Procurement is vital to the sustainability of any business. It focuses on establishing fundamental requirements, sourcing activities such as market research and vendor evaluation, and negotiating contracts. It’s a wholly different activity from purchasing, which, while important, is just a part of the overall procurement puzzle that successful businesses must assemble.
According to The Hackett Group, world-class procurement organizations influence, on average, 93 percent of their companies' spend, compared to 64 percent for the peer group. Procurement is essential for businesses as it helps in:
Uncovering insights that drive business growth
Leveraging spend data and external information to make data-driven decisions
Ensuring operational efficiency and supply chain resilience
Safeguarding the brand and protecting quality
The rest of the article will provide a comprehensive definition of procurement, differentiating it from purchasing, and discussing its value as a business process.
Procurement is a broader process that encompasses purchasing, focusing on strategic, long-term goals like corporate strategy and a competitive advantage.
Procurement is an umbrella term that covers other purchasing activities and ultimately aims to risk mitigation, lowering costs, and ensuring contract compliance.
Procurement is essential for businesses as it contributes to cost savings, improved financial performance, and sustainable practices.
What is Procurement?
Procurement is a strategic, long-term business process that involves the act of sourcing, purchasing, and acquiring goods, services, or raw materials from vendors or suppliers. It is essential for businesses to manage procurement effectively, as it contributes to cost savings, improved financial performance, and sustainable practices.
Definition of Procurement
A clear procurement definition in business incorporates a broader process that encompasses purchasing, focusing on strategic, long-term goals like corporate strategy and a competitive advantage. It includes activities such as:
Identifying needs: Determining the specific requirements of the business.
Sourcing: Researching and selecting suitable suppliers that can provide competitively priced goods and services.
Negotiating: Bargaining with suppliers to secure the best value for money.
Purchasing: Placing orders, receiving goods or services, and handling invoices and payments.
Risk management: Identifying and mitigating risks associated with supply-related interruptions.
Key Objectives of Procurement
The main objectives of procurement are to:
Obtain the best value for money: Ensuring that the business gets the most value for its investment. This can include negotiating competitive prices and managing costs effectively to contribute to the company's bottom line.
Meet customer expectations: Providing goods and services that meet the requirements and expectations of customers.
Reduce risk: Identifying and selecting suppliers with a good reputation and financial stability to minimize the risk of supply-related disruptions.
Enhance efficiency and productivity: Streamlining the procurement process to improve operational efficiency and reduce administrative overhead.
Ensure compliance: Adhering to relevant laws, regulations, and contractual obligations.
Contribute to corporate strategy and competitive advantage: Aligning procurement activities with the company's overall strategic goals and objectives.
By focusing on these objectives, businesses can optimize their procurement processes, leading to cost savings, improved financial performance, and a competitive edge in the market.
What are the Steps in the Procurement Process?
The procurement process involves several key steps that are essential for effectively acquiring goods and services. These steps are tailored to ensure maximum efficiency and can vary based on the size and type of business. Here are the key steps involved in the procurement process:
Needs Recognition: This is the initial step where the business identifies the goods or services it requires.
Purchase Requisition: Once the needs are identified, a formal request is made to the procurement department to acquire the necessary goods or services.
Supplier Research and Selection: This step involves considering a list of suppliers and evaluating them to choose the most suitable ones.
Negotiation: Bargaining with the selected suppliers to establish favorable contract terms and pricing.
Purchase Order: After the negotiation, a purchase order is generated to formalize the procurement of the goods or services.
Receipt of Goods or Services: Upon the delivery of the goods or completion of the services, the business receives and inspects them to ensure they meet the specified requirements.
Payment Fulfillment: This step involves processing the payment for the received goods or services, completing the procurement process.
Supplier Management and Evaluation: This step, usually done internally to an organization, ensures compliance with contract terms, and conducts regular evaluations to assess the effectiveness of the procurement process.
These steps are crucial for managing the procurement process effectively, from identifying the need for goods or services to the final payment and record-keeping. By following these key steps, businesses can ensure that they obtain the best value for their procurement, minimize risks, and contribute to their overall profitability and efficiency.
What’s the Difference Between Procurement and Purchasing?
