what is procurement

What is procurement? How procurement affects the profitability of any business organization?

Procurement is a crucial part of supply chain, it is the process that a company buys products or services from the third party.

It is an important contributing factor in the company’s profitability and revenue generation, and is usually related to business expenses.

Right procurement strategies help to streamline the process of purchasing goods for the company at the most reasonable prices.

Also it helps to build an understanding of the supply chain and thus enables the organization to spot any kind of issues in the process.

In this procurement guide, you will get to know the basic concepts of procurement, its importance and types.

This guide will also elaborate how procurement process is carried out and how you can improve procurement management efficiency.

Table of Content

Chapter 1: Overview of Procurement – What is Procurement?  

Chapter 2: 8 Essential Steps Required to Carry Out the Procurement Process

Chapter 3: Essential Tips needed to Improve the Efficiency within Procurement Management

Chapter 4: Understanding the Differences between Indirect, Direct, And Service Procurement

Chapter 5: Understanding the Differences between Purchasing and Procurement

Chapter 6: How to Review your Procurement Management Process?

Chapter 7: Is a Procurement Manager is Needed for your Business?

Chapter 8: Frequently asked questions About Procurement

Chapter 1: Overview of Procurement What is Procurement?  

Overview of Procurement - What is Procurement

Procurement has always been an important part of businesses. Hence, it enables the company to get the goods at the lowest possible price.

The procurement methods have changed tremendously in the last few years, however, the need of purchasing the goods remains as important as ever.

1. What is procurement? What are the main takeaways of procurement?

Procurement is the process that involves a wide range of activities for obtaining goods and services at competitive prices.

Procurement is a whole process of thinking that goes behind purchasing goods and services for a business.

Procurement is performed at a relatively large scale and involves both buyers and sellers, however, only the activities of buyers are labeled as procurement.

Some of the key takeaways of procurement are:

-Procurement is important for the functioning of business and if done well can help to gain profits for the business. Procurement alone can earn 70% of the revenue for the organization.

-Procurement is not only the act of making purchases, but it also includes all the actions ranging from sourcing, negotiating terms, purchasing, tracking the movement of supplies to the maintenance of records.

Continuous assessment of the whole procurement process is crucial to identify any weak spots or inefficiencies in the system.

The cost of the procurement process can be cut down by automating the tracking process of procurement through the introduction of technology.

2. 4 different types of procurement

procurement process

Procurement is of different types. Procurement is classified into direct and indirect procurement depending on the way the company uses the goods. The other classification is into reactive and proactive procurement.

  • Direct procurement

Direct procurement refers to the purchase of goods, materials, or anything that is required for manufacturing purposes.

This type of procurement causes continuous growth in the revenue of the organization and helps to gain external profits.

For example, direct procurement mainly provides goods like raw materials, stock items, or parts of the production.

  • Indirect procurement

Indirect procurement refers to the purchase of goods that are meant for internal use in the organization. This procurement is required to carry out day-to-day operations and does not contribute to the revenue or profit gain.

Products like office supplies, consumables, perishables, furniture, etc can be bought from indirect procurement service.

For a procurement company, direct procurement and indirect procurement are equally important. We will introduce more detailed information about direct procurement and indirect procurement in the later part.

  • Proactive procurement

The pre-planned purchasing of goods before a customer places an order or considers buying a product is called proactive procurement.

For example, manufacturing companies buy the materials in advance before orders and bulk purchasing can be cost-effective.

  • Reactive procurement

Reactive procurement

The planned purchasing of goods after an instant need or placement of orders by customers is called reactive procurement.

Reactive procurement isn’t cost-effective, because sometimes manufacturers have to pay additionally to procure materials urgently.

3. 3 P’s pillars of defining procurement

For in-depth understanding of the procurement definition, it is necessary to understand the three pillars of procurement. Procurement is a series of processes that consists of three main components also known as 3P’s.

  • Process

The process is the list of rules that are followed during any procurement. The process of procurement includes review, order, purchase, and paying for the goods.

The protocols followed during the process become complex with every step forward. Hence, the process needs to be well designed and well organized.

  • Paper

Paperwork, record keeping, and documentation are crucial at every stage of procurement. The reason is to collect and store the information for references and auditing.

The efficient recording of information for coordination and comparison is not only important for the buyer, but also the seller as well.

