Procurement is the art of acquiring things you didn’t even know you needed until someone convinced you that you couldn’t live without them.
What is Procurement?
The term procurement involves obtaining goods, services, or works from a third party by either bidding for them or through direct negotiations.
Procurement maturity drives the process in a company.
Large companies have separate procurement leaders managing the procurement process. The procurement process includes the following:
- Identify procurement efficiencies across the company and create a procurement savings plan.
- Negotiation of contracts by the strategic sourcing team. Procurement teams use procurement software for that.
- Setting up contracts and setting up a contract management process.
- Managing the daily operations, including the purchasing process, following up with the vendors, and so on.
- Report on annual savings goals to the finance team.
In contrast to the above, in a small company Procurement process looks like the following:
- Employees ask for purchase approval for items they need for business operations.
- A business owner of the finance department approves the purchase request.
- The accounting department issues the purchase order to the supplier.
- There is generally a lack of strategic processes for managing the procurement cycle.
What is the main role of procurement?
A company generally has a Procurement department responsible for managing the procurement function. The team is responsible for managing the complete procurement lifecycle.
A procurement department is responsible for the following:
1. Defining the procurement strategy to help meet the company’s financial goals. This includes meeting the annual savings goals.
2. Work with the stakeholders to understand the business requirements and select the vendor after due diligence and negotiating the best price for the company.
3. Work with strategic partners to ensure support for the company’s strategic initiatives.
4. Review and approve purchase requisitions and Issue purchase orders to vendors.
5. Managing the overall purchasing process and purchasing activities like vendor follows up and day-to-day operations.
6. Work with the Accounts payable team to resolve issues related to the three-way match process.
What is an example of procurement?
There are different types of procurement activities in a company. Broadly you can categorize it as Direct and Indirect procurement.
Procurement professionals manage both direct and indirect procurement.
An example of procurement is when a company needs to purchase office supplies, such as paper, pens, and other items. This is an example of indirect procurement.
Employees can purchase directly from the supplier if the procurement team has already established preferred suppliers. If a preferred supplier is not established, the procurement team needs to review the potential suppliers, negotiate prices, select the most suitable supplier, and manage the ordering process.
Once the order is placed, you need to track the purchase order until delivery and create a receipt to confirm that the product has been received.
What is the role of the procurement team?
The role of a procurement team is to oversee and manage the purchasing of goods and services for an organization. The role of the procurement team varies based on the company’s size and the procurement function’s maturity. It could vary from managing day-to-day purchasing activities to establishing a strategic process for managing Company Spend.
The procurement team is responsible for the following:
- Manage the purchase requests and negotiate pricing with vendors.
- Establish contracts with the preferred vendors to lock in the negotiated pricing.
- Use procurement technology to automate the end-to-end purchasing process.
- Ensure that the purchase orders are issued to the vendor.
- Follow up with the vendors to ensure order acknowledgment and confirmation of the delivery timelines.
- Be the escalation point for missed deliveries and coordinate alternate delivery schedules with the vendors.
Procurement vs. Purchasing
Procurement and purchasing are often used interchangeably, but they are different concepts in the world of supply chain management.
Purchasing is often a part of the overall procurement function.
This article explains the main differences between procurement and purchasing.
- Procurement includes a wider range of activities, including working with different stakeholders to understand their needs, negotiating costs with vendors, establishing procurement contracts, and tracking vendor performance. Purchasing refers to the act of buying goods or services.
- Purchasing activity follows the procurement process.
- Procurement is a strategic function that involves not only purchasing but also identifying and evaluating suppliers, determining the most cost-effective and efficient methods of acquiring goods and services, and ensuring that the purchased products and services meet the organization’s quality and delivery requirements.
- Procurement aims to achieve the best overall value for the organization, considering not just price but also quality, delivery, and supplier reliability. In contrast, purchasing is a more tactical function that focuses on the actual act of buying goods or services. The purchasing department may be responsible for issuing purchase orders, negotiating prices, and ensuring that the goods or services are delivered on time and by the terms of the contract.
Procurement and purchasing are both important components of an organization’s supply chain management strategy. Procurement provides a strategic perspective, while purchasing provides a tactical focus on the actual act of buying goods or services. Effective procurement and purchasing practices can help organizations maximize their purchasing power and minimize the risks associated with acquiring goods and services.
Who is a procurement specialist?
A procurement specialist is a professional who specializes in the acquisition of goods and services for an organization.
Titles vary from company to company, so there is no universal definition of a procurement specialist role.
- They are responsible for researching potential suppliers, negotiating prices, selecting the most suitable supplier, and managing the ordering process.
- They are responsible for one or max two purchasing categories.
- Procurement specialists are also responsible for executing the RFP (Request for Proposal) process. They might use strategic sourcing tools or manual methods to acquire the bids.
- They generally work with a category manager and stakeholders to drive purchasing decisions.
- They also oversee the delivery of goods and services to ensure that they meet quality standards and manage any disputes that may arise.
