What are the differences between the objects of work of “purchase” and “procurement”?
“Purchase” and “procurement” have different working objects : “purchase” revolves around orders, while “procurement” revolves around suppliers.
We know that procurement has two levels of tasks: order level and supplier level. “Purchase” revolves around orders and projects, placing orders, following orders, urging orders, delivering goods, inspecting goods, and receiving goods, which are mainly administrative and secretarial tasks; “procurement” revolves around suppliers, evaluating, selecting and managing suppliers, improving their performance, and incorporating them into product development as early as possible to give full play to the advantages of suppliers.
The tasks at these two levels are related: if the problems at the supplier level are not solved, there will be more problems at the order level. You know, it is difficult to solve problems at the level where they occur – the order level. Only when they are raised to the supplier level and through the selection and management of suitable suppliers can they be truly solved.
For example, when a supplier has quality problems, it will first appear at the order level because the incoming materials are not up to standard. What “purchases” usually do is return the goods and let the supplier restock them for free. Some quality problems are related to the supplier’s system and process, which need to be improved at the supplier level. “Purchases” do not have the ability and resources to drive suppliers to solve this problem systematically. As a result, the same problem will occur repeatedly.
This is quite typical in the construction industry: supplier selection is generally a centralized decision, such as at the company level; supplier performance is decentralized and managed by each specific project. The project is only interested in project-level issues. Once delivery and quality issues arise, they are generally patched and rushed to catch up; for supplier-level issues, such as process and system issues, there are neither resources nor capabilities to deal with them, resulting in supplier-level issues not being resolved. However, some project-level issues are rooted in the supplier’s organization, process, and system levels. If supplier-level issues are not resolved, the same contractor or supplier will have the same problems on this project today and on another project a few months later. Therefore, there is a saying in the construction industry that “there are only lessons, no experience.” In this industry, whether in China or the United States, supplier management is very weak. This is also part of the reason why the industry has been struggling.
Similar problems are also common in companies with centralized procurement and decentralized management. You must know that problems related to systems and processes must be raised to the supplier level to be truly solved, and cannot be effectively achieved through decentralized management . Just think about it, if you are just one of 10 factories, why would you spend a lot of energy to evaluate suppliers, identify the shortcomings of their systems and processes, solve the overall problems of suppliers, and let the other 9 benefit? The factory level is mostly based on order processing, and you don’t have the resources to deal with problems at the supplier level. As a result, there is supplier selection but no supplier management, and even such extreme situations occur: some suppliers are blacklisted in Division A, but are still preferred suppliers in Division B.
In my opinion, the choice of supplier isManagement obligations are inseparable . Without centralized management, centralized procurement means that the headquarters is usually driven by the single indicator of cost when selecting suppliers, and the branches are usually driven by the single indicator of delivery when managing suppliers . Everyone is playing for their own single indicator and doing local optimization, which is destined not to be “procurement”.
Second, the two are at different levels : “purchase” is an administrative secretary, not an equal business partner; “procurement” manages strategic resources and is also an equal business partner.
“Purchase” does not mean that there are no tasks for “procurement”, but those tasks, such as supplier selection, are mainly done by other departments, usually internal customers, such as the design department. In this way, “purchase” is just doing miscellaneous work, and its status is naturally low, and of course it cannot become an equal partner of design and marketing. It is precisely because of its low status in the company that “purchase” cannot attract first-class employees and becomes a person’s last stop in the company.
“Procurement” has gone far beyond shopping with cash, and is a strategic resource for companies to manage suppliers. As mentioned earlier, about 70% of the value-added activities of manufacturing companies occur with suppliers. Suppliers are an important part of the company’s value chain, and procurement is the manager of this strategic resource, responsible for many things that were previously the responsibility of the production and operations department. It is crucial to controlling product costs and is an equal partner of design and marketing.