  • People

These are stakeholders and other people involved at every stage of the procurement process. These people are responsible for authorizing each stage of the process.

The number of people depends on the scale at which manufacturing is being carried on. For large organizations, each procurement stage has a dedicated team for the management of operations.

4. Why procurement is important?

Why procurement is important

Procurement is a crucial step for any organization to stay competitive in the industry. Because it helps to understand the supply chains and assists in finding better processes for the goods.

The procurement process is seen as a strategic function working to enhance the profit gain for the organization.

It helps to streamline the process, lowers the costs of goods, and also helps in the identification of better and cheaper sources of supply. In short, it helps to reduce the ‘bottom line’ of the company.

Cost reduction is one most important factors during procurement. But on another hand, it is also important to maintain the quality of items purchased. So that company’s reliability is not compromised.

5. How does procurement work?

Procurement is an ongoing process that consists of several steps. The company identifies its needs, sources the suppliers that can supply the goods of desired quality.

They negotiate prices, terms and conditions. Do final purchasing and receive goods and follow transactions.

Procurement is an ongoing task. On one hand, companies negotiate the terms with suppliers to ensure the best possible cost.

While on the other hand, companies are also conducting quality checks to make sure the goods delivered are of desired quality.

Small scale organizations have one or two people handling all the procurement processes from sourcing the suppliers to receiving goods.

Bigger organizations have specialized teams for each supplier to meet the internal specific needs. On the same procurement tasks, all teams work together to fulfill the company’s requirements.

Chapter 2: 8 Essential Steps Required to Carry Out the Procurement Process

Essential Steps Required to Carry Out the Procurement Process

Procurement is a step-wise process that needs several elements to be considered such as identification of goods, sourcing suppliers, negotiating terms, reviewing, purchasing, receiving, evaluation, and record keeping.

Following are some of the important stages of procurement.

1. Identifying the requirements to carry out procurement

The first step is to recognize the needs of the organization that helps to sketch out an accurate plan for further functioning.

The team identifies whether the item is needed or not, any existing supplier can fulfil the need or a new supplier needs to be sourced.

The company also identifies whether it is a new purchase or restocking of previous items. The team consults all the relative departments to make sure the procurement plan is devised efficiently, and it will fulfil the needs of each department.

2. Completing essential documents of the requirements

Completing essential documents of the requirements

Whenever a company needs to purchase goods in a significant quantity, they need to complete related documents and make a formal request to the finance department.

The request is also known as a purchase requisition. The relevant documents are either in written or electronic form.

They consist of information related to product procurement like price, quantity, time frame, and other specifications.

The purchase requisition can be denied or accepted depending upon the decision made by the purchasing department. If approved, the team can move a step ahead and select vendors for purchasing goods.

3. Determine the various sources supplying procurement

After determining the requirements and approval of purchase requisition, there is a need to find the best vendors among a list.

For the re-orders, the order be made to existing vendors. For new items, the process of finding the vendor is a bit longer.

You need to check whether the quality, speed, and cost provided by the new vendor are according to the needs of the organization or not.

After finalizing the vendor, a request for quiet (RFQ) is made to the potential supplier. The request needs to be as detailed as possible to make the process smooth.

4. Negotiating and finalizing the price

Negotiating and finalizing the price

The right practice for a good procurement practice is to get at least three quotes from vendors, then you can make a selection from them.

You can examine each quote and negotiate where possible. Once you agree, make sure to get the condition into writing.

After selection, the supplier is announced according to the fair process. If you need to walk away from the offer, make sure you have some alternative options to consider.

5. Purchase requisite and order

After the approval of purchase requisition, concerned authorities in the company will generate a purchase order (PO).

And this PO must consist of all the specific terms and conditions. It needs to be sufficiently detailed and carefully compared to avoid any kind of mistakes.

6. Service supply and inspection

The buyer is notified ahead of shipment. The mode of delivery depends upon the previous practices of buyer and seller or whatever has been decided between both.

Once the goods are delivered, the buyer needs to thoroughly inspect the delivered items to make sure everything is following the PO.

Service supply and inspection

The buyer examines for any kind of damages and errors. Thus the buyer approves or rejects the order based on the examination. If approved, the process moves towards payments and transactions.

7. Taking the payment process

If the items are approved, check the documents and pay the invoice according to the price mentioned in PO.