- Procurement specialists must have strong analytical, negotiation, and collaboration skills to drive the decision-making process across the company.
What are the advantages of procurement?
Effective procurement management delivers the following advantages for a company:
- Cost savings: Effective procurement can help organizations negotiate better prices and reduce the overall cost of goods and services.
- Improved quality: Procurement can ensure that the organization receives high-quality products and services by thoroughly evaluating suppliers and setting clear standards for quality and delivery.
- Increased efficiency: Streamlining procurement processes and automating repetitive tasks can help organizations save time and operate more efficiently.
- Better supplier relationships: Procurement teams can build and maintain strong relationships with suppliers, leading to better communication, favorable terms, and improved collaboration.
- Risk management: Procurement teams can help organizations manage risks by thoroughly evaluating suppliers, setting clear standards and expectations, and continuously monitoring supplier performance.
- Compliance with regulations: Procurement teams can ensure that the organization complies with laws and regulations related to purchasing, such as procurement processes and anti-corruption measures.
- Effective resource allocation: Procurement can help organizations make the most of their budget and resources by understanding their needs and strategically allocating resources.
Effective procurement practices can bring significant benefits to organizations, including reduced costs, improved quality, increased efficiency, and better supplier relationships.
What are the disadvantages of procurement?
There are several disadvantages of procurement, including:
- Time-consuming: Procurement can take significant time, especially for large and complex projects. Running an effective procurement process and price negotiations take time, which could lead to delays.
- Limited Control Over Quality: In some cases, procurement can result in lower quality products or services, as the focus is on cost savings rather than quality. This risk can be mitigated by ensuring that the procurement team has a balanced set of goals.
- Additional cost: If you have a large procurement team, you need to have an additional budget for the head count, and small companies might be unable to afford it.
What is a Procurement manager?
A procurement manager is responsible for managing the procurement function and managing the team.
- A procurement manager is responsible for all procurement and purchasing activities. That includes vendor negotiations, purchasing, and order tracking.
- A procurement manager may or may not have an annual savings goal. The procurement manager must also ensure that the organization gets the best value for its money by evaluating prices, quality, and delivery times.
- A procurement manager is responsible for allocating the work to the team. Some procurement managers adopt a category strategy where the team is structured by category, and some structure their teams to support different stakeholder departments. For more on this, read how to set up a procurement team.
- They must stay up-to-date on industry trends and developments to identify new opportunities for cost savings or improved efficiency.
What is the procurement process?
There are best practices for setting up a procurement process, but the procurement process varies from company to company. With that said, here are key steps in a procurement process:
- Identifying needs: The first step in the procurement process is to identify the needed goods or services. This involves determining what is needed, how much, and when. Different business functions identify the needs to meet their operational goals.
- Supplier evaluation and selection: After the needs have been identified, the procurement team will research potential suppliers and evaluate their capabilities and qualifications. The procurement team might have key suppliers for different categories. They would run a quick RFP to assess the company’s quality, delivery times, price, and overall value.
- Negotiating contracts: Once a supplier has been selected, the procurement team will negotiate the contract terms, including the price, delivery times, and other relevant terms. The procurement team works with the legal team during contract negotiations to protect the company’s interest.
- Placing the order: After the contract has been negotiated and agreed upon, the procurement team will place the order with the supplier. The purchasing team takes care of placing the order.
- Delivery Tracking: The procurement team will monitor the delivery of the goods or services to ensure that it meets the agreed-upon specifications and delivery times.
- Tracking supplier performance: After the goods or services have been delivered, the procurement team will evaluate the supplier’s performance by measuring quality, delivery times, and overall value.
- Maintaining supplier relationships: The procurement team will maintain ongoing relationships with suppliers to ensure that future procurement needs are met and identify continuous improvement opportunities.
Procurement involves using well-defined procedures to obtain necessary items and services. A consistent procurement process helps organizations get quality products and services at a fair price, mitigate potential risks, and adhere to necessary legal regulations.
What is procurement to pay?
Procurement is the process of acquiring goods and services at the best possible price, with consideration for quality and timeliness. It involves researching potential suppliers, negotiating contracts, placing orders, monitoring delivery, evaluating supplier performance, and maintaining supplier relationships. Procurement aims to ensure that organizations receive high-quality products and services at a reasonable cost while managing risks and complying with relevant regulations.
What is indirect procurement?
Indirect procurement refers to the procurement of goods and services that are not directly involved in producing a company’s products or services. Indirect procurement includes office supplies, IT equipment, consulting services, and maintenance services.
The goal of indirect procurement is to support the company’s operations and activities rather than being part of the final product. Indirect procurement is typically managed by the procurement or supply chain function. It may involve different processes and standards than direct procurement, as indirect goods and services tend to be less critical and have lower price tags.
