Industrial engineering

What is Procurement? Definition, Process

What is Procurement meaning in business?

Procurement is a process of acquiring goods and services. Procurement is commonly a part of the input for a company that uses the gained goods or services in the making of their own final product. This makes procurement a very important function of any business.

Procurement involves activities such as identification of needs of the company, sourcing from vendors, selection, price negotiation, ordering, receiving, and payments.

If you ask for “what is procurement definition?We can define procurement as a process of sourcing goods, and services from a third-party seller through direct purchasing, competitive bidding, or tendering process while ensuring the proper quality and quantity.

Some businesses use the term procurement refers to only buying the products, while other businesses refer to the entire process that leads up to the purchase as procurement. That means there are some difference presents between procurement and purchasing.

The term procurement is used to refer to buying goods and services for a business concern, which is customarily performed on a large scale. Procurement involves two parties; one is the buyer, and another is the seller or vendor. But it is the act of buying that is tagged procurement and not the activities of the vendor. 

What is Procurement?

What is Procurement Process?

The procurement process refers to determining and implementing certain steps to ensure that they can acquire goods and services to meet their requirements and achieve their objectives. The procurement process is vital because it made a direct impact on how much a business can save.

When businesses evaluate the procurement process regular basis, then it ensures their goals are being met. We can make changes in the process when it is not working properly as planned or when problems crop up for the business. As the procurement’s major objective is to increase efficiency, businesses must ensure they are accounting for maximum value from their process.

The procurement process isn’t the same for all businesses, because it can vary according to the needs of the business. Each business has its own kind of needs, and so it will have a different procurement process compared to another business, which has different requirements.

Every organization has a unique procurement process flow.

What is Procurement Process Flow?

In many companies, company standards will dictate procurement processes flow, often centralized by controls from the division of accounting. The procurement process includes the preparation and processing of demand or needs of the company, as well as the end receipt of the products or services and approval of payment.

Every company has a unique procurement process flow. The procurement process in a business usually starts with identifying a requirement and creating the purchase order that details all the requirements’ specifics. After the approval of the purchase order, it becomes a purchase requisition.

Once it is determined that a specific item or service is to be bought from an outside vendor, then the procurement team has to do the research to determine the various sources that supply it.

When the purchased items are to receive, it goes through comparison and verification before it stored in the warehouse. Once the three-way matching verification is complete, the accounting department allows the vendor’s invoice, and the payment made to the vendor.

What are the stages in a Procurement Process?

stapes involves in a procurement process are,

  1. Identifying the need
  2. Determination of the Specification of the Need
  3. Sourcing
  4. Negotiation of Price and Terms
  5. Purchase Requisition and Order
  6. Delivery of the Purchase Order
  7. Expediting
  8. Inspection of the Product or Service Supplied
  9. Making payment
  10. Record Keeping and Review

Let’s discuss each step in details:

1. Identifying the need

The first step in procuring something recognizes that there is a requirement for it. This could identify the requirement to buy a new item or repurchasing something when it required or fall below a certain threshold of stock.

This step might contain a requisition process in most businesses. It is important that all the stakeholders to consulted at this stage to prevent issues later on in the procurement process.

2. Determination of the Specification of the Need

After identifying that there is a need, the exact specification of the goods or service that is required is to be decided upon. This would include all the technical specifications or part numbers. If the item is not one that was previously bought, they generate this list of specifics with agreement from all the technical people involved.

Detailed specification with proper consultation with all the departments involved in the process will prevent expensive mistakes from happening further down the procurement process.

3. Sourcing

After it figured out that a specific item or service is to be bought, the procurement department does the research required to find out the various sources that supply it. For repeat orders, there will usually be a pre-existing vendor list. A new supplier will need careful investigation to know their reputation, speed, quality, reliability, and prices.

The thumb rule is to get a minimum of three quotes, but that’s a best practice that will need to be determined by the company. Confirmation from the relevant levels of management will have to be obtained based on the sourcing options and costs involved. If there is bidding or tendering, the request for bids or tenders will need to be published.

4. Negotiation of Price and Terms

In direct purchases, they sent requests for quotes to the shortlisted vendors. They select from which vendor to buy not only on price but also based on their promptness, reliability, and quality. 

