Procurement, in the simplest sense, involves a series of activities and processes that are necessary for an organization to acquire necessary products or services from the best suppliers at the best price. Such products or services that are procured include raw materials, officer equipment, services, and supplies, furniture and facilities, technical equipment and support, telecommunications, printed collateral, contingent worker recruitment, testing and training, and travel-related services, among many others.
Part of an Organization’s Corporate Strategy
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.
Why It’s so Important in Business
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.
The Need for Visibility
You can’t control what you can’t see, which is why visibility is vital in the procurement process. Organizations need full visibility into their internal processes and spending. The most effective way to achieve this is with spend segmentation. By segmenting spend and suppliers by specific categories, organizations can better understand exactly where their money is going and why, and how to reduce costs.
Steps in the Process
Having a systematic process allows organizations to be strategic when procuring goods and services from external vendors. It helps them manage supplier relationships, determine which vendor to buy from to receive the lowest cost and best quality, determine what specifications and quantities are needed, streamline the shipping and delivery timeframes and methods, review and accept the items purchased, approve payments, review supplier performance against contract, and identify and resolve performance issues. In short, having an effective management process can allow firms to increase efficiencies and cut costs when purchasing from vendors.
This process can include numerous steps, which include the following:
- Identifying requirements
- Authorizing and approving a purchase request
- Identifying suppliers
- Making inquiries
- Receiving quotations
- Negotiating terms
- Selecting a vendor
- Creating a purchase order and goods receipt
- Managing shipping
- Receiving invoices
- Making payment
Procurement versus Purchasing
Many people use the two terms interchangeably, but there are differences. Purchasing consists of the last explicitly transactional steps found at the end of the overall procurement process. Procuring deals with sourcing, negotiation, and strategic selection, which must occur before the purchasing of any products or services can be had.
How Technology Can Help
With the help of the right software, organizations can streamline their supplier selection and rate management. They can create new job postings in just a few clicks that give bidding suppliers complete job requirements, which include rate structures, certifications, and qualifications. They can manage relationships, monitor performance, and process payments. By optimizing the process with a management solution, companies can protect their profit margins and significantly cut costs.
A Vital Process
Procuring is about more than just the purchase of goods, services, or works from external sources. It requires strategic planning in order for organizations to acquire these things at the best possible cost, which meet their needs in quality, quantity, location, and time. It is a vital part of any company’s overall business strategy.