose business so he cuts his price to match the new guy. Now put yourself in the “usual” vendor’s spot. Every time a new vendor tries to get in and get a piece of the pie, the Buyer is hammering you for equal or better pricing. What are you going to do? That’s right, you’re going to find ways to maintain your margins elsewhere as discussed above. You’re also not going to be very willing to do anything more than what is absolutely required to maintain your position as it’s very obvious that you aren’t all that important to the Buyer. This game always costs more and can cost you customers! If that’s not bad enough, you are also getting known for bad purchasing practices, questionable ethics, and probably running into regulatory and auditing compliance issues. Who can afford that? Better yet, who wants to afford that? But that’s traditional purchasing with “VENDORS.”
Just like it sounds, you put your money in and a bag of chips drops down, or it’s supposed to. Sometimes you have to shake the machine because it got stuck. Maybe it delivers maybe it doesn’t. Maybe the chips are good, or maybe they’re stale and you have to toss them. Either way you’re wasting time shaking the machine and gambling on quality and customers when you could have a reliable qualified partner helping you grow your business with documented savings and processes you can count on. You, the business owner or decision maker, don’t see any of this because your purchasing department isn’t a Procurement Organization with a Strategic Sourcing Process and Total Cost of Ownership (TCO) perspective. I can’t emphasize this enough! TCO and Strategic Sourcing are two of your greatest competitive advantages in the market place!
Stay tuned for my next post on: Best-in-Class Procurement (TCO – Strategic Sourcing with SUPPLIERS)
Let ProcurementSCM do the heavy lifting so you can do what you do best!
See you soon…
Steve Hasbrouck, C.P.M