Effective indirect procurement can help organizations reduce costs, improve the quality of indirect goods and services, and support operational efficiency. By developing and implementing best practices in indirect procurement, organizations can ensure that they receive high-quality indirect goods and services at a reasonable cost and that they can manage risks and comply with relevant regulations.
What is e-Procurement?
E-Procurement (electronic procurement) is buying goods and services through an online platform.
The scope of e-Procurement could vary. For example – In government organizations, e-procurement generally refers to getting bids through an online portal.
In general, e-Procurement automates all procurement activities, including strategic sourcing, purchasing, and supplier management.
It involves researching potential suppliers, negotiating contracts, placing orders, monitoring delivery, evaluating supplier performance, and maintaining supplier relationships.
E-Procurement enables organizations to streamline their purchasing processes by automating manual tasks such as creating purchase orders and tracking delivery information. It also provides visibility into the entire procurement process, allowing organizations to track spending in real-time and identify opportunities for cost savings. Additionally, e-Procurement can help organizations ensure they receive high-quality products and services at a reasonable cost while managing risks and complying with relevant regulations.
What does a procurement manager do?
A procurement manager is responsible for managing the procurement activities of a company.
This includes managing the full procurement cycle from need identification to placing the purchase order with the order and tracking the delivery.
- A procurement manager is responsible for a group of categories, or all Spend, depending on the organization’s size.
- They might or might not have supervisory responsibilities.
- They might be responsible for coming up with Savings numbers and responsible for achieving them.
- A procurement manager is also responsible for developing a supplier performance management plan and working with stakeholders to conduct the QBR (Quarterly business review) with the key vendors.
What is procurement in supply chain management?
Supply chain management is an overall term that covers the various activities required in a company to acquire raw materials and distribute the final product to the customer.
A supply chain management function comprises procurement, purchasing, and logistics functions. Logistics include warehouse management and managing last-mile shipments.
Procurement in supply chain management refers to vendor negotiations, selection, and purchasing cycle management. A procurement cycle could include the following activities:
- Executing an RFP (Request for Proposal) by working with different suppliers.
- Consolidating vendor responses and scoring the responses for internal stakeholder review.
- Working with the selected vendor to execute the contract.
- Placing orders, monitoring delivery, evaluating supplier performance, and maintaining supplier relationships.
Procurement aims to ensure that the organization receives high-quality products and services at a reasonable cost while managing risks and complying with relevant regulations. Effective procurement can help organizations reduce costs, improve the quality of goods and services, and support operational efficiency.
What is a Chief procurement officer?
A chief procurement officer (CPO) ensures that the procurement and supply chain function is aligned to best support the company’s goals.
A CPO is generally responsible for the following:
- CPO is part of the executive team and reports to the Chief Financial officer (CFO) or the COO (Chief operations officer).
- CPO is responsible for working with finance and developing a savings target to meet the company’s financial goals.
- The primary KPIs for CPOs are driving operational efficiency and reducing overall costs across the organization.
Here is a summary of the key priorities for CPO from the Deloitte Chief Procurement officer survey:
What is a Procurement Card (P-Card)?
A procurement card (also known as a purchasing card or p-card) is a type of credit card used by organizations to purchase goods and services.
- It is designed to streamline the procurement process by eliminating manual tasks such as creating purchase orders and tracking invoices.
- The vendor is paid using a p-card instead of an invoice. Some vendors accept payments at the point of sale, and some still allow you to use a p-card with a line of credit. In most cases, P-cards are used at the point of sale.
- Procurement cards give organizations visibility into their spending in real-time, allowing them to track costs and identify opportunities for cost savings. When a P-card process is integrated with a purchasing tool, it provides the control and visibility that finance teams need to reduce costs effectively.
What is Procurement Fraud?
Procurement fraud refers to any illegal or unethical activity committed to procuring goods and services. This type of fraud can involve a wide range of activities, including bribery, kickbacks, false invoicing, embezzlement, and misrepresentation of facts.
Procurement fraud can significantly impact an organization, including financial losses, damage to reputation, and reduced trust in procurement processes. It can also lead to legal and regulatory consequences, such as fines and penalties.
Examples of procurement fraud include:
- Bribery and corruption: This involves paying or accepting bribes in exchange for awarding contracts or for favorable treatment in procurement processes.
- Kickbacks: This involves paying or accepting money or other incentives in exchange for favorable treatment in procurement processes.
- False invoicing: This involves submitting false invoices or claims for payment for goods or services that were never received or that were received but at a lower value than claimed. Generally, the invoices are off by a few cents, making it difficult to identify the fraud.
- Embezzlement: This involves misusing procurement funds or misappropriating procurement-related assets.
- Misrepresentation of facts: This involves providing false information or concealing information during procurement processes to secure a contract or to obtain favorable terms.
Organizations can prevent procurement fraud by implementing strong internal controls, conducting regular audits and reviews of procurement processes, and providing training and education for procurement personnel. Additionally, organizations can work with suppliers to promote ethical behavior and raise awareness of the risks and consequences of procurement fraud.