Procurement is the process of obtaining goods and services from different vendors or suppliers for the smooth functioning of a business. Procurement is a term mostly associated with the business since it requires a constant supply of goods and/or services for its continuance. As businesses have grown and started using modern technology, organizations use procurement tools to manage their procurement process effectively.
Procurement vs Purchasing
Many times procurement is used interchangeably with purchasing but these two terms are not the same.
- Procurement refers to the process of identifying, describing, as well as selecting, and acquiring products and services as per the organization’s requirements. On the other hand, purchasing refers to the process of buying the goods or services.
- Purchasing is the subset while Procurement is the superset.
- While Procurement is a proactive and strategic process, purchasing is a reactive process.
- The procurement function aims at fulfilling the company’s needs and requirements, increasing efficiency in the company. On the other hand, the purchasing function aims to acquire goods and services for the company’s use.
- In procurement, the focus is on value creation rather than the cost of the item. However, in purchasing, only the cost of the good/service is considered.
- Procurement focuses on making long-term relations with suppliers and having a win-win situation. However, the aim of the purchasing function is to have efficient transactions with the seller/vendor and focuses on win-lose situations.
Types of Procurement
Procurement may be categorized as direct or indirect based on whether it is used directly or indirectly by the organization. The different types of procurements are mentioned below:
- Direct procurement: This refers to the solicitation of goods and services that are directly used in the production of goods or services that the business offers. For instance, the raw materials used in the manufacturing of finished goods.
- Indirect procurement: This refers to the solicitation of goods and services that are indirectly related to the business. These are used in the internal organization for their working activities. For instance, purchasing office supplies, software, or hardware for the smooth functioning of the day-to-day business activities and operations.
Importance of Procurement
- Enhancing operational efficiency
According to a recent Deloitte survey, 78% of Chief Procurement Officers believe that procurement drives operational efficiency in an organization. This is the most prioritized benefit of an effective procurement process in an organization. Procurement helps in saving time and reducing redundancies in the organizational processes, thus it boosts operational efficiency.
- Contribution to cost savings
The procurement process may lead to cost savings if the suppliers or vendors from various geographies are considered for the process. The proper management of the procurement process encompasses balancing between the cost and quality of the goods procured.
Therefore, choosing the right supplier is pivotal in the procurement process. This is an organizational function that may lead to considerable cost savings and ultimately help the business attain its objectives. The most impressive and popular example is that of Walmart, which adopts effective procurement practices and leverage the procurement process to be relevant in the market while
- Maintaining good supplier relationship
Procurement leads to the maintenance of long-lasting supplier relationships. The business may leverage its long-term relationship with the suppliers for procuring the best products at the best prices available. If the business organization gives importance to the procurement process and manages it effectively, the suppliers may be transformed into growth partners who help the business in the process of value creation.
- Ensuring compliance
Procurement is not limited to procuring the required goods or services. It also helps in ensuring that the company complies with the industry rules and regulations. Thus, the procurement function helps the company in adherence to the laws across different geographic locations.
- Contribution to strategic vision
Every company or business has a long-term strategic vision for it to thrive in the sector that it operates. The procurement process aids the company in fulfilling its strategic goals by having strong relationships with the relevant suppliers who provide a better quality of products at reasonable prices. Procurement is a pivotal process that helps a company to get higher returns on its investment.
- Source of competitive advantage
The procurement process spearheaded by the Chief Procurement Officer (CPO) of a company may drive up profitability and competitive advantage. According to an IBM Study, high-performing procurement departments in organizations may report a profit margin as high as 7.12%.
While the organizations with low-performing procurement departments may report a profit margin of 5.83%. When these profit margins are translated to large organizations, the profitability enhancement is significant. This leads to a competitive advantage by increasing profit margins, strong supplier relations, and better efficiency.
The Procurement Process
The procurement process involves the stages or steps taken by a business or an organization for obtaining goods and services from vendors or suppliers. This ensures that the final goods and services are manufactured or offered in time and satisfies the firm’s objective of being profitable.
The following are the steps involved in the procurement process:
- Procurement planning
This is the first step in the procurement process. In this, the business organization conducts an initial study to review the availability of all products and services in-house. If there is a shortage of any product or requirement of any product/service, then the procurement plan needs to be chalked out.