The organization needs to maintain an error-free and smooth payment process. It can avoid a late fee and build a trustful and good relationship with the vendors.

8. Keep the record and review

It is important to document each step of procurement for auditing, references, and taxation process. The entire process should be evaluated and re-evaluated to improve and avoid any errors.

There is a case that neither the buyer nor the seller record the process. And when they have caused controversy about former works, there is no clear evidence to prove that which side is right. So keep the record is very important.

Chapter 3: Essential Tips needed to Improve the Efficiency within Procurement Management

Essential Tips needed to Improve the Efficiency within Procurement Management

To achieve a seamless procurement process, you need to implement the right procurement management practices. So that process remains efficient and transparent.

Here are some traits that can help you to improve procurement efficiency.

1. Improve your procurement management by incorporating an automated process

It is important and beneficial to automate the procurement management practices, because the process will be kept transparent and no data will be lost.

Automated software can help to reduce the chaos caused by paperwork by digitizing the information. It also lessens the workload of employees and reduces human dependency while keeping the process error-free.

There are certain tools that automate the procurement process. These tools help to navigate complex procurement requirements quickly and easily.

Procurement automation tools help the users to improve the internal workflow and track a number of suppliers.

2. Improve the vendor management within the procurement process

Improve the vendor management within the procurement process

A structured program that helps to manage suppliers. It also can improve the impact of those suppliers to the buyer’s business is called vendor management.

Vendor management within the procurement process includes managing vendor deliverables, compliance and payment invoices.

Vendor management can be improved by paying attention and importance to each vendor. You should maintain a structured supplier relationship by providing near-real-time updates.

You also need to understand each vendor’s performance strategically to maintain a collaborative relationship.

3. Take greater control over business management

There are different strategical practices that are helpful to get a control over business management.

This involves the processes and procedures that regulate, guide and protect an organization. Setting up financial policies is also a way to have a control over business management.

Make sure to practice transparency for decision-making and prefer the hierarchy for decision-making.

So that, you will have a complete understanding of your business, it will help you while making important decision. To improve and further refinement, accept the feedback from all the stakeholders.

4. Use analytical skills for decision making

Analytical skills typically refer to the set of skills that make up your ability to analyze information, solve problems and make decisions.

Critical thinking, decision making, data analysis, research, and communication are some of the top analytical skills.

From project planning, sourcing vendors, and negotiating the terms and conditions, make sure to make the decision using top-notch analytical skills. Try to have a broader perspective to keep all the projects on track.

Chapter 4: Understanding the Differences between Indirect, Direct, And Service Procurement

Understanding the Differences between Indirect, Direct, And Service Procurement

1. What is direct procurement? When is it used?

The act of obtaining goods and raw materials for production is called direct procurement. The goods are formed in large amounts.

The suppliers buy these products at best possible price ensuring the quality and reliability. These purchases are made frequently and are necessary for key business practices.

Direct procurement is the purchasing of goods and services that are required for the production of the end product. These are either raw or stock materials that are used for the manufacturing process.

Direct procurement is made to prepare ahead for the production. Direct procurement is vital for a company’s profitability, and it also helps to establish long-term innovative and collaborative relationships.

2. What is indirect procurement? When is it used?

Sourcing of services, products, and goods for a business to enable them for maintaining and developing certain operations, is called indirect procurement.

The expenditure done for the maintenance, goods and services required for daily operations refer to indirect procurement. Indirect procurement is not directly contributed to the company’s bottom line.

Indirect procurement is the purchase of goods for internal use of the organization like for day-to-day use.

For example, procurement of office supplies, furniture, etc. is indirect procurement. Any kind of hindrance in indirect procurement affects day-to-day business operations.

3. What is service procurement? When is it used?

What is service procurement

The procurement of people-based services and management of the workforce is called service procurement. These are the providers offering human services to companies.

The major related companies include technical consulting companies, specialty service agencies, or maintenance companies.

A large part of today’s external workforce is a part of service procurement. Service procurement fills in gaps and helps to keep the process in line.

For example, you can be offered procuring professional services, software subscriptions, etc. from related company.

Chapter 5: Understanding the Differences between Purchasing and Procurement

Understanding the Differences between Purchasing and Procurement

In business functioning, the two terms, “purchasing” and “procurement” are often used.

