Procurement Strategy vs Purchasing Strategy: Key Differences Explained

Many times teams notice that both terms, procurement strategy vs purchasing strategy are being used interchangeably and make this comparison. They frequently overlap and some organizations consider them synonymous. There is still a practical difference that is useful to make. A procurement strategy is generally the wider policy or approach for a business in terms of its sourcing of goods and services, supplier management and cost, quality, risk and continuity protection. Purchasing strategy refers to the way that buying is organized and carried out more frequently; channels, order timing, quantities, approvals and delivery control.

The terms are not legally defined. “purchasing strategy” could refer to the overall sourcing strategy in one company, and to only the buying methods and order control in another. The following comparison is not a discussion of vocabulary but a scope distinction to help teams take on responsibility.

What is procurement strategy about?

A business-oriented definition of procurement strategy is: A strategic approach to acquiring products and services that helps a business achieve cost, quality, delivery, capability, risk, compliance, cash flow and growth objectives. It can encompass the entire procurement lifecycle – category management, strategic sourcing, supplier management, contracts, risk management, governance, performance monitoring and improvement.

Strategic procurement isn't just a single buying decision. It determines the way the company will deal with the supply market in the future.

The more extensive approach to the procurement strategy.

Procurement strategy can include direct materials, packaging, MRO, logistics, capital equipment, professional services, and contract manufacturing. It prioritizes categories and not just individual purchase orders.

When a manufacturing company is purchasing a component that is critical to their production, they must consider the supplier's capacity, technical quality, MOQ, lead time, total cost and the continuity of production simultaneously. That combination of decisions is at the procurement-strategy level. The following is just one possible result of that plan, in the form of a purchase order.

Questions Procurement Strategy Should Answer

Procurement strategy should answer questions that go well beyond when to raise a purchase order:

• What should the company prioritize across cost, quality, delivery, and risk?
• Which suppliers and categories create the greatest exposure?
• Which sourcing model fits each category—single source, dual source, local, or imported?
• How should supplier performance be managed after the award?
• What level of quality and delivery reliability is required to protect production?

Those questions belong to procurement planning and supplier management. They are broader than deciding how to issue an order or when to reorder stock.

What Is Purchasing Strategy?

Useful purchasing strategy definition is planned approach which a business takes to organize and control the actual process of purchase of goods and services. It could include purchasing channels, timing for ordering, supplier utilization, order quantity, approval criteria, delivery expectations, price negotiation, payment, and purchasing procedures.

The use of this term varies by organization. This is because some people consider purchasing strategy to be synonymous with procurement strategy. Others use it for the action aspect of the procurement process—the purchase, scheduling and control of approved requirements.

The Main Focus of Purchasing Strategy

Purchase strategy is frequently taken care of with regards to the effective place and effective administration of purchases. These typologies of decisions involve the use of approved suppliers, framework agreements, blanket orders, planned releases, competitive quotations, reordering points, purchasing catalogs, or direct buying channels.

Examples of purchasing strategies in a factory are easy to come by. A buyer may place order quantities for cartons and labels, determine if he wants to consolidate MRO orders with one distributor versus another, or establish his own rules for re-ordering fasteners and standard components, either locally or from overseas. The selections are not only significant to inventory, cash and delivery when the supplier list is approved, but they're relevant when it's not.

Look into Purchase Strategy and Purchase Decision on a Daily Basis

Purchase strategy in procurement is evident in everyday work, such as when to buy, how much to buy, from whom to buy, from which level of approval, and how to repeat purchases.

There is still room for commercial sense at this juncture. Sometimes a lower price is not necessarily desirable if it results in overstocking, high MOQs, a long lead time, or lack of delivery options. In addition to price, order scheduling and inventory planning must be included.

Procurement Strategy vs Purchasing Strategy: Key Differences

There are conflicting terms across organisations. Another distinction is that procurement strategy has a wider scope and is more business-centric whereas purchasing strategy has a narrower scope and more focussed on buying methods and execution.

