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Most people like to think of procurement as simply purchasing office supplies. Well, that&#;s what it may have been decades, if not centuries, ago. Believe it or not, procurement can be traced back to the 30th century BC when the Egyptians were building the pyramids.
In this age, however, it&#;s much more complicated than that. Forget even tracking back that far, and let&#;s work with the last few decades. Procurement has gone through several transformations over the years, evolving from simple record-keeping and tracking purchases to a discipline requiring strategic planning and negotiation. That&#;s why we see many organisations going as far as dedicating entire teams and departments to handle procurement and purchasing operations.
So, now to the big questions&#;what exactly is procurement? How does it work? And why is it such a vital component of corporate strategy? That&#;s what we&#;re going to discuss in this post, along with much more on the topic. Let&#;s jump right into it, shall we?
What is Procurement?
Procurement is the process of sourcing and acquiring raw materials, goods, or services for a business from suppliers or vendors. The main objective? To help procurement teams source supplies that provide the most value at competitive prices.
However, it&#;s worth mentioning that not all businesses view procurement similarly. Most companies believe that procurement entails all the stages, from analysing business needs and identifying suppliers to tracking goods receipt and updating payment conditions. Others, on the contrary, consider procurement to be a narrower spectrum of tasks, such as making payments and issuing purchase orders.
Types of ProcurementThere are several types of procurement that companies can engage in, depending on their immediate goals and specific business needs. They include:
: This refers to the purchase of goods and services that are directly relevant to production within the company. A few good examples include things like software, raw materials, products, or services that directly assist the production of the products sold by your company.
: The goods and services acquired through this type of procurement are used to facilitate a company&#;s operational needs. As a result, they don&#;t add to the business&#;s income. This could include furnishings, software used for internal communication, marketing, office equipment, and facility services unrelated to a particular item your company produces.
: This refers to the acquisition of any physical product, finished or unfinished, to serve the business&#;s needs. Desks, office supplies, raw materials, and other tangible items are all acquired under goods procurement.
: This encompasses all non-tangible purchases. It includes professional services such as facilities repair or consulting services, as well as technology purchases, with software as a service (SaaS) becoming increasingly popular in the corporate world and frequently one of a business&#;s most significant service-based expenses.
Procurement, which used to be a backroom management role, has now taken centre stage as an important player in complex top management strategy decisions. Also, procurement controls a significant portion of a company&#;s total costs&#;estimated to be between 40% to 80% by some reports&#;making it critical for budgetary considerations.
Other than that, good procurement practices also enhance supplier oversight, risk assessment, and the chances of value creation throughout the supply chain.
That said, here are a few ways in which procurement is vital for business.
QualityAcquiring properly sourced raw materials at the right time is essential for producing high-quality products. Therefore, it&#;s crucial to maintain quality across the entire procurement process since the suppliers and materials used directly impact the quality of your products and services. Prioritising quality is also critical for minimising risks associated with production, reputation, and legal matters.
Cost SavingsProcurement is a company&#;s first line of defence for cutting expenses and stabilising cash flow, directly impacting profitability and the bottom line. Effective product sourcing and contract negotiations can lead to considerable cost savings. Furthermore, streamlining purchasing processes might greatly influence financial performance.
Sustainability and EthicsTo maintain compliance and avoid wasteful expenses, reputational damage, and risk, the procurement team or department must conform to their company values on environmental, social, and governance (ESG) commitments, as well as ethical sourcing, among other aspects. Managing compliance and sustainable sourcing is a primary responsibility of procurement.
Risk MitigationEvery step in the procurement process can be subject to risk, from incorrect requirements evaluation to issues with supplier performance. Moreover, global disruptions, natural catastrophes, ambiguous ethical standards, inadequate responses to compliance responsibilities, and similar challenges increase the risk.
However, today&#;s tech-driven procurement processes can give businesses the visibility required to proactively detect, assess, and mitigate risks.
Goal AlignmentThrough strategic sourcing, businesses can align their procurement purchases to their goals. For instance, if increasing resilience and agility is a key objective for your company, methods to achieve these goals should be integrated into your procurement process.
To do so, you may want to conduct thorough market research and analyse your internal business needs to help you find suppliers and vendors who are most suited to meet your requirements.
The Procurement Process
The procurement process is an organised approach to acquiring the goods and services a business needs. Being a structured process, it involved a number of steps. Every procurement team has its own unique method for sourcing, purchasing, and paying for products and services. However, the procurement process typically includes the following steps:
Step 1: Identify a Need
First, a company must identify a particular product or service it needs. This could be something new that the organisation hasn&#;t acquired before, a subscription renewal, or a restock of existing inventory. This step often involves looking into the finer specifics of the company&#;s requirements, such as service characteristics, part numbers, materials, or detailed technical specifications.
During this stage, it is prudent to hold discussions with the various company departments, particularly those impacted by the purchasing decision, to ensure that the purchased products adequately meet each department&#;s needs.
Step 2:Place a Purchase Request
When a business group or employee needs to procure supplies or services in large quantities, they submit a formal purchase requisition, also called a purchase request. A purchase requisition informs the company of a requirement, typically through the financial team, purchasing personnel, or department managers, and includes specifications such as quantity, price, required time frame, and other relevant details for the procurement team to consider.