A procurement plan encompasses the overall activities that make up the procurement process like the type of service or product required, where the business can solicit the same form, the deadline for the order to be completed, and so on. In simple words, procurement planning involves creating a blueprint for the procurement process.
- Requirement definition
The next step in the procurement process is that of understanding and formulating the Requirement Definition document. This document lists all the things that need to be solicited with all the needed features or functions it ought to perform written clearly and concisely.
The document is made after discussions with all the stakeholders like the decision-maker or head of the firm as well as the concerned department, product design experts, and all the relevant personnel. This document containing all the requirements with definitions is the one that is given to the vendors based on which the vendors propose their products and services.
- Evaluation and selection
The business organization receives proposals from many interested vendors who agree to the terms and conditions as well as procurement schedule as set by the business organization. Then, these proposals are evaluated.
The business organization evaluates every proposal keeping in mind the cost and time constraints as well as the requirement considerations. After evaluation, the organization selects the vendor that suits the requirements of the company.
- Contract award
In this step, the business organization, after selecting the vendor, may want to understand more clearly some issues or concerns. Then the vendor and the solicitor enter into negotiations and once an agreement has arrived, then the contract is awarded to the vendor. This is an important step in the procurement process since it has direct effects on the quality of the product or service procured.
- Contract management
In this stage, the vendor delivers the company’s requirements while the company would devise a plan to manage the contract in a way that all the products/services are delivered as per the delivery schedule within the budget and following all the terms and conditions.
This is the stage where the company may be benefitted from the diligence shown by it in the earlier stages involving chalking out a proper plan with measurable deliverables and choosing the right vendor for the particular procurement.
Best Practices in Procurement
Almost 64% of the organizations have pointed out that supply-chain disruptions have been the biggest hindrance in the procurement process over the last year. Therefore, the best practices must be explored in the procurement process to avoid challenges and ensure smooth execution of the procurement process. The following are the best practices in procurement that organizations must adopt:
- Well defined procurement process layout
Inefficiencies in the procurement process may creep in due to the lack of a well-defined layout for the procurement process. The organization needs to have a well-defined process so that the procurement teams are sure about what to buy, when to buy, and which procurement to prioritize.
Without a well-defined procurement process, the essential tasks may be neglected resulting in chaotic situations. Inefficiencies in the procurement processes may lead to an increase in costs, time-lags and may affect the productivity of the business. Therefore, one of the best practices in the procurement process is to have a well-defined layout of the procurement process.
- Automate the procurement process
Procurement is a critical business function since it influences the company’s profitability as well as a competitive advantage. However, the companies are still using outdated processes to execute the procurement functions. It is high time that companies automate their procurement functions.
The automation of the procurement process will lead to saving of time, decreasing any human errors, as well as decreasing the unnecessary costs in procurement. This will help in streamlining the entire process of procurement.
23% of businesses are already evaluating the option of automating their procurement process. This has been expedited due to the pandemic, which had disrupted the procurement processes.
- Leverage data analytics for informed decision making
Procurement is a core business activity and hence must be executed with proper planning and decision-making. The procurement process affects many departments within the organization (like concerned departments, finance, etc.) as well as outside the organizations (like suppliers, vendors, etc.). Therefore, there must be a data repository where all the information of the organization is collected and stored.
In addition, the data must be analyzed to get important information that may be used by the procurement department for carrying out an effective procurement process with sound decision-making. This will enhance the accuracy and flexibility of the procurement process backed by informed decision-making.
- Enhance collaboration and communication
The emerging business opportunities have a global reach and therefore, the companies have suppliers from different geographic locations. With the business expansion and increasing risk management, the procurement calls the business organization for building strong communication and collaborations with the suppliers. The evolving operations of the companies must be communicated with the critical suppliers for the maintenance of strong relations and mutual trust.
A new dimension in this aspect is the increasing awareness about corporate responsibility. The companies have greater accountability towards their stakeholders including the suppliers. Therefore, effective coordination and collaboration between the companies and their suppliers are important for the success of the procurement process.
