Purchasing and procurement

by Michael Wilson — This article originally appeared in the May/June 2020 issue of FMJ

As recently as the early 1970s, the notion of supply-chain management, and with it, the concepts of procurement and purchasing, were unknown within American industry. Businesses, government agencies, manufacturers, as well as facility managers and building owners, were selecting the products they needed based on a business model developed during the industrial revolution.

The essence of that model was:

• When a manufacturer needed parts, they ordered enough to meet current needs.
• The manufacturer made products using those parts, but just enough to meet current demand.
• Distributors ordered the products and a few days or weeks later, the product was delivered to the distributors.
• Once delivered, the distributors sold the products to their customers.

This model worked well for decades. However, by the 1960s and into the 1970s, suppliers and distributors were looking for a more strategic approach to distributing products. The goals, among many, were to cut costs, improve efficiencies (e.g., shorten delivery times, reduce waste), and ensure products were available whenever needed, not just when they were ordered, helping to avoid product delays.

Manufacturers made specific changes to achieve these goals, and words like supply chain management, supply-cost management, supplier integration, strategic sourcing, and others also became part of the lexicon.

What spurred such a revolution? It seems all parties in the distribution process—from manufacturer to end-customer— realized that streamlining the supply chain offered even more benefits than they first suspected.

Soon, the federal government started encouraging if not requiring some form of streamlined supply-chain management program from its vendors. In the 1970s, the U.S. Air Force discovered it could save as much as 30 percent on its annual purchases with a supply-chain management program in place.

The new program helped eliminate waste and the Air Force had the products it needed when it needed them, which helped to reduce downtime. The Air Force was able to take advantage of bulk-ordering price discounts and rebates. Under the supply-chain management model, the entire distribution process worked more like a smooth-operating electric clock, instead of a stop-and-go traffic light.

Now it was up to end-customers such as facility managers to take the next step. Would they look for ways to streamline their ordering so they too could take advantage of greater efficiencies and, with them, cost savings?

At that time, FMs had to realize there is a significant difference between purchasing and procurement. Although the two terms can be used interchangeably, they do not mean the same thing.

Purchasing

Purchasing products is what facilities had done for decades before the concept of supply-chain management was considered. It is very simply the process of purchasing goods when needed and as needed.

As to how it compares to procurement, here is a significant distinction:

• Purchasing is a verb; it is an action.
• Procurement is a noun; it involves strategy.

For example, when purchasing, an FM places an order with a distributor to purchase cleaning supplies a couple of days later, the order is delivered. An invoice is sent to the FM and is paid. That is the end of the process: ordered, delivered, paid.

The entire process is typically quick ( one of its main advantages), very casual, even personal. The FM may have worked with the same distributor for several years, making the process an old habit. They have a cordial, if not friendly, relationship. When supplies are needed, that distributor is the one to call and other considerations are often left out of the equation.

Procurement

Procurement involves strategy. Although it does include purchasing products, it has a much broader scope, usually involving several stages:

Determining what kinds of products are needed.

Just as FMs must prepare a “scope of services” description before taking janitorial bids and submitting requests for proposals for cleaning, they also need to create something similar when it comes to products. This does not include which products to select but what type or category of products to select, such as degreasers, sanitizers, or an autoscrubber.

Identifying potential suppliers

Some FMs prefer to select products from a local distributor. However, a local distributor may not always be able to address all their needs and, therefore, is not always the best fit for a procurement program. In such cases, a distributor that is part of a national network may be a better choice.

Determining which specific products to select

With the list of needed products in hand, FMs can work with potential suppliers to determine which specific products best meet their needs. Some suppliers have access to online dashboard systems that help them select products such as cleaning supplies, paper goods, liners, and other items used daily. These dashboards allow both the fFMs and the distributor to compare products based not only on pricing but also on features and benefits, whether the products meet green and sustainability requirements and other criteria. This information helps determine which of a wide range of products to purchase. (See sidebar: Procurement and Sustainability.)

Selecting suppliers based on price, payment options, and terms

Once products are selected, procurement typically involves purchasing large quantities at one time. In such situations, price negotiation plays a vital role. With some management companies, it can take 45 days or longer to pay invoices. This may be too long for a smaller distributor, making it a consideration when selecting distribution services. Establishing payment terms that are agreeable to all parties is part of the procurement process.

Formalizing a conflict-resolution platform

As with all business relationships, problems may arise between distributor and FM. In purchasing, there is typically no set procedure for how to resolve issues should they occur. With procurement, there is a mediation process so all parties know what steps they can take to resolve a problem.

Evaluating delivery and logistics solutions

The farther away a destination is from the distributor, the longer it may take to receive products. To alleviate this issue, some distributors are part of a nationwide network. This means if Distributor A in Omaha does not have certain products in stock, it can turn to sister Distributor B in Tulsa, which does have the products in stock, and have that distributor deliver the products to the customer.  This can eliminate product delays.

Having a Plan B

Why do distributors need a plan B? Sometimes a product may be temporarily or permanently unavailable. Sometimes, there is a delivery disruption such as a warehouse fire, climate change, or impact from coronavirus.  Having a Plan B ensures that one or more comparable products have already been selected. Last-minute purchasing tends to become a form of “hope for the best” purchasing. Having a backup plan prevents this.

Procurement is much different from purchasing. It involves vetting different suppliers, determining what types of products are needed, considering payments and terms, negotiating, and other factors. It also involves creating a strong relationship among all stakeholders for the benefit of the facility. Satisfying the needs of the facility, along with building users, is the goal of an effective procurement strategy.

About the author

Michael Wilson is vice president of Marketing and Packaging for AFFLINK, a global leader in supply chain optimization, packaging, and developers of ELEVATE, providing clients with innovative process and procurement solutions to drive efficiencies in today’s leading businesses.