Key takeaways
- Procurement is the process of acquiring goods, services, or assets for an organization, crucial for supporting operations and achieving objectives.
- Successful procurement involves several steps, including vendor selection, internal approval, purchase order creation, payment, and record maintenance.
- Different types of procurement include direct procurement, indirect procurement, and strategic procurement, each serving distinct organizational needs.
- Challenges in procurement include supplier base fragmentation, lack of spend visibility, maverick spending, manual processes, compliance and risk management issues, and limited strategic focus.
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.
To know more about how companies can enhance their procurement process
Types of procurement
Direct 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:
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.
Challenges in Procurement: Organisations are likely to face with procurement:
1. Supplier Base Fragmentation:
Procurement often entails dealing with numerous suppliers across various categories. Managing this fragmented supplier base presents challenges such as inconsistent service levels, complex contract management, and difficulty in capitalizing on volume-based discounts or negotiations.
2. Lack of Spend Visibility:
Limited insight into procurement spend complicates expense tracking and analysis. This lack of visibility obstructs cost control efforts and hampers budgeting and strategic decision-making processes.
3. Maverick Spending:
Procurement involves multiple organizational stakeholders making independent purchases, leading to maverick spending. This decentralized approach results in higher costs, inconsistent quality, and missed savings opportunities as employees bypass established approval processes.
4. Manual Processes:
Relying on manual and paper-based procurement processes is time-consuming, error-prone, and inefficient. Tasks such as purchase requisitions, approvals, and invoice processing become labor-intensive, impacting productivity and increasing the risk of inaccuracies.
5. Compliance and Risk Management:
Procurement entails adherence to internal policies, legal requirements, and supplier agreements. Managing compliance and mitigating risks, such as supplier non-compliance and data breaches, is challenging and requires timely intervention.
6. Limited Strategic Focus:
Procurement activities often prioritize operational needs over strategic value, leading to a limited strategic focus. This hinders the identification of cost-saving opportunities, supplier consolidation, and the formation of strategic partnerships.
Conclusion
Procurement is a fundamental process for organizations, involving the acquisition of goods, services, or assets from external suppliers. It encompasses various steps, from need recognition to vendor selection, internal approval, purchase order issuance, order details and invoicing, payment, and record maintenance. The procurement process can be categorized into different types, including direct procurement, indirect procurement, and strategic procurement, each serving specific organizational needs and objectives. However, organizations often face challenges in procurement, such as managing a fragmented supplier base, limited spend visibility, maverick spending, manual processes, compliance and risk management issues, and a limited strategic focus. Overcoming these challenges requires leveraging procurement tools, implementing strategic sourcing practices, fostering strong supplier relationships, and adopting e-procurement tools to streamline processes and enhance efficiency. By addressing these challenges and optimizing the procurement process, organizations can unlock significant benefits, including cost savings, improved supplier performance, enhanced operational efficiency, and better alignment with organizational goals. Embracing digital transformation, centralization, and data-driven insights through spend analysis can further drive success in procurement and propel organizations towards sustainable growth and competitive advantage in today’s dynamic business landscape.