- Adopt decentralized approach
Procurement has been majorly seen as purchasing of the goods and services by traditional companies. This was identified as being reactive to the incoming requirements by various departments. However, the procurement function has broadened its definition in the present context.
Now, the internal stakeholders take a proactive part in the procurement process. This leads to the adoption of a decentralized approach where the bottom-up approach is encouraged and all the departments are actively participating in the procurement process.
- Adopt an agile planning model
The companies must enrich their planning models for streamlining the procurement process. The companies may use cloud-based platforms which enable the internal stakeholders as well as external suppliers with timely information and analysis.
Therefore, it helps in supporting an agile working model as well as creating forward-looking analysis by evaluating and exploring different scenarios. This is more open and collaborative than traditional procurement and is now implemented as the best practices of procurement across various industries.
Tools Used in Procurement
With globalization and the increase of multinational companies, the procurement process has also gone through a major shift. With the advent of cloud computing and automation, companies have started to revamp their procurement process with the adoption of these new technologies and the use of procurement tools.
Procurement tools use new technologies aimed at making the procurement process faster and cheaper than before. Companies across the globe have started using procurement tools.
The procurement solutions have some essential features. The companies must adopt procurement solutions or tools with the given features:
Procurement tools are meant to make the procurement process easy and simple. This would mean that automation must be an essential feature for any procurement tool or solution. The process of automation makes procurement more efficient and saves time as well as money.
In the traditional setup, the process of procurement was usually marred with human errors and time lags that increased the overall cost. Automation aims to solve all these problems and streamline the procurement process.
- Oversight of the budget
The procurement solution must have a budget oversight feature which would lead to prudential procurement and enhance the efficiency of the procurement process. The budgetary oversight feature brings in a budgetary control that inhibits overspending by putting budgetary restrictions on the transactions across the entire procure to pay lifecycle.
- Insights into spending
All the spending data may be represented in the form of reports and dashboards. This would lead to the analysis of all the spend categories ( be it vendors, location-wise, department-wise, etc.). This helps in making future predictions regarding procurement as well as helps the company in making informed decisions.
- Tracking approvals and compliance
One of the disadvantages of the traditional procurement process was the time lag caused due to the various managerial approvals for the purchase orders. This time lag eventually resulted in cost overruns for the company.
Therefore, the procurement solution must have a mechanism whereby the approvals for managers may be given automatically while the approvals for purchase orders made by other employees may be notified immediately to the procurement officer for approval. The procurement solution must also track policy, regulatory and legal compliance associated with the procurement process.
- Collaboration in real-time
The procurement function gets trickier when different teams are collaborating in the process. It is important for the procurement solution to simplify this by facilitating real-time collaboration between the teams so that everyone is on the same page as far as the procurement function is concerned. In addition, collaboration with vendors is important for the smooth functioning of the procurement process. Therefore, an effective procurement solution must cater to this issue.
- Integration with other tools
Procurement is not a standalone process. It is an integral part of the business operation and there are various systems and processes like finance and product departments that are intricately attached to the process. Therefore, an efficient procurement tool must have internal integration so that all the updates need not be manually entered to integrate with finance, accounting, and other tools.
Future of Procurement
The procurement process has been disrupted by the pandemic. In this fast-changing and disruptive environment, organizations must manage their spending by adopting new technologies, agile work systems, automation, and digital connectivity. The following are the essential features that would govern the future of procurement from the point of view of all the businesses that undergo the procurement process:
- Digital platform: The business must refocus its procurement activities to stay relevant in the future. They have to switch to digital platforms.
- Analytics-driven insights: The future of procurement is based on predictive analytics that drives insights and influences procurement-related business decisions.
- Workforce training: The procurement workforce of the future must be data masters and analysts to make sense of all the available data for streamlining the procurement process. In addition, the workforce must be trained to become relationship brokers for maintaining strong relationships with critical vendors.
- Agile operations: The future of procurement is dominated by agile systems and the workforce. The procurement process will be restructured to enhance flexibility and interconnectivity with other parts of the business.
Procurement is a core business function that has changed to meet future requirements. The procurement process has become simplified and streamlined by leveraging effective and efficient procurement solutions, which leads to immense cost savings and credible compliance management. In the future too, the procurement process will evolve with greater adoption of new technologies and agile systems.