What is procurement in business?
Since the beginning of commerce, procurement has played an essential, transactional aspect of business practice.
The world has evolved, and purchases are no longer tracked on scrolls by scribes.
However, the practice of carefully choosing and acquiring the needed service and goods for daily business operations is still very important.
To better understand this discussion and gather all the needed information on what procurement is in business, carefully read to the end.
What Is Procurement? – What Is Procurement in Business
Procurement refers to the wide variety of activities businesses engage in to obtain services and goods.
These services and goods have to be of good quality, quantity, time, and price from the best source.
However, not every company define procurement the same.
Several companies see procurement to encompass all steps ranging from gathering requirements for business, sourcing suppliers, updating terms of payments, and other steps.
While some others consider procurement to be a narrowed-down variety of activities like making payments and issuing purchase goods and service orders.
Procurement versus Purchasing – What Is Procurement in Business
The concept of purchasing and procurement has often been confused with each other.
However, they are not the same because some factors differentiate them.
Procurement takes a strategic process in acquiring valued services and goods.
It takes great effort to get valued products using a series of outlined steps to ensure smooth acquisition.
Companies often take proactive approaches when they are submitting procedure orders.
This helps them pinpoint future shortages and get them in time for when needed.
Meanwhile, purchasing is just a transactional process, purchasing services and goods.
With purchases, companies do not take great interest in the goods or service value but in the price.
Purchasing takes a reactive approach to satisfy immediate needs.
To summarize, procurement is a strategic process that lays greater importance on value through a proactive approach to fill future deficiencies.
Meanwhile, purchasing is just a transactional process that lays greater importance on goods’ price through a reactive approach to satisfy immediate needs.
Types of Procurement – What Is Procurement in Business
Procurement is classified in different ways.
They include:
Direct Procurement
This is the procurement that is used to obtain services and goods that are used for production.
For manufacturing companies, these are raw components and materials.
Meanwhile, for retailers, this includes purchased items from wholesalers that retailers will resale to consumers.
Indirect Procurement – What Is Procurement in Business
This involves purchasing essential products for daily operations but doesn’t contribute directly to the business’s bottom line.
They can include items ranging from furniture and office supplies to equipment maintenance, advertising campaigns and consulting services.
Goods Procurement
This is the procurement of material products and sometimes items such as software subscriptions that serve companies’ needs.
Good procurements rely on effective supply-chain managing practices.
It can either be indirect or direct.
In other words, they can be office supplies or raw materials.
Service Procurement – What Is Procurement in Business
This is the procurement of services people provide.
Just as with good procurement, it can either be indirect or direct.
Direct service procurement can be labour used directly in business operations.
Meanwhile, indirect service procurement can be used to safeguard the company’s structure.
Importance of Procurement – What Is Procurement in Business
Procurement can be beneficial in improving your business profitability.
These are some of the ways it can benefit your business:
Reduced Cost
Procurement is firstly about getting the best supplies from the best suppliers.
Businesses can decide to change their supplier, renegotiate their contracts to get better terms or find means to get discounts from their purchase.
This will help to cut back their costs while increasing their profit margins.
Enhances and Support Business Brand – What Is Procurement in Business
Procurement doesn’t only focus on cost; it can also help you achieve your company’s strategy.
For instance, let’s assume your strategy is getting a low-cost but quality product; procurement can get suppliers to help you achieve that.
You can achieve that with procurement when it’s a high-cost and quality product you want.
It works to find the right suppliers to align with your company’s goals.
Mitigate Risks and Enhances Growth
Businesses thrive when they have the needed goods available.
When there is a disruption in supply chains, it can result in devastating consequences.
Procurement ensures that the needed goods and services are available when needed through the process of careful examination and vetting for potential suppliers.
They check suppliers’ history to ensure that they can deliver your orders, and if any issue should arise, they will navigate through it.
All of this help to mitigate the risk of goods and service shortage and enhance growth.
Understanding Procurement – What Is Procurement in Business
Procurement is a process that involves certain steps.
It starts with a business identifying the goods or services they need, seeking vendors that will align with its objectives, negotiating costs and terms, and finally purchasing and obtaining the needed items.
Small companies often have only one person responsible for procuring services and goods.
