No matter how efficient, no business can claim to be self-sufficient internally. Every company depends on the outside sector for acquiring services or goods. That is why understanding the concept of procurement becomes an absolute necessity.
What Is Procurement?
Procurement is a process by which companies and industries purchase products or services from a third-party supplier or vendor. It is an important part of any business because it enables the business to carry out its activities without any hiccups smoothly.
You can do procurement as a seller or as a buyer. It is a full-fledged process that incorporates various activities alongside the product journey. Keep in mind that the procurement process should be devoid of any resistance so that businesses can run their operations smoothly.
Parts of the Procurement Process
Businesses need the following to make relative and necessary purchases:
- Data collection and market research
- Inquiries about product resale value
- Price comparisons with brand competitors
- Previous orders
- Business-related decisions
- Payments
Types of Procurement
Direct Procurement
It is a practice in which any business acquires raw materials, instruments, machines, and labor to produce or manufacture products for its own brand. Direct procurement is what influences the production of products. If this is halted, it directly affects the sales of the business.
Indirect Procurement
Indirect spend is the use of materials, goods, and services for any external use whether to facilitate a business or to assist any company in conducting their organization’s activities. Indirect procurement has no direct correlation with the business and its end products. However, it is necessary for the operational capacity of any organization. Hence, it is indirectly connected with the company’s progress.
Goods Procurement
Goods procurement is the most well-known type of procurement. In this type of procurement, raw materials and other tangible resources are acquired to conduct business. This one is linked with both direct and indirect procurement.
Services Procurement
It is a procurement process in which businesses purchase services from a third party. The services either directly add value to the product or service provided by the company or aid in the business operations to achieve the final product.
Is Procurement and Purchasing the Same?
It is common for people to mistake procurement for purchasing. However many factors divide these two into separate categories, such as intent, end goal, and the stakeholders.
Procurement |
Purchase |
| Acquiring goods and services | Buying goods and services |
| Focus on the value of items | Focus on the cost of the items |
| Is a proactive approach | Is a reactive approach |
| Provides all the things that are necessary for the operational capacity of a business | Provides the necessary raw materials |
KPIs for Procurement
Procurement KPIs are a quantitative way to analyze the efficiency of the whole process. These KPIs provide valuable insights into the effectiveness of the whole journey and help businesses identify their lacking areas.
KPIs |
Purpose/ Intent |
Calculations |
| Purchase order cycle time | The time period that the vendor takes to supply the required items to the company | Number of hours or days it takes to process requisitions / Number of purchase orders sent to suppliers |
| Supplier lead time | The time period the supplier takes to supply the needed items | Number of days it takes for items to arrive after supplier receives purchase order / Total Number of purchase orders sent to supplier |
| Number of suppliers | Relying on one supplier is not sufficient to conduct mass production. Thus, it is necessary for companies to collaborate with more than one supplier | Headcount of the suppliers that are dealing with the company |
| Supplier defect rate | A measure of the defective raw materials that are being provided by the supplier | Number of defective parts of vendor / Total number of parts from the same vendor |
| Supplier Availability | How a supplier reacts to the ninth-hour demands of the company | Number of suppliers fulfilled the business order / Number of orders sent to the supplier |
| Fulfillment Accuracy | Capacity of the supplier to meet the demands of the company | Number of accurate orders from supplier / the Total number of orders from the same supplier |
| Total ROI of Process | How the overall procurement process is benefitting the organization’s sales turnover | Annual savings generated: Total Amount spent on procurement |
| Compliance Rate | Ensures quality by assessing the difference that exists between the quoted price and the final payment | Disputed invoice: Total invoices |
| Purchase Order Accuracy | Maintains a strict check on whether the raw materials that are being supplied align with what was ordered or not. | Product/ Service delivered: targeted delivery order |
| Spend under management | Is necessary for keeping track of the overall and net budget of the company. It is also necessary to ensure that the product expense does not increase after the purchase requests | SUM = Total approved spend (direct, indirect, and service-related cost) – Maverick spend |
Principles of Procurement
Accountability
The business markets are now expanding with every passing day. This expansion of business is leading to complex supply chains. To ensure smooth processes, businesses should assign accountability to someone for their actions. Accountability is when a company appoints someone to lead the procurement process and then that someone is responsible for the outcomes.
Competitive Supply
Companies that depend only on a sole supplier need to procure products from various suppliers. Not only is this a healthy activity but is financially viable as well. Having multiple suppliers is a necessity because it helps companies to choose from the best solicitors. This can also be helpful for companies to strike a balance between price and quality.
Consistency
For companies to stay aligned with their product turnover, the procurement process should be consistent. The procedures, the SOPs, and the pathways to acquire goods and services should remain persistent across the board. This practice ensures that there are no communication gaps.
Fit for Purpose
The fit-for-purpose phrase indicates that the company is purchasing those services and goods that best suit the company’s intended purpose. This not only reduces additional costs but also ensures that the services and goods can be delivered under the objectives and goals of the company.