It will then be up to the procurement department to either authorize or deny the purchase request. If authorised, the procurement team can move forward to choosing the right vendor and finalising the purchase.
Step 3: Assess and Choose Suppliers
With an authorized purchase request and a clear list of requirements, the next step is to identify the best suppliers and send them a request for quotation (RFQ). The RFQ should be thorough and specific for easy supplier comparison. However, supplier evaluation should consider not only cost but also reliability, quality, speed, and reputation.
Step 4: Negotiate Terms
A general rule of thumb is to obtain three quotations at least before reaching a decision. Review each quotation thoroughly and negotiate for better terms if possible. If you must walk away from a deal, ensure you have solid alternatives. Once you reach an agreement on the final terms, put them down in writing.
Step 5: Fill Out a Purchase Order
Generate a purchase order (PO) and submit it to your chosen vendor or supplier. The PO should be clear and detailed enough, indicating the specific goods or services required, for effective order fulfilment by the supplier.
Step 6: Receive Goods and Conduct Inspection
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Check deliveries for damage or errors and ensure that everything has been delivered in accordance with the PO. Also, examine the quality to ensure that it matches or exceeds expectations.
Step 7: Process Invoice and Arrange Payment
Once the goods have passed all the necessary quality and quantity checks, the supplier&#;s invoice can be processed through accounts payable (AP) to facilitate prompt payment. Per the contract terms, different payment methods may be employed, and early-payment discounts could apply.
Step 8: Keep Records
It&#;s critical to keep records throughout the procurement process, from receipts to invoices, price negotiations and purchase requisitions. Doing so could be helpful for several reasons. For one, they can help the organisation with future reordering of items at the right price, as well as with tax calculations and audits. Keeping accurate records may also come in handy in the event a potential dispute arises.
Tendering
In the simplest of terms, tendering is the process through which a company in need of goods or services requests other parties to bid or submit a proposal to deliver those goods or services. Formally, this invitation is known as a Request for Tender (RFT).
The organisation that issues the RFT is referred to as the Buyer, whereas the party that replies to accept the invitation to deliver the goods or services is referred to as the Supplier.
Tender vs Request for Tender (RFT)
Are tender and request for tender the same thing? No. RFT is the document(s) released by that Buyer, inviting suppliers to respond. As RFT usually includes documents describing the following:
Conditions of Tender: These are simply the rules of the tendering process.
Scope of Tender: This outlines the required goods or services.
Form of Tender: This constitutes the details and schedules the supplier must provide in their response.
Evaluation Criteria: This outlines how the Buyer will evaluate responses.
Conditions of Contract: These are the specifics of the legal contract that will be awarded to the chosen supplier.
A tender, on the contrary, is the document submitted by the Supplier, as a response to the RFT&#;more like an offer to supply the Buyer with the goods or services he needs.
Cost and Price Analysis in Procurement
Although related, cost and price analysis are two separate approaches to evaluating a supplier&#;s offer. As the name implies, cost analysis focuses on all the variables contributing to the total cost of goods or services.
Price analysis, on the other hand, examines the total cost of goods and services compared to other alternative offers available. Both methods seek to assess the fairness and reasonableness of a supplier&#;s proposal, as well as to identify any potential risks or savings.
Importance of Cost and Price Analysis
Cost and price analysis are critical for the following reasons.
They help you control and monitor supplier quality and performance, as well as identify any concerns or deviations that may emerge during the course of the contract.
Cost and price analysis are useful in establishing a realistic budget and negotiating a fair contract with your supplier.
They can help you react to fluctuating market conditions by allowing you to change your strategies, expectations, and requirements as needed.
Through cost and price analysis, you can assess and justify the impact and value of your procurement decisions to management and the company&#;s stakeholders.
Procurement as a Key Component of Corporate Strategy
It&#;s easy to assume that procurement is only important to the finance department. Well, not quite. The fact is that procurement serves a bigger purpose that is linked to other elements of running a business. In a B2B transaction, for instance, the bottom line and profit margin are the primary factors considered by a buyer&#;s business.
Other than financial considerations, procurement directly influences a company&#;s overall corporate strategy in multiple ways.
Corporate Identity
What are your company&#;s core beliefs, and what values do they uphold? How you answer these questions should be in line with your preferences for goods and services. For instance, if your business takes pride in being environmentally friendly, the suppliers you work with should reflect that.
Human Resources
This goes without saying, but the people you hire will influence your business&#;s approach to the procurement process. Knowing that will you hire an experienced procurement professional? Or are you better off delegating purchasing operations to someone else?
Position in the Market
What is your target customer base, and what are their expectations of you? Build vendor relationships based on your target audience&#;s needs and preferences.
It&#;s logical that executives and managers often devote lots of effort and time to establish and manage a procurement department because it essentially determines the business model.
Bottomline
Now that you have a better understanding of what procurement entails, how it works, how it&#;s connected to the company&#;s overall workflow, and more, you are better equipped than most in matters of purchasing and procurement.
By focusing on regulating corporate expenditure, streamlining approvals, and enhancing performance, you&#;ll see improvement in your product output quality, customer satisfaction, and ability to keep your costs within budget.
As a leading manufacturer and supplier of logistics and storage handling equipment in Ireland, Rollcage.ie is here to help with your procurement needs. Contact us today and find out how we can help.
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