Administrative and secretarial “purchases” mainly focus on the transaction process, which is closely related to ERP operations; while “procurement” that manage strategic resources focus on the relationship level, developing and maintaining supplier relationships on behalf of the company, which has little to do with ERP operations. For example, when I was a supply chain business manager, this was a “procurement” position, responsible for supplier relationships. The company’s ERP was the SAP system, but I had basically never operated SAP. The purchasers who were responsible for order-level work were busy with SAP all day.
“Procurement” does not use ERP, but it does not mean that they do not use data; on the contrary, they use various reports, indicators and analysis to support supplier selection and manage the overall performance of suppliers, and are data users. “Purchase” focuses on orders and ensures the accuracy and timeliness of data, and is the data producer. This actually has universal significance: judging the strategic importance of a position, whether it is a data producer or a data user can give you a general idea .
The above discusses the characteristics of “procurement”, namely, focusing on suppliers, solving problems at the order level by solving problems at the supplier level; managing suppliers as a strategic resource and becoming equal partners of brother functions; actively managing demand and streamlining supply by streamlining demand.
I would also like to add that there are several situations that are destined not to be “procurement”:
One is that engineers or internal customers decide everything, and procurement is just an execution, revolving around orders, and basically doing miscellaneous work;
Second, procurement has the responsibility to manage suppliers, but does not have the corresponding authority and resources, resulting in a struggle;
The third is driven by a single indicator and local optimization, getting the lowest price at the expense of delivery, quality and service.
The first case is easy to understand. In the second case, the company recognizes the importance of the procurement function and gives procurement many indicators, such as annual cost reduction, on-time delivery and supplier quality. However, with only responsibilities but no resources, procurement cannot support and manage internal customers internally, and has no ability or resources to push suppliers to implement effective improvement plans externally, and becomes a scapegoat for various problems.
For example, in order to reduce costs, suppliers need to optimize product design and improve production processes, but procurement can neither drive the design department, which is unwilling to bear design risks, nor the quality department, which is unwilling to bear the quality risks brought about by production process improvements. As a result, the cost reduction problem has become a procurement problem, and the only tool left in the procurement toolbox is negotiating price reductions. After several rounds of negotiations, both soft and hard tactics have been used, and everything that can be negotiated has been negotiated, but the goal is still not achieved. Then the only option is to implement a strong approach, force the issue, push all the problems to the supplier, play the game of “reduce the price for me by x%, how to reduce it is up to you”, and continue to wallow in the quagmire of “purchase”.
When driven by a single indicator, procurement only focuses on price, and naturally embarks on the path of local optimization, focusing on negotiating price reductions at the order and material number level, and has no intention or ability to influence more things. People’s abilities are used up and lost. If procurement is doing price negotiations all day, after a long time, the only thing they can do is to negotiate price reductions, and the positioning of procurement by the brother function will become more “purchase”. What’s so difficult about bargaining? If you can talk, you can bargain. This is why you can do procurement and bargain with suppliers right after graduating from school.
Under “procurement”, procurement is fully responsible for supplier performance, but this does not mean that supplier management is the responsibility of a single procurement department, especially in technology-driven companies. More precisely, supplier management is a cross-functional task, including engineering design, quality management, order processing, etc. The task of procurement is to lead this cross-functional team and drive team members to perform their respective duties. This requires company authorization (support from the boss), and it also requires procurement itself to have higher leadership, positively influence brother functions, and let them assist procurement in doing the right thing. This places higher demands on procurement leadership, and “procurement” also becomes a leadership role. In the “Certified Professional in Supply Management” (CPSM) of the Institute for Supply Management (ISM) in the United States, one of the three certification modules is leadership, reflecting the industry’s recognition and attention to this role change.
Therefore, whether the procurement department can complete the transition to “procurement” depends on whether it can complete two tasks: one is to select and manage suppliers that can meet the company’s strategic needs; the other is to manage and lead the internal team to jointly perform the supplier management function. The latter is more important and more difficult than the former. It is not to say that bargaining is not important, but if it is still used as the main criterion for measuring procurement personnel, it shows that procurement is still “purchase” in this company.