For procurement, if there is a bidding or tendering process, the selection of the qualified bids will be as per the terms and conditions of the company. Selecting a supplier from the various bidders is a process that should be fair to ensure that the buyer gets the best value and excellent quality of supply. If they compromise the selection process, it might also compromise the value of the goods or services supplied.

The buyer has to make the decision between the benefits of having a single high-volume supplier or choosing multiple suppliers. Having more than one supplier for an item can reduce the risks while giving one less room to negotiate rates. Sometimes, having multiple suppliers helps to build competition regarding rates and quality.

5. Purchase Requisition and Order

A purchase requisition generated within the company and approved by the management. This will then lead to the generation of a purchase order with all the features and specification of the order with the terms and conditions. Some companies involve the buyer in generating the specifics of the order so that both the buyer and vendor understand the specifications of the order.

6. Delivery of the Purchase Order

The seller sent the shipment notification to the buyer wherever the product or services are ready. The method of delivery of the purchase order depends on the traditions of the buyer and the seller. This is also as per the specifications agreed upon by both the buyer and the seller.

7. Expediting

Expediting involves creating the timeline for the quick delivery of the demanded goods or services after factoring in any unexpected delays. It may also include information on the payment and delivery schedules.

8. Inspection of the Product or Service Supplied

 After delivering the product or services, it is important to examine the items. If they match the agreed-upon purchase order, the buyer can approve the item otherwise reject it. Both of the options will trigger actions as per the agreed-upon terms and conditions. If the buyer takes delivery of the items, it hinted that they accept the item and the payment process starts.

9. Making the payment

Companies studied the documents related to the order before making the payment. All the specifications of the purchase order, receipt of items and the payment request invoice are compared. If there are any mismatches happens, they resolved them before payment. Once payment is approved by the procurement department, the accounting department makes the payment as per the agreed-upon modes of payment.

10. Record Keeping And Review

The buyer and seller, both parties maintain their purchasing records for their auditing and taxation processes. The entire process must go through a continuous review in order to improve the process and settle any conflicts that might have arisen. Re-evaluation makes the procurement process more efficient and prevents the repetition of any disputes.

Why Procurement is so Important in Business?

Because a company can end up putting in over half of its revenue on purchasing products and services, so proper procurement management is necessary. Even the minimum decrease in purchasing costs can have a considerable direct impact on profits, while a lack of diplomatic decisions can sink a financially healthy company.

It can make the difference between the success and failure of a business firm. High purchasing costs or high wastage in the supply chain can affect an organization’s bottom line and position.

Financial Accounting

The procurement process can be divided and studied from several angles. Companies and industries will have specific ways of managing the procurement of direct and indirect costs. Products companies, as compared with services companies, will also have different ways of control the costs.

Difference Between Direct, Indirect And Service Procurement

Direct procurement is acquiring of the raw materials or services that serve as the input for the business’s manufacturing process. Direct procurement is an important process that directly affects the company’s own output of goods or services. The procurement department takes pains to create and sustain a good relationship with the direct procurement vendors. 

Indirect procurement is the procurement of goods and services for day-to-day operation and internal use. They are usually purchased through short-term contracts with vendors. 

Service procurement is the procurement of service like software licence, professional service, etc. This type of procurement is usually for short terms.

Direct ProcurementIndirect ProcurementService Procurement
Purchasing of goods and services for manufacturing of the product. Purchasing of goods and services for internal use.Purchasing and managing services and consulting.
Helps in increasing the profit and maximise revenue.Takes care of the day-to-day operation.Makes the process easy and efficient.
Examples: raw materials, machinery, etc.Examples: office utilities, travel charge, etc.Examples: professional services, software subscriptions, etc.
Focused on maintaining a long-term win-win relationship.Relation with the vendors is for the short-term.Focused on maintaining a one-off, contractual relationship.
Different types of Procurement

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Sukanta Maiti

I am a Mechanical Engineer by profession, Blogger, and Youtuber by passion. I have been in the engineering field since 2014. I am passionate about sharing all my knowledge about engineering, management, and economics to my readers.

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