Both the terms are related to buying of goods, due to which they are thought to be the same by some people, however, they are certainly not the same and carry different meanings.

1. Purchasing and procurement are different in definition

Procurement is an entire series of processes from identifying a company’s needs, finding relevant vendors to the establishment of long-term and innovative relationships. Procurement is one of the stages of the entire supply chain.

While purchasing is one of the sub-step of the procurement process that is associated with buying goods and services and making transactions.

Purchasing is only limited to purchase requisition, purchase order, receiving the delivery, evaluation and verification, and final processing of payment.

2. Purchasing and procurement are different in strategic and tactical

From the above-mentioned definitions, it is crystal clear that purchasing is a tactic while procurement is a strategy. Purchasing is associated with buying goods and it ends with the transactions.

However, procurement is a whole strategy that starts with identifying the exact needs of the company, approving the purchase requisite, finding the right vendor, negotiating the prices, and maximizing the profit gain. Thus, procurement is a strategy that adds value to any business.

3. Purchasing and procurement are different in objectives

Purchasing and procurement are different in objectives

Purchasing is limited to the cost of order placed, and procurement is associated with maximizing the value of the entire process.

The objective of purchasing is to minimize the cost of one purchase. And the objective of procurement is to evaluate totals costs, mitigate risks, maximize profits, and adding to revenue.

4. Purchasing and procurement are different in the relationships with supplier

Purchasing focuses on building one-time relationships with the vendor as it aims to work with the only existing supplier base.

On the other hand, procurement puts its focus to develop sustainable and long-term relationships with the different vendors and supplier bases.

Procurement sees the vendors as strategic partners of the organization. Those vendors can play their role to add profitability to the organization.

5. Purchasing and procurement are different in risk evaluation and mitigation

Purchasing only focuses on transactions short term and doesn’t concern risk evaluation of the purchase.

Lack of risk evaluation can pose significant threats to an organization like financial risks, operational risks, data security risks, etc.

While procurement focuses on risk identification and evaluation to mitigate all kinds of risk factors, because it adopts the strategy of compliance among all stakeholders.

Chapter 6: How to Review your Procurement Management Process?

How to Review your Procurement Management Process

Working with the existing vendors is comparatively easier than sourcing new ones. However, sourcing is necessary thus their performance needs to be optimized, because that will affect the overall project.

Here are some benefits that you can gain through the procurement management process while working with vendor services.

1. Identifying suppliers contract milestones

To keep the process error-free and to gain maximum benefit out of the collaboration, it is important to identify the suppliers’ contract milestones.

Milestones require both the buyers and sellers to review the functioning and make sure the services and goods are being delivered on time.

Once there is some problems happened, both sides can find out what’s the reason, and which step cause the problem, then solve that immediately.

2. Reviewing how suppliers are performing

It is important to keep the performance of suppliers in check. Make sure to compare it with the contract and purchase order (PO) to identify any loopholes.

If the performance is right keep on going. And if something is being compromised from the side of the supplier, make sure to reach out and review the contract.

You can set certain key performing indicator to review the supplier performance with time. Make an actionable supplier evaluation plan to finalize broad and detailed parameters.

Certain parameters including price, quantity, quality, service, delivery, payment terms, certifications, value addition, innovation and compliance are necessary to review.

3. Identifying, inspecting, and resolving supplier performance

Identifying, inspecting, and resolving supplier performance

For keeping the procurement process smooth and seamless, make sure to properly identify and inspect any kind of errors and issues in the supply of goods.

There will be some issues related to supplier performance, and it is critical to implement a strong evaluation plan for resolving those issues.

Then also execute internal and external accountability can help you manage your procurement business well.

4. Communicate the update

Communication regarding updates in the procurement process between different stakeholders and external vendors is also significant.

It can help in improving the process and generate more creative ideas, mitigate the problems, and hence add value to the business.

More is the communication, more creative ideas will be generated. The limitation in the communication within the procurement process reduces the ability of the procurement department, the end to end procurement process will also be influenced by that.

Chapter 7: Is a Procurement Manager is Needed for your Business?

Is a Procurement Manager is Needed for your Business

Typically, organizations spend 55 percent of their costs on the procurement process, while this amount can rise to 80 percent in some companies.

Thus to improve the bottom line, your business needs a procurement manager also called a purchasing manager.