The main difference between procurement and purchasing lies in their focus and scope. Here are the key differences between the two:
Scope: Procurement is a broader, strategic, and long-term process that encompasses various activities such as identifying needs, sourcing, negotiating, and managing contracts. Purchasing, on the other hand, is a more transactional and short-term process that deals with ordering, paying, and receiving goods or services.
Focus: Procurement focuses on strategic, long-term goals like corporate strategy and a competitive advantage. Purchasing, however, concentrates on short-term goals such as fulfilling the five rights in a transaction (right quality, right quantity, right cost, right place, and right time).
Relationship with Suppliers: Procurement involves establishing long-term, collaborative supplier relationships. Purchasing, in contrast, may resort to short-term, transactional relationships with suppliers.
What is Procurement Policy?
A procurement policy is a set of guidelines used to establish and standardize the procedure for purchasing goods and services within an organization. It provides specific instructions to help employees successfully navigate common procurement activities and is also known as a purchasing policy.
The purpose of a procurement policy is to improve spend visibility, increase consistency, control maverick spend, and reduce risk. It should cover the entire lifecycle of procurement activities, including planning and sourcing, solicitation management, and policy governance.
Additionally, a procurement policy should reflect and align with the organization's broader strategic corporate goals, values, and objectives, such as sustainability, diversity and inclusion, and data protection. The policy should be tailored to address the unique needs of the business and provide guidelines for ethical and compliant procurement procedures.
Key elements of a procurement policy
The key components of a procurement policy include:
Goals and Objectives: The policy should establish the organization's goals and objectives for procurement, such as cost savings, risk mitigation, and compliance with regulations.
Eligibility Requirements: The policy should define the criteria for who is eligible to participate in the procurement process, ensuring that only qualified vendors are considered for contracts.
Selection Methods: The policy should outline the process for evaluating bids and proposals, including the criteria for awarding contracts.
Contract Management: The policy should establish procedures for managing contracts, including monitoring supplier performance, ensuring compliance with contract terms, and conducting regular evaluations.
Budget Constraints: The policy should determine allowable costs and budget constraints, ensuring that procurement activities align with the organization's financial goals.
Compliance: The policy should ensure compliance with government purchasing regulations and statutes, as well as the organization's internal policies and procedures.
Conflict of Interest: The policy should establish procedures to prevent conflicts of interest from influencing procurement decisions, ensuring that decisions are made based on what is best for the organization, not on personal gain.
By including these key components in a procurement policy, organizations can establish a standardized and consistent approach to procurement, promoting transparency, accountability, and efficiency.
What is the Role of Procurement Management in Project Management?
The role of procurement management in project management is to ensure that the necessary goods and services are acquired from external sources to meet the project's objectives. Procurement management involves the processes used to manage the purchase process, such as purchase requisitions, requests for quotes, and purchase orders. The procurement manager is responsible for initiating the procurement project, undergoing the steps outlined above to manage the procurement process.
The procurement manager works closely with the project manager to ensure that the procurement process aligns with the project's goals and objectives. The procurement manager also communicates with vendors to buy, rent, or contract products and services needed to achieve project objectives.
Effective procurement management is essential to the success of a project, as it ensures that the team has access to the goods, services, and resources they need to complete the project on time, on spec, and on budget. To streamline the decision-making and empower more data-driven decisions, many procurement managers turn to procurement platforms like ours.
Procurement and Opstream
Opstream is an excellent platform not only for procurement managers, but anyone handling procurement processes - Operations, Finance, Legal Ops, and the like. It centralizes purchase requests for all stakeholders to communicate and collaborate. It also provides a user-friendly interface that streamlines the procurement process, making it easier for procurement managers to manage the procurement process effectively.
The platform offers features such as automated workflows, customizable approval processes, and real-time analytics, which help procurement managers to make data-driven decisions. These features benefit our partners in many ways, including:
Quick and easy onboarding: Be up and running in days, not months. Our intuitive interface requires little to no user training.
100% Self-Service Procurement: With Opstream's Intake Editor, you have full control. It's 100% configurable, no code required. Simply drag and drop to add questions, set conditions, and define your workflow effortlessly.
Duplication Prevention: Our AI engine detects existing and similar platforms within your organization, helping you make informed decisions BEFORE purchasing.
Intrigued? Schedule a demo with us today to get started.