Value for Money
Value for money is a phrase that describes the process of a company acquiring the highest quality raw materials or services for its operational capacity at reasonable costs. Organizations should understand that low costs do not always equate to high-quality goods. Companies should focus on getting the most out of their money by managing budgets more efficiently.
Fair Dealings
There is no room for biases and favoritism in the e-commerce industry. Every person involved in the procurement process should keep the bids and purchase orders as transparent as possible. There should be no room for inclement towards a specific vendor, solely based on personal connections.
Necessity
This principle is subjected to the acquisition of only those raw materials, goods, and services that are of utmost importance for the company’s optimized performance in the market. Procurement specialists should avoid any unnecessary costs which are just adding up to the budget burden of the company.
Integrity
People who are involved in the procurement process need to practice unbiased behavior and should exhibit high moral traits such as trustworthiness, reliability, and honesty. This is because the company is relying on them for fund transactions and smooth financial operations.
Transparency
As the procurement process involves colossal transactions, there is a need for the process to be as transparent as possible. From the payments made to the acquisition of raw materials, everything should be streamlined. This enables the company’s authoritative figures and decision-making bodies to get a clear view of the whole procurement process.
Key Differences Between Public and Private Procurement
Public Procurement
In this type of procurement, the government bodies requisition goods and services for industries, factories, or to serve state-owned enterprises. Regulatory bodies conduct public procurement in favor of the public interest.
Private Procurement
When a company acquires raw materials and services for the optimal functioning of its own business, it is known as private procurement.
Difference |
Private Procurement |
Public Procurement |
| Funding | The company’s finance department handles the finances | Taxes and government departments decide the funds |
| Regulation | International regulatory bodies are less onerous and more subjective | International regulatory bodies such as the World Bank, ADB, WTO |
| Stakeholders | Small number of stakeholders involved | Everyone who is financing the services |
| Focus | Profit-focused | Public focused |
| Scrutiny | Lenient | Aggressive |
How Procurement Works
Planning
The company stakeholders should develop a budget strategy regarding the necessary services and goods. Finance managers of the company should also be a part of this planning process.
Sourcing
The sourcing department, mainly the department heads and the purchasing approvers, should conduct internal and external market research to source out the best suppliers.
Payments
The finance department of the company rolls out the required payments so that they can acquire market-competitive goods and services at suitable prices.
Evaluation
The overall evaluation of the total spend, analyzing the gaps in the procurement process, and maintaining and strengthening the company-supplier relationship. This evaluation helps project the future spending of the company.
Steps in the Procurement Process
For a business to carry out a successful procurement process, it needs to draft a process that is reliable, transparent, and optimized. Here are some of the steps that are part of a successful and sufficient process.
1. Identification of the Needs
Companies should identify the necessary items whose absence is hindering the functioning of the business. These needs can be identified via quick surveys, requisition forms, or meetings with the employees.
2. Submission of the Requisition
After the identification of the company’s needs, the responsible team should draft and submit a requisition against all the necessities of the company. The team should first analyze whether the requested items are in stock or not. In the case of services, the team should assess how the absence of the requested services is creating gaps in the overall company’s performance.
3. Sorting the Suppliers
There are many ways in which a company can initiate its bidding process. Some of the most widely used methods include RFP (Request for Proposal) and RFQ (Request for Quote).
The bidding process is highly dependent on the purchase requisition and the type of purchase requested.
4. Negotiations of the Best-Suited Offers
The procurement team is responsible for drafting a purchase request. The team is also in charge of establishing the terms and conditions. This is to ensure that the company is getting value for money.
5. Initiating the Purchase Order
One of the most crucial steps, PO generation goes through various checks to ensure that the requirements, pathways to procurement, and payment methods are all transparent. The procurement specialists are responsible for providing the supplier with the purchase order.
6. Receiving and Reviewing the Goods
The procurement team then analyzes the received goods and services. The review process involved the assessment of how aligned the delivered goods are with the PO expectations. In case the received goods and services are not up to the mark, the team can ask for adjustments either as compensation or by returning.
7. Analysis of the Order
This one is a more in-depth analysis of the received order. The procurement team matches the processed order with the received one. The same team also conducts a supplier survey to analyze whether the supplier is performing according to the company’s expectations or not.
8. Payment Approval and Settlement
The team is in charge of submitting the final invoices to the finance department after cross-checking with every involved department. The invoice approval is a necessary step to omit any unprecedented error in the procurement process.
9. Post-close Activities
Last but not least, the procurement department needs to close the procurement process by ensuring that the record is kept, maintained, and reported. Record maintenance is inevitable for future analysis and long-term company goals as well.
The Bottom Line
The procurement process is an absolute necessity for any organization. This process, when done right, is highly beneficial for business turnover. Not only does it save businesses from stock out, but also adds value to the productivity of the business processes.