1. What is a procurement manager? What you can gain from them?

A procurement manager is the person who is responsible for the procurement process is sourcing suppliers, examining supply chains, identify errors and devise a strategic plan to help improve profitability.

Hiring a procurement manager will save you from a lot of hustle, because he will be responsible to look for the product needs.

What’s more, look around for a new and better deal, and imply specialist knowledge to help you achieve your goals are also his responsibility.

2. What procurement managers are dealing with?

When a business grows, it becomes too burdening for the owner or the CEO or CFO to make decisions regarding purchasing. For the reason that it requires proper insight into the matters.

Thus, here the procurement manager comes to your rescue. The purchase manager can handle all the procurement tasks with specialist skills.

What procurement managers are dealing with

  • Tactical sourcing and sourcing out activities

The procurement manager will be responsible for tactical sourcing which is short term and transactional approach. They will also be responsible to look for vendors and source out activities related to procurement.

  • Negotiating the deals and vendor management

The vendor management puts forward various deals, hence the procurement manager is responsible to negotiate the terms and conditions. The manager also need to help in closing great deals on behalf of the organization.

  • Strategizing and choosing products and goods

The procurement manager will determine the specifics of requirements. And hunt the right goods and products according to the requirement is also his job.

Then, the manager will start strategizing the whole process and see whether the vendor is worth collaborating with or not.

  • Approving organizational purchase request

The company wants to close off the deal at the best possible prices. Hence, the procurement manager needs to analyze and evaluate each purchase request and financial report before approving them for the company.

  • Receiving goods and services

The procurement manager keeps an eye on the goods that are delivered. Also, he keeps the inventories in check, and has detailed information regarding products, their performance, and delivery.

The manager makes sure the received goods are as per the standard of the existing contracts.

3. What are the key advantages of working with a procurement manager?

Here are main benefits you can get after hiring a procurement manager:

-The manager also evaluates price, time of delivery, and quality of goods. He will handle the procurement process more smooth and error-free.

-The purchase manager takes off the burden from the shoulders of higher authorities by taking over all the procurement-related tasks. And he will holds face-to-face meetings with the vendor management to learn more about their services.

-The procurement manager visits the distribution and supplier plants to make sure the desired quality is being achieved. Such visits help to know much about supplier management. After making sure the vendor is reliable, then the company can sign a contract with them.

To keep up with the latest trends in the industry, the procurement manager attends trade shows, meetings, and conferences for you. This helps you avoid spending time on that and your team still can understand the contemporary condition of the market well.

Chapter 8: Frequently asked questions About Procurement

faqs

1. What a procurement manager can do in procurement?

While the primary duties of a procurement manager or specialist are linked to sourcing goods and services for the organization. Procurement managers evaluate and compare products and services to determine which best meet the organization’s needs.

2. What are the types of procurement?

Procurement can be direct, indirect, goods, and service procurement.

-Direct procurement is the purchase of the goods that are required to make end products in the manufacturing process like raw material.

-Indirect procurement is the purchase of goods that are for day-to-day use in the organization like office supplies.

-Goods procurement involves the purchase of physical items. It can be both direct and indirect.

Service procurement is procuring workforce and people-based services like professional services.

3. How is project procurement management processed?

The project procurement management involves evaluating the order, review and approve the received items from the vendors.

The procurement management process specifies how to deal with various supplier managements. It can make sure the desired level of service is received.

Implementation of project procurement management helps in resolving the issues of suppliers swiftly and you can get maximum value out of it.

4. What is the procurement cycle?

In the business functioning, the steps of the procurement process are considered as a procurement life cycle. Procurement is an ongoing process just like our life cycle whose various steps overlap and rely on each other.

A thorough procurement cycle has integrated processes and businesses. The procurement cycle needs to be aligned with the existing process and make a smooth transition with the new ones. The procurement cycle is not always linear, adjustments are required occasionally.

Conclusion

Procurement is a crucial part of supply chain management and is evolving continuously with time. Digitizing various tasks related to procurement has reduced the cost of each procurement cycle significantly.

The use of digital software makes the process more user-friendly. Also, digitization has helped achieve transparency which wasn’t possible before.

When the lockdown was implemented in many countries, companies with a diverse network of suppliers across the world were able to cope with the crisis and resort to alternate options.

Thus the crisis has shed light on the importance of having a risk management plan to keep yourself from such disasters.