Meanwhile, larger companies often have a specialized team of individuals responsible for dealing with vendors or supporting certain internal groups in the business.
For some products, the team might need to get the input of different groups in the business to identify the company’s general requirements.
Procurement is one of the ongoing processes in business.
For instance, companies’ main objective is to foster a good relationship with vital suppliers who will help them acquire the best items at a lower cost.
To do this, they will have to keep steady open communication with existing and potential suppliers.
Also, they need to regularly check for performance analysis and quality assurance to know that their suppliers can consistently meet their goals and expectations.
Steps for Procurement Process – What Is Procurement in Business
Every business defines its procurement process based on its needs and structure.
However, generally, here are nine main steps for the procurement process:
Identifying Company’s Needed Services and Goods
The first step in the procurement process is to identify the requirements for every specific service or item.
It could be new items that haven’t been purchased by your company, restocking of current goods or services or even subscription renewal.
To do this, you will need to delve into several details of the item your business requires, such as specific technical specifications, service characteristics, materials, or part numbers.
At this point, it will be best to speak and seek advice from all the departments affected by your purchasing decisions.
This will ensure that the items procured will accurately reflect their departmental needs.
Present Purchase Request– What Is Procurement in Business
When a business group or employee needs to acquire many new services or supplies, they make formal purchase requests, also referred to as purchase requisitions.
Purchase requisitions notify the business that there are existing, usually through purchasing staff, a financial team, or department managers.
They contain the item’s specifications, such as the timeframe for when it’s needed, quantity, price, and other essential things the procurement team needs to know.
The department overseeing purchases can then deny or approve the request.
If the request is approved, your procurement team will proceed with choosing a supplier and purchasing.
Assesses and Choose Suppliers
After getting the requirements list and the approved purchase requisition, the next thing to do is to get the best supplier and submit your (RFQ) request for a quote.
Businesses send requests for quotes to their potential vendors to get a quote which is important in comparing the different vendors.
Supplier assessment needs to be focused on the cost suppliers offer, their reputation, quality, reliability, and speed.
Some companies go ahead to consider social and ethical responsibilities as procurements are often interlocked with corporate identities.
For instance, retailers who value sustainability would greatly benefit from teaming up with suppliers who are environmentally responsible.
Negotiate Terms and Prices – What Is Procurement in Business
Getting up to three or more quotes from vendors is best before deciding who to trade with.
When you have received quotes from potential suppliers, you should carefully examine each one and make negotiations where needed and likely.
If you don’t accept a deal and leave it, you need to ensure there are solid alternative options for you to choose from.
When you agree on the terms, ensure they are written down.
Create Purchase Orders
After negotiating your order’s terms and price, the next thing is to fill out your purchase order, also referred to as PO, and have it sent to your supplier.
Your PO should provide details for the exact goods or services you need.
This will enable your vendor to fill out their end in the purchase order.
Receive and Examine Delivered Goods – What Is Procurement in Business
The next step is to receive your goods.
However, don’t stop there.
You should also carefully examine the deliveries to ensure no damages or errors.
Ensure that the items are delivered as you specified in your PO and that their quality meets expectations.
Perform a Three-way Matching
You also need to perform a three-way matching.
Three-way matching is comparing your purchase order with the packing invoice and list or order receipt.
This aims to ensure that the services or goods your supplier delivered match your purchase order.
Also, it works to ensure that you don’t make payments for inaccurate or unauthorized invoices.
When you are performing your comparison, ensure that you indicate any discrepancies you discover between the documents.
Ensure that you resolve the issues before making a payment arrangement.
Make Payment – What Is Procurement in Business
When you are sure that those three documents are, then what you need to do next is to approve the invoice and make payment.
You should have a regular process for invoice payment via accounts payable.
It helps you to know if your payments sync with the payment due date and invoice amount.
A standard payment process will help you ensure that invoices are paid in due time while helping you prevent paying late and strengthening your relationships with your suppliers.
Recordkeeping
Recordkeeping in business is a very vital aspect of the operation.
So, you need to keep a good record of the whole step of every procurement process.
These records would be useful when you want to reorder goods later on.
They will also help you calculate taxes during auditing and resolve potential disputes.