Difference in Scope

Procurement strategy can encompass the entire external-supply lifecycle, from business requirements and category planning through to contract, risk, performance and improvement. Buy strategy is concerned with how the approved requirements are bought, scheduled, controlled and delivered.

With an electronic component critical to a production line, procurement strategy may determine the number of supply sources, qualification standard and contract form. Order releases, amounts of fish, timing of releases, and the channel for ordering releases are dictated by purchasing strategy.

The hard copy copybooks were discarded.Hard copy copybooks were abandoned.

Typical issues procurement strategy deals with are long-term business value, total cost of ownership, supply continuity, supplier capability, quality and risk. Often, buying strategy involves having the right to execute a purchase efficiently, when to buy, the commercial terms, balance between inventory and planned demand.

The two goals are related. Both must take costs and delivery into account. Typically, procurement strategy is more of a broader view of business goals.

Difference in Time Horizon

Procurement strategy tends to be applied throughout the annual planning process, category plans, supplier relationships, product life cycle or growth periods. Purchase strategy can apply to purchasing cycles, reorder periods, production schedules, contract call-off windows and delivery dates.

In the case of a custom OEM part, supplier development is a multi-year procurement decision. The other blanket-order shipment is a purchasing-cycle decision.

Difference in Supplier Management

Typically, procurement strategy involves supplier segmentation, supplier qualification, supplier audits, supplier development, risk monitoring, relationship management and performance governance. Purchase strategy might include approved-supplier utilization, ordering analysis, quoting comparison, availability, and delivery follow up.

Purchasers continue to provide useful feedback to suppliers, and may oversee operational relationships. A more expansive supplier tactic could be part of procurement or category management.

Difference in Risk Management

In most cases, procurement strategy evaluates the risk of the supply market, supplier dependence, technical risk, quality risk, compliance risk, and planning for continuity. Operational risk can be managed by purchase strategy, such as order timing, inventory, supplier allocation, delivery confirmation and escalation.

It is a good case example of a sole source tooling supplier. Back-up source and a qualification plan may be needed for procurement strategy. The amount of safety stock to be carried and timing for ordering replenishments may be determined by purchase strategy as the supply is awaiting approval.

The internal ownership differs from one another.Inside ownership is different in each.

Senior management, procurement leadership, finance, engineering, quality, operations and supply-chain management can be involved in the procurement strategy. Users of purchasing strategy tend to be purchasing managers, users, buyers, planners, warehouse staff, and operational stakeholders.

If the two teams have joint responsibilities for supplier, contract and/or category, then responsibilities should be documented. The boundary is often not clear from job titles.

Difference in Performance Measures

The metrics for procurement strategy can include total cost, supplier quality, delivery reliability, category results, contract coverage, supply-risk reduction, supplier capability, and business contribution. Purchasing strategy can be evaluated based on purchase-order accuracy, cycle time, inventory performance, adherence to deliveries, price variance, and adherence to process deadlines.

Only speed is a measure of purchasing and savings is a measure of procurement can result in a distorted behavior. There needs to be a balance between procurement KPIs in both layers.

Procurement Strategy vs Purchasing Strategy

How Procurement Strategy and Purchasing Strategy Work Together

Procurement strategy and purchasing strategy should not be separate functions, but an integrated approach. Procurement strategy determines direction of the business. Buying strategy is converted into buying rules and schedules.

Procurement Strategy is the setting of the Business Direction.

Procurement strategy sets goals, including the following: reducing total delivered cost, supply protection, quality improvement, qualification of alternative suppliers, new product development, or supplier concentration reduction.

Those goals influence the selection of suppliers, the structure of the contract, the ways in which risks will be managed, and what the expectations are for performance. If an imported custom component, the strategy may involve two qualified sources, a capacity review every quarter, and a quality gate prior to volume release.

The Purchasing Strategy converts Direction into Buying Rules.

The strategy for purchasing results in order quantities, supplier allocations, release schedules, approved purchasing channels, reorder levels, payment terms and delivery controls.

