What Is Procurement?
Procurement is the process of acquiring goods, services, or assets for an organization, typically through purchasing or contracting with external suppliers or vendors. It is a fundamental function in the operations of businesses, government agencies, and non-profit organizations. The primary goal of procurement is to obtain the necessary resources at the right quality, quantity, price, and time to support the organization’s operations and objectives.
Every procurement process is more complex than it might seem to be. Since procurement is an umbrella term that includes several core business functions, it should be considered a core part of any organization’s corporate strategy. Strategic procurement is an organization-wide process. Moreover, having a good procurement process in place will ensure that companies pay the best price for goods or services, save time by choosing the most reputable vendors, and minimize order delays and mistakes. Each organization varies from one another in terms of their operations and requirements. Some organizations require a formal process to suit their complex environment, which is often the case in government or education sectors. In those industries, vendors must comply with strict guidelines. Others, like enterprise businesses, require a few key steps to manage budgets more effectively. Here are the steps involved in a successful procurement cycle:>
Step #1: Need recognition
Every procurement process begins when a business feels the need for a good or a service. These goods or services can either be internal – any materials required to run the business, or external – materials that the business will eventually sell. At this stage, businesses are also expected to set a budget within which they expect to procure the goods or services. This will help companies to ensure that they don’t end up paying too much and overshooting their budget.
Step #2: Vendor selection
This is one of the most crucial steps in the procurement cycle. Companies must identify different vendors who can cater to their requirements. A comprehensive comparison should be undertaken to understand which vendor provides the best value and quality for your goods or services. It’s important to find vendors who not only deliver a high-quality product for a competitive price but also has a strong reputation.
Step #3: Internal approval
The next stage in the procurement process involves getting the thumbs up from the internal department that controls finances to purchase your goods or services. This includes creating a purchase requisition document and submitting it to that department.
Step #4: Purchase order
The purchase order is used to buy materials between a buyer and seller. It specifically defines the price, specifications, and terms and conditions of the product or service and any additional obligations.
Step #5: Order details and invoice
This is the stage of the procurement process where the vendor sends an invoice to the purchaser which describes exactly what the order includes. The invoice confirms the sale and reaffirms exactly when the payment is due. When the purchaser receives the order, they typically have a limited amount of time to notify the vendor of any issues with the good or service. At this point, purchase orders, order receipts, and vendor invoices – are aligned and reconciled, highlighting any discrepancies to ensure that what you are being charged matches what you have received.
Step #6: Payment
Once the order is received, the next step in the procurement process is for the purchaser to make payments to the vendor within the timeframe that has been agreed upon. Usually, payment is made in the form of cash, check, bank transfers, credit letters or other types of electronic transfers.
Step #7: Maintain a Record
The final stage in the procurement cycle is essential to ensure all-around bookkeeping and audit purposes. These include purchase records to verify tax information and purchase orders to confirm warranty information. Purchase records reference future purchases as well.
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Types of procurement
Direct procurement involves the acquisition of goods, materials, or services that are directly related to the organization’s core operations and production processes. These are items that become part of the final product or are used in the manufacturing or service delivery process.
Indirect Procurement (Non-Production Procurement):
Indirect procurement, also known as non-production procurement or indirect spending, refers to the acquisition of goods and services that are not directly incorporated into the organization’s final products or services. This category includes a wide range of goods and services necessary for day-to-day business operations.
Strategic procurement goes beyond the basic acquisition of goods and services; it involves a more comprehensive and long-term approach to procurement that aligns with an organization’s strategic goals and objectives. This type of procurement emphasizes supplier relationships, risk management, and the alignment of procurement strategies with broader organizational strategies.