Goods versus services purchases – similarities and differences

Find out interesting insights with Mike Vaishnav, CFO & Strategic Advisor

Moderated by Riya, Digital Transformation Consultant at Hyperbots

Don’t want to watch a video? Read the interview transcript below.

Riya: Hi, everyone! This is Ria, and I’m very excited to have Mike join us on call today. Mike is a CFO consultant and strategic advisor to many privately held organizations. The topic of discussion for today is goods versus services and the similarities and differences between them when it comes to purchases. So to start off, Mike, would you share your thoughts on the key differences between purchasing goods and services in a typical organization?

Mike: Sure. Thanks. Yeah. So let’s focus on that. It depends on the size of the organization, a big company versus a small company. But let me focus on the general process and how the goods and services differ. The goods would be more on tangible property, where you need to have a specific quantity, specific price, and specific quality of the product you require. It depends on whether you’re buying the raw material or you’re buying the machinery or equipment. It all depends on whether you’re buying for a fixed asset or an inventory. What services would be different? It’s more on the intangible nature, like consulting services, temporary labor, or high-level consulting. It depends on the expertise required, and the level of people needed. The goods are more tangible and measurable, while services are milestone and delivery-based, often tied to hours or retainership agreements. These are the main basic differences between goods and services.

Riya: Got it. So in terms of terms and conditions for procurement, how do they differ between goods and services?

Mike: For goods, as I said, you need specific quantity, quality, and specifications. When you purchase something, you need to ensure that you have specific quantities and specifications, including delivery timing and any maintenance if you’re buying fixed assets. Services can include follow-up services, installation, or after-sales support. On the services side, it’s more about expertise, confidentiality, and deliverables. Milestones and performance levels need to be clearly outlined, including time and labor-based or lump sum agreements. These are the key differences in terms and conditions for goods and services.

Riya: Got it. So would you like to explain when it comes to pricing? How do the considerations differ between goods and services, especially when you’re negotiating with a vendor?

Mike: Goods pricing is largely market-driven. It depends on market rates, supply and demand, and the economic environment. Bulk purchases often allow for negotiations on price and discounts based on payment terms. Services, on the other hand, depend on labor costs and expertise. You negotiate hourly rates or lump-sum fees based on the level of experience and type of service provided. These are the key differences between pricing for goods and services.

Riya: Okay, so could you elaborate on how the approval processes differ when purchasing goods versus services?

Mike: One commonality between goods and services is the need for cross-functional collaboration. For goods, purchasing raw materials, for example, requires operations, procurement, finance, and legal departments to work together. Services, on the other hand, may involve less cross-functional approval, especially for specific departments like legal services, which can order on their own under certain thresholds. Generally, services may involve fewer approval channels if the department has the budget and authority.

Riya: Got it. How does the receiving process differ between goods and services? And what challenges does this present?

Mike: Receiving goods involves matching the goods received with the purchase order and ensuring quality and specifications are met. You also need to match the goods receipt with the purchase order and invoice. Some goods may require testing or verification, especially with machinery or equipment. For services, the process is different as there is no physical product to receive. It may involve verifying hours worked for contractors or ensuring milestones and deliverables are met. This presents challenges in verification compared to the more straightforward process for goods.

Riya: Thank you. So, Mike, would you like to explain how purchase orders play a role in both goods and service procurement? And how does that differ?

Mike: The purchase order is critical for both goods and services. For goods, the purchase order details specific quantities, descriptions, and timing. For services, it’s more descriptive and outlines the type of service and terms. Services may use blanket POs, where a general budget is set, and departments draw from it as needed. In both cases, the PO serves as a formal document for procurement.

Riya: Thank you. So would you like to explain how invoice processing differs between goods and services? And what are the best practices in this area?

Mike: For goods, invoice processing involves three-way matching: the purchase order, goods receipt, and invoice. You ensure that what was ordered matches what was received and invoiced. For services, it’s a two-way match, between the purchase order and the invoice, as there’s no goods receipt. If contractors are involved, you can also match the time cards with the invoice. For other services, you ensure the department head approves the invoice based on milestones achieved. These are the main differences in invoice processing between goods and services.

Riya: Got it. So, Mike, how does vendor onboarding differ for goods versus services? And what should organizations really focus on?

Mike: For goods, you need to assess the vendor’s reputation, certifications, and production capacity. Supply chain reliability and logistics are key considerations. You want to ensure the vendor can meet your material needs without causing delays. For services, you focus on the vendor’s expertise, reputation, and the quality of their workforce. In both cases, you need to ensure the vendor can meet your organization’s specific requirements.

Riya: Thank you, Mike. So that brings us to the last segment of the interview. What role do you see AI playing in streamlining procurement for both goods and services?

Mike: AI can play a significant role in automating workflows, reducing human intervention, and improving accuracy in areas where companies don’t have sophisticated systems in place. AI can help with compliance, predictive analysis, and market data insights. It can assist in real-time data sharing with vendors and create dashboards to track purchases, vendor performance, and inventory levels. AI can offer customized solutions to streamline procurement processes for both goods and services. 

Riya: Thank you, Mike.