Procurement Procurement

Welcome to “Procurement Procurement,” where we demystify the old and new happenings in the procurement world. This article embarks on the strategic importance of procurement to organizations across industries. Learn how efficient procurement strategies drive business success and sustainability, from the very basics of sourcing materials and services to the leveraging of the latest technologies that promise to make business procurement even more efficient. The best of the procurement world beckons you.

Understanding Procurement

Understanding Procurement

Procurement describes the process of obtaining needed goods or services, primarily for business needs. In many cases, this word is associated with the business environment since companies have to get services ready for purchase or have to secure any product in huge volumes. The procurement journey is an essential aspect of organizational operations and may span from the identification of an initial need to the final buying decision process. While entities could either be buyers or sellers in this process, we shall focus most on the perspective of the buying company.

Key Insights

  • Procurement involves the acquisition of goods or services, generally for business operations.
  • The procurement cycle includes several phases: preparation, solicitation of bids, and the processing of payments, engaging multiple company departments.
  • Costs associated with procurement vary widely based on what is being procured and the scale of the need.
  • Competitive bidding is a common feature in extensive procurement operations, attracting several potential suppliers.
  • Unlike straightforward purchasing, which is transactional, strategic procurement involves a deeper, more planned approach to acquiring necessary resources.
Exploring How Procurement Functions

Exploring How Procurement Functions

Procurement often devours a big part of corporate resources, both from the point of view of the budget and management. The procurement budget is usually stipulated, arguing that managers have a clear ceiling that should be used for obtaining the required goods or services. Efficiency and effectiveness of the procurement process represent critical factors within the strategic operation of a company since obtaining material or services at the right price might be the element of profit or loss.

A company’s internal standards usually guide the procurement cycle and are often coordinated by a company’s division of Accounts Payable (AP). It involves many vital stages, right from the first request for goods through to the final approval to make payment.

These stages include planning purchases, setting standards and specifications, conducting supplier research and selection, managing financing and price negotiations, and controlling inventory. Given its complexity, procurement often requires coordinated efforts from different parts of an organization.

The procurement process unfolds through several key steps:

  • Identifying the necessary goods and services.
  • Completing a purchase requisition and gathering quotes from various suppliers.
  • Negotiating terms and prices, finalizing contracts, and issuing the purchase order.
  • Receiving the goods or services and processing the payment.

Procurement is one of the most critical business operations in most companies.

Procurement is then the tool par excellence to optimize the chain of provision, helping to find reliable suppliers who can offer the products and services under competitive conditions and prices, with features according to the specification of the company.

This is true for literally any need—raw materials in production, marketing service, or day-to-day office supplies.

For example, if a company continuously requires a service without an end date, the company might always need an email security solution. This ensures that the company can choose suppliers within its budget constraints and meet all its operational needs. This is a definite strategic choice made by the company, ensuring that the company saves time, money, and other resources that might be used when dealing with a supplier who is not practical. This means that they have to improve their strategies and identify suppliers so they are able to meet the quality requirements searched by the business and supply it consistently and reliably.

How Competitive Bidding Contributes to the Procurement Process

How Competitive Bidding Contributes to the Procurement Process

Competitive bidding is one of the integral parts of business transactions that involve multiple potential suppliers. For goods, it is much easier, but when it comes to services, there is no transparent process. This includes bidding protocols and standards set to be followed during the acquisition process of goods or services.

When it comes to goods, competitive bidding usually includes submitting proposals that specify the per-unit cost, along with terms related to shipping and delivery. However, the bidding for services is often more intricate due to the involvement of factors such as individual roles, technology solutions, operational methods, customer support, training programs, and service charges.

In both scenarios, the entity requesting bids will select a supplier based on a combination of cost considerations and operational needs. The party issuing the bids is tasked with managing costs tailored to the specifics of the procured goods or services. Government bodies and major corporations frequently issue calls for procurement bids on a regular or planned basis to ensure they foster optimal partnerships that support their operational objectives.

Types of Procurement

What is it?Examples
Goods ProcurementItems are generally stored as inventory for both direct and indirect procurement needs.Essentials such as raw materials, wholesale products, and office necessities.
Indirect ProcurementGoods and services are not directly related to production processes.Various operational needs like office supplies, marketing support, and utilities.
Direct ProcurementEverything necessary to manufacture a final product, from raw materials to machinery.Components, parts, machinery, and items procured for resale.
Services ProcurementServices involving personnel, applicable to both direct and indirect procurement strategies.Legal services, contracted professionals, temporary staff, and on-site security solutions.

Goods Procurement

This would, therefore, require the acquisition of all the needed tangible products that an organization requires for direct use in production, for instance, raw materials, or in functions that support production, for instance, office supplies.

Indirect Procurement

These are the purchases that support the operational aspects of a firm and do not necessarily go straight into the generation of revenues. For example, this category might include office supplies, furniture, and marketing materials.

