All About Procurement

Procurement is a fundamental business function that encompasses the entire process of acquiring the goods, services, and raw materials an organization needs to operate efficiently and achieve its objectives.

It’s much broader than just “purchasing” and involves a strategic approach to sourcing, negotiating, and managing supplier relationships.

What Does It Involves?

Procurement is about ensuring that a business has the right resources, at the right time, at the right price, and of the right quality. It covers everything from:

• Raw materials for manufacturing: For a car company, this includes steel, plastic, and electronic components.
• Finished goods for resale: For a retailer, this means the products on their shelves.
• Indirect goods and services: Office supplies, IT software, cleaning services, marketing agencies, utilities, travel expenses, consulting, security services, etc.
• Works: Construction or renovation services.

Key Activities in the Process

While the specific steps can vary by organization and industry, a typical procurement process generally includes:

1. Identify Needs: The process begins when a department or individual within the organization identifies a requirement for a specific good or service. This involves defining precise specifications, quantities, and timelines.
2. Purchase Requisition: A formal request (purchase requisition) is created and submitted, outlining the need, quantity, estimated cost, and justification. This often goes through internal approval workflows.
3. Sourcing Suppliers: Once the need is approved, the procurement team identifies potential suppliers who can meet the requirements. This involves market research, reviewing existing supplier relationships, and potentially issuing:
   • A. Request for Information (RFI): To gather general information from potential suppliers.
   • B. Request for Proposal (RFP): To solicit detailed proposals for complex projects or services.
   • C. Request for Quotation (RFQ): To obtain price quotes for clearly defined goods or services.
4. Supplier Evaluation and Selection: Potential suppliers are evaluated based on various criteria beyond just price, such as:
   • Quality of goods/services
   • Reliability and delivery capabilities
   • Reputation and financial stability
   • Compliance with regulations and ethical standards
   • After-sales support and warranties
   • Sustainability practices
5. Negotiation and Contract Formation: The procurement team negotiates terms and conditions with the selected supplier(s), including pricing, payment terms, delivery schedules, service level agreements (SLAs), and legal clauses. A formal contract is then drafted and finalized.
6. Purchase Order (PO) Issuance: A purchase order is a formal document issued by the buyer to the seller, detailing the goods or services being ordered, quantities, agreed-upon prices, and delivery instructions. It serves as a legal commitment to the purchase.
7. Order Expediting and Receiving: The procurement team monitors the order to ensure timely delivery. Upon receipt, goods are inspected to ensure they match the specifications and quantity ordered. Services are verified against agreed-upon deliverables.
8. Invoice Verification and Payment: The supplier sends an invoice, which is compared against the purchase order and the receiving documents (often called “three-way matching”) to ensure accuracy before payment is processed.
9. Record Keeping and Performance Management: All procurement activities, contracts, invoices, and supplier performance data are meticulously recorded. Ongoing supplier relationship management (SRM) involves continuously evaluating supplier performance, providing feedback, and seeking opportunities for improvement and value creation.

Types of Procurement

Procurement can be categorized in several ways:

• Direct Procurement: Involves acquiring goods and services that are directly used in the production of a company’s final product or core service.
  • Examples: Raw materials for manufacturing, components for assembly, wholesale goods for resale, direct labor for a service.
• Indirect Procurement: Involves acquiring goods and services that support the day-to-day operations of the business but do not directly become part of the end product.
  • Examples: Office supplies, IT software licenses, marketing services, facility maintenance, consulting, travel.
• Goods Procurement: Focuses on the acquisition of tangible items (can be direct or indirect).
  • Examples: Office furniture, machinery, raw materials, finished products.
• Services Procurement: Focuses on the acquisition of people-based services (can be direct or indirect).
  • Examples: Consulting, cleaning services, IT support, legal services, temporary staffing.
• Works Procurement: Specific to acquiring construction or renovation services.
  • Examples: Building a new facility, renovating an office space.

Procurement vs. Purchasing vs. Sourcing vs. Supply Chain Management:

These terms are often used interchangeably, but they have distinct meanings:

• Purchasing: A transactional subset of procurement. It focuses on the act of placing orders, receiving goods, and processing payments.
• Sourcing: An early-stage part of procurement focused on identifying needs, finding potential suppliers, and evaluating them.
• Procurement: The broader, end-to-end process of acquiring goods and services, encompassing sourcing, purchasing, contract negotiation, supplier management, and more.
• Supply Chain Management (SCM): An even broader concept that encompasses the entire flow of goods and services, from raw materials to final consumption, including procurement, logistics, inventory management, demand planning, and distribution. Procurement is a critical component of SCM.

Strategic Procurement (or Strategic Sourcing):

This is a more advanced approach to procurement that moves beyond just tactical purchasing. It involves:

• Long-term Planning: Aligning procurement activities with the overall business objectives and long-term strategy.
• Value Optimization: Focusing on total cost of ownership (TCO) rather than just upfront price, considering quality, reliability, and supplier relationships.
• Risk Mitigation: Identifying and managing supply chain risks, such as supplier disruptions or quality issues.
• Supplier Relationship Management (SRM): Building strong, collaborative relationships with key suppliers to foster innovation, drive continuous improvement, and secure better terms.
• Data Analysis: Leveraging spend analysis and performance data to identify opportunities for cost savings, efficiency gains, and process optimization.

Effective procurement is crucial for a company’s financial health, operational efficiency, and competitive advantage. By strategically managing how an organization acquires its necessary resources, businesses can significantly impact profitability, innovation, and resilience.