Procurement refers to the process of identifying, shortlisting, selecting, and acquiring suitable goods or services or works from a third party vendor through a direct purchase, competitive bidding, or tendering process while ensuring timely delivery in the right quality and quantity.
Procurement and procurement processes can require a substantial portion of a company’s resources to manage. Procurement budgets typically provide managers with a specific value they can spend to procure the goods or services they need. The process of procurement is often a key part of a company's strategy because the ability to purchase certain materials or services can determine if operations will be profitable. In many cases, procurement processes will be dictated by company standards often centralized by controls from the accounts payable division of accounting. The procurement process includes the preparation and processing of a demand as well as the end receipt and approval of payment. Comprehensively, this can involve purchase planning, standards, specifications determination, supplier research, selection, financing, price negotiation, and inventory control. As such, many large companies may require support from a few different areas of a company for successful procurement.
Procurement is nuanced and intertwined with several core business functions, and as such, it should be considered a core component of a company’s corporate strategy. For example, if a company’s identity is based on being environmentally conscious, then the procurement specialist’s strategy must focus on engaging green suppliers. If a company has specific goals, it needs to procure the right workers to help it achieve them. Because an organization can end up spending well over half of its revenue on purchasing goods and services, proper procurement management is vital. Even the slightest decrease in purchasing costs can have a significantly direct impact on profits, while a lack of strategic decisions can sink an otherwise financially healthy company. It can make the difference between success and failure. High purchasing costs or a high degree of wastage in the supply chain can affect an organization’s bottom line and reputation.
Procurement Life Cycle
Most of the organizations think of their procurement process in terms of a life cycle. Different consulting firms and experts have developed various frameworks. Some of the most common steps from the most popular frameworks include:
- Identification of need and requirements analysis is an internal step that involves an understanding of business objectives by establishing a short term strategy (three to five years) for overall spend category followed by defining the technical direction and requirements.
- External macro-level market analysis: Once an organization understands its requirements, it should look outward to assess the overall marketplace. A key part of a market analysis is understanding the overall competitiveness of the marketplace and trends that are likely to impact the organization.
- Cost analysis is the accumulation, examination and manipulation of cost data for comparisons and projections. A cost analysis is important to help an organization make a make-buy decision.
- Supplier identification includes identifying particular suppliers that can provide the required product or services. There are many sources to search for potential suppliers. One good source is trade shows. Modern procurement software often incorporates a supplier catalog for standardized goods and services.
- Non-disclosure agreement (NDA): It is quite normal to request vendors to sign an NDA prior to engaging with them. This protects the organisation where sensitive information is shared with multiple potential vendors ahead of releasing detailed requirements which often point to strategic decisions a firm has taken.
- Supplier communication: When one or more suitable suppliers have been identified, an organization will typically conduct a competitive bidding process. Organizations can use a variety of competitive bidding methods including requests for quotation, requests for proposals, requests for information, requests for tender, request for solution or a request for partnership. Some institutions choose to use a notification service in order to raise the competition for the chosen opportunity. These systems can either be direct from their e-tendering software, or as a re-packaged notification from an external system. During this step direct contact may be made with the suppliers. References for product/service quality are consulted, and any requirements for follow-up services including installation, maintenance, and warranty are investigated. Samples of the product/service being considered may be examined, or trials undertaken. Organizations should do a risk assessment, total cost of ownership analysis and best value assessment before selecting the final suppliers/solution.
- Negotiations and contracting: Negotiations are undertaken that often include price, availability, customization, and delivery schedules. The details are outlined in a purchase order or more formal contract.
- Logistics and performance management: Supplier preparation, expediting, shipment, delivery, and payment for the product/service are completed, based on contract terms. Installation and training may also be included. An organization should evaluate the performance of the product/service as they are consumed. A supplier scorecard is a popular tool for this purpose. When the product/service has been consumed or disposed of, the contract expires, or the product or service is to be re-ordered, the organization should review their experience with the product/service. If the product/service is to be re-ordered, the company determines whether to consider other suppliers or to continue with the same supplier.
- Supplier management and liaison: Organizations that have more strategic goods or services that require ongoing interfaces with a supplier will use a supplier relationship management process. Strategic outsourcing relationships should set up formal governance processes.