Direct Procurement

Classic examples include raw materials, machinery, and other parts that are part of manufacturing. Examples in this category will include purchases made in the procurement of all goods and services required by the production process.

Services Procurement

This category is split into direct and indirect services, similar to goods procurement. Direct services procurement involves services that are integral to the company’s core operations, possibly including production labor. Indirect services procurement, on the other hand, might cover services that support the business environment, such as on-site security services.

9 Steps in the Procurement Process

9 Steps in the Procurement Process

Procurement workflows can differ widely based on a company’s specific structure and operational requirements, yet they typically follow these nine essential steps:

  1. Determine the necessary goods and services for the company

Initially, a company must pinpoint what specific goods or services are required, whether it’s something entirely new, a replenishment of current inventory, or a renewing a service agreement. This stage often involves detailed assessments of the requirements, including exact specifications, material types, part numbers, or service details. It’s advisable to involve all departments impacted by the procurement to ensure the acquired items meet the comprehensive needs of the organization.

  1. Submit a purchase requisition

A formal request for purchase, or a purchase requisition, is usually resorted to in the case of pretty large supplies or services submitted by the appropriate employee or department. This alerts the organization of the need, including details like cost, desired time frame, and quantity, among others, necessary information that makes the purchasing team aware. This request is later reviewed, and upon approval, the procurement ensues.

  1. Evaluate and choose suppliers

Armed with an approved purchase request and a long list of specifications, it’s time to choose the right vendor. This would involve issuing a request for quote (RFQ) to all potential suppliers and soliciting detailed proposals that would best compare against each other. Other factors to consider include efficiency, quality, and reliability, among others. All ethical considerations and corporate social responsibility form an essential part of the choice of suppliers, especially in those businesses that are committed to sustainable practices.

  1. Negotiate costs and contractual terms

It is advisable to gather at least three quotes from different suppliers to ensure competitive pricing. Scrutinize and negotiate these quotes as needed, ensuring you have alternatives in case negotiations fall through. Once a final agreement is reached, document the terms in writing.

  1. Issue a purchase order

Create and send a detailed purchase order to the chosen supplier, specifying the exact goods or services needed so the supplier can accurately fulfill the order.

  1. Accept and examine the received items

Upon receipt, inspect the delivered items for any discrepancies or damages to ensure everything aligns with the specifications in the purchase order and meets quality expectations.

  1. Perform three-way matching

The AP department shall execute a three-way match between the purchase order, proof of delivery, and the invoice. This would confirm the items delivered or services rendered to what was ordered and protect the company from payment on overbilling, errors, or incorrect and unauthorized charges. All discrepancies shall be cleared prior to authorizing payment.

  1. Validate the invoice and process payment

Approve the invoice for payment if you are only assured that the three-way match is duly validated. The account payable should be processed; it needs to be uniform from the point where, with correct authorization, all invoices get timely processed payments up to the deadlines and amounts of invoices. The timely and accurate payment of invoices will prevent the company from being treated with late fees and will allow it to continue building solid relationships with the supplier.

  1. Maintain documentation

Keeping detailed records throughout the procurement process is crucial. These records support future reordering at the correct prices, assist in audit processes, aid in tax calculations, and can help resolve any disputes that might arise.

Three Pillars of Procurement

The procurement process is underpinned by three essential components: people, processes, and documentation.

People

The human element forms a very critical factor in the procurement cycle. Every stage of the process is initiated and approved by human beings. This team includes the procurement specialist, significant stakeholders, accounts payable personnel, and the department requisitioning the goods and services. The level of complexity and value at stake will generally determine how many stakeholders are involved. In the case of high value or high stake, a more comprehensive input and approval area is needed.

Process

The procurement process is one of those ways that an organization brings efficiency because it helps cut costs and ensures that supplies are cut in good time. Without following an ordered process logically, there may be errors and inefficiencies, as parties involved are likely to have no clear guidelines of what is to be done and when it is supposed to be done. Inefficiently organized procurement processes, on the other hand, mean poor organization. As a result, there are overpayments, which influence the company’s bottom line, and late payments, which, in turn, can mar relations with the supplier.

Paper

This is where the keeping of elaborate records at every stage of the procurement process becomes paramount. The documents become an invaluable storehouse of corporate knowledge relating to payment terms, supplier performance, and other details, which are often critical operational insights. Records that ensure continuity and efficiency of procurement in case of staff changes. Detailed documentation would also mean that it will be very easy for the business in the future to trace or even substantiate each activity within the procurement circle in case of an audit or dispute.

Procurement vs Purchasing

Procurement vs. Purchasing

Below is a comparison table that outlines the differences between these two processes.