If buyers can't cancel a framework agreement, it's not worth having. Common criteria are time-based release schedules, a minimum safety inventory for a critical component, or dividing the orders among two qualified sources to prevent either source from being idle.

Data Feeds Purchasing Decisions

Data is collected for purchase activity, such as delivery, price changes, order accuracy, inventory, shortage, MOQ and demand variation. That information must be fed into the procurement team's category strategy, supplier allocation, supplier risk planning and commercial negotiations.

The useful cycle works as follows: establish the strategy, carry out the buying process, monitor actual performance, identify issues, and adjust the strategy and the buying process when things change.

Practical Example: Manufacturing Procurement and Purchasing

The difference is more easily demonstrated in a generalized manufacturing case than in a vocabulary argument. Imagine a custom component that is critical to production: an industrial part or an OEM electronics product that has tooling, a well-defined specification and an important MOQ.

The decision to make the procurement strategy took place in December 2013.

The initial questions the business asks are: How much does it spend each year, what is the risk of running out of the part, what technical specifications does it need, is the supplier capable of providing it, what are the quality requirements, how long does it take to get the part, what is the minimum order quantity (MOQ), and what impact does the late or incorrect part have on the production process?

Two suppliers may be qualified, technical-approval may be required, a framework agreement may be negotiated, and total delivered cost may be considered instead of unit price, among other requirements, in this class of procurement. Supplier evaluation and supplier qualification are here, prior to any routine order release.

The Purchasing Strategy Decision

Order quantities, purchase frequency, assignment of suppliers, delivery plan, buffer stock, approved ordering process, and rules for when to release purchase orders are all part of the purchasing strategy that determines order quantities.

The purchasing team could maintain the line of products with the help of a forecast, reorder points, blanket order, scheduled releases and supplier confirmations without stocking more inventory than cash flow allows. When one supplier's MOQ is high, the rule of buying may be to release small lots or maintain a buffer rather than make a one-off purchase when there is an increase in demand.

The following summarizes the functionality that the example demonstrates:

The procurement strategy determines the management approach to the category throughout time. The methods used to order and control planned requirements in practice are defined as purchasing strategy.

One of the layers can fail independently from the other. A good supplier system will not ensure production if orders are given too late. A poor supplier-selection or risk decision will not be improved by efficient ordering.

When to Focus on Purchasing Strategy

In this situation, when the issue is not just order processing, but structuring the supplier base, the sourcing model, risk management, cost management, or governance.

Having a fragmented supplier base or Uncontrolled supplier base.Uncontrolled or fragmented supplier base.

The presence of too many suppliers, repeated purchases, variable pricing, or inadvisable suppliers often indicate that there is no procurement strategy. Typical starting points include spend analysis, supplier segmentation, category planning, supplier qualification, and more specific approval rules.

Single-Source Dependency or High Supply Risk.

A continuity plan is required for critical categories with minimal suppliers, long lead times, and/or unique tooling, or categories that are difficult to qualify. The activities of Dual sourcing, Supplier development, Capacity review, Safety stock and Approval of alternative materials are part of this level.

Repeat Quality and Supplier Performance Issues

When a supplier repeatedly fails to deliver on schedule or to manage the defect, it is not because of a late order placement but because of a failure at any of the following steps: supplier selection, specifications, contracts or performance governance. The supplier strategy should be the subject of root cause analysis and not the last shipment.

The business model is either a business growth or new product or global expansion.

Growth brings informal buying into the open. Usually, category ownership, supplier planning and increased risk controls are required with new products, volume increases, international sourcing, customer commitments, etc.

The right time to plan for buying.

When the supplier and direction of the category is known but orders are not well planned, released, approved, tracked or received, focus here.

Multiple Stockouts and Emergency Purchases

Buying strategy can enhance reorder points, forecast usage, release schedule of suppliers, buffers of stock and timing of order. If there are repeated shortages, it may also indicate that there is a problem with the supplier. The cause of the buying-rule change should not be concealed.

Poor MOQ control, and too much inventory.