Procurement Stages – What is Procurement in Business
The procurement process steps can be seen to be in three different stages, which are:
Sourcing Stage
This stage covers the first few steps to identify business needs, create purchase requests, and assess suppliers.
You would benefit more if you try to build good working relationships with your suppliers even after completing the initial steps in this stage.
This will allow your vendors to learn more about your business, improve their processes and products, and develop trust.
Purchasing Stage – What Is Procurement in Business
This stage comprises negotiating terms and prices, creating purchase orders, and receiving and examining the delivered items or services.
The purchasing stage is the most crucial because it determines if you will get the right items at the best price and terms.
Payment Stage
The payment stage is the last stage of procurement.
It involves performing three-matching, approving invoices and making payments, and finally keeping a record of all the steps.
This stage is equally important as how you will determine successful and correct payment and potentially ease future purchases.
Procurement Elements – What Is Procurement in Business
Three vital elements work together to ensure that the procurement process occurs, and they are:
People
Firstly, people are in charge of authorizing and initiating the different procurement steps proves.
Aside from procurements specialists, some other people involved are other stakeholders like business groups who request services and goods and accounts payable.
The number of people involved in a procurement process depends greatly on an organization’s size and the number of services or goods needed.
For example, more stakeholders might need to work on identifying and approving good quality or value purchases.
Process – What Is Procurement in Business
Effective procurement processes often work in helping companies succeed in cutting costs while ensuring that the needed supplies arrive.
So, systematic and well-designed processes promote timeliness and accuracy as everyone involved will know their tasks and the timeframe to accomplish them.
In contrast, unsystematic procurement processes bring about inefficiencies and often costly errors.
For example, an overpayment can affect the bottom line, and late payment can destroy vendor relationships.
Paperwork
Maintaining records for all the procurement process stages is important and promotes easy accessibility.
These records are where organizational knowledge, such as supplier performance and payment terms, are stored.
All of this helps a business keep having an efficient procurement process regardless of changes in its procurement team.
Also, the paperwork can be used as a trail to follow in resolving disputes and easing auditing.
Principles of Procurement – What is Procurement in Business
The procurement process is mostly similar in both public-sector and private-sector organizations.
However, they have a few essential differences.
For instance, in public-sector organizations, the individuals involved in procurement are charged with public funds.
So, they are expected to follow strict principles during procurement processes.
These principles are sometimes regarded as ethical conduct codes.
You can adopt some of these principles in your business as they benefit private organizations.
Procurement principles can vary based on an organization’s needs.
However, here are the seven most common ones:
Fairness
First off, no individuals or suppliers involved in procurement should be provided with preferential treatment.
Rather, their offers should be assessed objectively.
Efficiency – What Is Procurement in Business
Also, the procurement process should be efficiently performed.
This will work to maximize value while avoiding delay.
Competition
Individuals in charge of procurement should search for competitive offers from several vendors.
This should stand unless there is a specific reason not to seek competitive offers, such as if a single-source provider only provides a service or good.
Integrity – What Is Procurement in Business
The individuals involved in procurement should demonstrate to others that they are reliable, honest, responsible, and trustworthy.
They should only use the procurement funds for their projected purpose.
Value for Money
Furthermore, individuals in charge of procurement should value money and manage it economically and efficiently in procuring services and goods.
This might include performing risk assessments and cost analyses.
They should understand that low cost often doesn’t mean greater value.
Rather, they should know that durability and quality are good factors in determining if a purchase represents money value.
Transparency – What Is Procurement in Business
Those in charge of the procurement process should ensure that relevant information concerning procurement is readily available to others.
Accountability
Finally, individuals responsible for procurement are answerable for their decisions and actions,
They are to accurately report every procurement activity without leaving out any mistakes.
Procurement Key Performance Indicators (KPIs) – What Is Procurement in Business
Monitoring your procurement performance works effectively in improving your procurement process.
Some KPIs you can use in measuring procurement include:
- Supplier lead time
- Purchase order cycle time
- Supplier defect rate
- Number of Suppliers
- Fulfilment accuracy
- Supplier availability
- Total ROI of a procurement process
Conclusion on What Is Procurement in Business
In summary, procurement is a vital operation in a business.
It ensures that needed goods and services are readily available in the business.
This discussion has provided information on everything you need to know about procurement in business.