ProcurementPurchasing
Strategic Process Transactional Process
Emphasizes ValueFocuses on Price
Proactive ApproachReactive Approach
Anticipates and Addresses Future NeedsMeets Immediate Needs

Procurement is the process of acquiring goods and services, but sometimes, it does get mixed up with procurement in some respects due to their several similarities. Nonetheless, the two have critical differences amidst them.

Procurement is a strategic process where the purchase of goods and services takes a perspective. Emphasis is placed on the total value in purchases and follows a set of steps with the main aim of ensuring that the best outcome has been reached on purpose. Usually, companies take a lead time, plan, and go ahead with a proactive way of procurement and ordering to address the potential shortfall and future requirements.

On the other hand, purchasing is, in the main, a transaction. It is an act of buying goods and services with the proper emphasis on getting the best value for the price being offered. This tends to be reactionary, where the approach is immediate requirements and short-term needs.

Financial Management of Procurement

Financial Management of Procurement

Procurement expenses are very usual and expected in a business’s financial accountancy since purchasing allows a company to amass both goods and services that support its revenue objectives. Some of the functions of the CPO that help in controlling these complexities include appointing a chief procurement officer (CPO). Some of the roles of the CPO include:

  • Establishing and overseeing procurement standards.
  • Collaborating with accounts payable to integrate these standards smoothly and ensure efficient payment processes.
  • I am participating in procurement panels, especially in scenarios involving multiple competitive bids, to make informed procurement decisions.

Procurement practices can be viewed and managed from various perspectives. Different industries and companies have unique approaches to handling the procurement of both direct and indirect costs. Furthermore, the strategies for managing procurement costs can vary significantly between companies focused on goods versus those providing services.

Direct vs. Indirect Procurement Expenses

Direct expenses encompass all costs associated with the production and cost of goods sold, including every item that goes into the final product. In manufacturing settings, this could include everything from raw materials to individual components and parts. For retail businesses, it involves the cost of acquiring merchandise from wholesalers for resale.

In service-oriented businesses, direct costs are mainly the hourly wages of employees who deliver services. These direct procurement expenses directly influence a company’s gross profit margins.

Conversely, indirect procurement relates to purchases that are not tied directly to production. These are expenditures necessary for supporting general business operations. This category can cover a wide array of items such as office essentials, marketing materials, advertising efforts, consultancy fees, and beyond. Typically, businesses employ distinct budgets and management strategies for direct and indirect costs.

Accounting for Procurement in Goods versus Services Industries

Accounting for Procurement in Goods versus Services Industries

Procurement is a critical part of expense management across all sectors. Yet, the approach to accounting for procured items varies significantly between companies that deal primarily with goods and those that provide services. This difference fundamentally affects how revenues and costs are recorded and managed.

For companies that focus on goods, procurement is central to acquiring inventory items, necessitating robust supply chain management to ensure efficiency and cost-effectiveness. These goods are critical as they directly contribute to the company’s primary revenue through sales.

On the other hand, service-oriented companies generate revenue primarily through the services they provide rather than through physical goods. While they may not depend as extensively on a traditional supply chain for inventory, they might still procure technology or other goods to support service delivery. For these companies, direct procurement costs typically revolve around the labor costs of employees who deliver services, making direct procurement less of a focal expense. However, such companies often incur higher relative indirect costs, which include expenses like marketing and other operational costs that are managed as indirect procurement expenses.

The understanding of essential financial management, then, comes from knowing the different approaches that companies that offer goods and those that offer services take in their procurement. This, in turn, will ensure companies fine-tune their procurement and accounting strategies to the very needs of either their goods-focused or service-oriented operational model, hence optimizing their cost structures and overall financial performance. These are strategic procurement solutions that ensure the effective utilization of resources and efficiency of operations while keeping companies on the winning edge in their respective markets.

FAQ

What is involved in the procurement process?

The activity, therefore, includes all the activities related to the acquisition of required goods and services for the firm’s daily operations. It encompasses sourcing, negotiation of terms, buying, receipt, inspection of procured goods, and maintenance of detailed records of all activities mentioned above, most importantly.

Can you please simplify the meaning of RFQ in procurement?

A Request for Quote (RFQ) is one of the procurement procedures through which a company gets bidding from specific contractors to handle a project. Many companies that need to be served with products require, in this case, an invitation for the bid (IFB) in this kind of procurement procedure.

Does the procurement actually involve a purchase?

Yes, but that goes further than just buying. Procurement includes strategic activities while purchasing, or being a purchaser usually concentrates on the operational aspect of getting goods and services.

How does purchasing fit into procurement?

As it belongs to a broader process of procurement, and if purchasing explicitly entails the actual act of buying, procurement represents a strategic, broad process ranging from the selection of suppliers to ensuring suppliers are paid on time.

Is procurement a project?

Not exactly. According to the project, procurement is defined as the process of obtaining goods and services, which carries a host of tasks. In simple terms, it involves the acquisition of all materials and services needed for a particular project, where procurement management ensures that they help complete the projects successfully.

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