Examples of purchasing strategy are order quantities, batch sizes, supplier MOQs, scheduled releases, demand consolidation and inventory aging. The lower unit price of a high quantity order may lead to an inventory and cash-flow liability that is greater than the business can handle.

Slow Approvals and unclear Buying Channels.

The approved catalogs, lists of suppliers, thresholds of approval, and purchase-order controls, coupled with clear responsibilities, can reduce the time of routine buying and still maintain control. There is no need to go through the same process as a custom production part if a low risk consumable is used.

Inconsistent Order Execution

Have uniform order confirmation, delivery dates, packaging directions, document specifications, shipment tracking, receiving, and invoice checking. Common problems are orders that are placed on an incorrect drawing or the lack of required documentation on shipments.

Common Mistakes When Comparing Procurement Strategy and Purchasing Strategy

The comparison will be useful only if not used as a rigid dictionary.

Using the Terms as universally defined.

There are different levels of usage by company, country, industry and structure. Some companies refer to the two labels as the same. Still others employ them to differentiate between strategy and purchase. Give responsibilities within the organization instead of by job title.

Organizations must adopt a broader perspective when considering Purchasing Strategy, as it is not solely about price.

Order timing, availability of suppliers, inventory, MOQ, delivery reliability, payment terms and flexibility of operation are also included in purchasing strategy. If the unit price is a little higher but the excess stock or long and unreliable lead times are reduced, then it can be the better commercial option.

Many organizations see Procurement Strategy as a document only approach.

If the written strategy does not affect the selection of suppliers, the rules of buying, contracting, risk management, performance management, and daily decision making, then it's worth little. Objectives require owners, processes, KPIs and a review process.

Failing to distinguish between categories for different controls.Using the same controls for all categories.

Normal, routine materials, custom OEM components, capital equipment, and materials that are critical to production do not require the same level of evaluation, approval, and supplier management. Controls should be based on risk and value.

The failure to account for the feedback loop between planning and execution.The lack of feedback loop between planning and execution.

Procurement rules should be dictated by procurement strategy, which should be driven by purchase of data. Leaving that loop unchecked, companies continue to rely on outdated supplier assumptions, lead times, inadequate inventory policies, and the same delivery issues.

How to Align Procurement Strategy and Purchasing Strategy

Alignment is a management exercise: same facts, clear ownership, and a review rhythm.

Decide on the scope of each function

Identify the decisions that are made in procurement strategy and purchasing strategy. Add in supplier qualification, category plans, sourcing models, contracts, risk, order schedules, purchasing channels, inventory and delivery execution. The boundaries will differ according to the size of the company. Ownership is still a must be clearly visible.

With a documented procurement strategy framework, teams can visualize those boundaries without making it a language game.

Ensure that Strategic Objectives are connected to Purchasing Rules.

The broad goals need to be broken down into real tasks. For protecting supply continuity, approved back-up suppliers, minimum inventory, scheduled releases and capacity confirmation may be necessary. There you have it, the procurement planning process in action: Direction first, then procurement rules.

Ensure that Shared Data and Performance Reviews are used.

There should be the same information regarding spend, prices, delivery, quality, inventory, MOQ, lead time and order performance shared between procurement and purchasing. Cross-functional reviews should include an examination of strategic outcomes as well as purchasing execution.

The strategies should be reviewed and adjusted.

Reevaluate procurement strategy when business objectives, product, customer demand, or markets of suppliers change. Adjust purchasing plan when order history, stock levels, supplier lead times and/or production plans change. Use each as a living management tool.

Summary Guidance – Procurement Strategy Sets Direction, Purchasing Strategy Controls Execution

Procurement strategy vs purchasing strategy makes sense as a scope distinction. Procurement strategy typically refers to the overall business strategy of suppliers, sourcing, cost, quality, risk, governance and the value of suppliers in the long-term. Purchasing strategy is more closely about the ordering, scheduling, controlling, and delivering of approved requirements.

There is still going to be variability between organisations with regard to terminology. The challenge is to set scope, responsibility, decision rules, and indicators to ensure the business can simultaneously deal with long-term supplier value and day-to-day purchasing execution.