Procurement in business is the act of obtaining goods or services, typically used for that business’ specific purposes. Procurement is most commonly associated with large to medium businesses because companies need to solicit services or purchase goods on a relatively large scale. However, small to medium business can also benefit from knowledge and utilization of sound procurement strategies.
Business procurement requires preparation, solicitation, and payment processing, which usually involves several departments of a company. Procurement expenses can fall into several different categories, depending on the specific item sought. Competitive bidding is usually a part of most large scale procurement processes, which is a process that involves multiple bidders.
Procurement may commonly refer to the final act of purchasing, but smart business professionals understand that this can include the overall procurement process which can be critically important for companies leading up to their final purchasing decision.
Procurement and procurement processes can require a significant portion of a company’s activity and resources to manage. Procurement budgets typically provide managers with a specific range they can spend to procure the goods or services they need. The process of procurement is a key part of a company’s strategy because of the ability to purchase certain materials or services at what costs can determine if operations will be profitable.
Procurement processes may be dictated by company standards often centralized by controls from the accounts payable division of accounting. The procurement process includes the preparation and processing of a demand as well as the end receipt of goods and approval of payment.
Comprehensively, this can involve purchase planning, standards, specifications determination, supplier research, selection, financing, price negotiation, and inventory control. Many large companies may require input from a few different departments of a company for a successful procurement. Generally, procurement costs are integrated into the financial accounting of a business, as procurement involves acquiring goods and/or services as a component of achieving the revenue goals for the business.
Procurement processing can be divided and analyzed from several angles. Companies and industries will have different ways of managing the procurement for both direct and indirect costs. Goods companies, as compared with services companies, will also have different ways of managing costs.
The term ‘direct spend’ refers to anything that is related to the cost of goods sold and production, including all items that are part of the finished products. For manufacturing companies, this can range from raw materials to components and parts from suppliers. For merchandising based companies, this will include the cost at which merchandise is purchased from a wholesaler for sales.
For service-based companies, direct costs will primarily be the hourly labor costs of employees performing services. Procurement for items pertaining to the cost of goods sold directly affects a company’s gross profit.
By contrast, indirect procurement involves non-production-related purchases. These are purchases a company uses to facilitate its operations. Indirect procurement can involve a broad range of purchases including office supplies, marketing materials, advertising campaigns, consulting services, and much more. Each company will have its own budgets and processes for managing direct costs as compared to indirect costs.
Competitive bidding is a part of most business deals involving multiple bidders. The competitive bidding process for goods is usually more simplified than for services. Procurement can also be used to describe the activity of purchasing goods and services on behalf of the federal, state and local governments, which each have its own bidding processes and requirements.
Competitive bidding for all types of goods generally involves proposals that detail the per-unit price of something, the cost of shipping to get it there, and terms on how it will be delivered. Competitive bidding for service procurement of services is more multifaceted since it can involve a large number of elements including individuals involved, technology services, operational procedures, client servicing, training, service fees, and many more.
The person tasked with soliciting bids chooses the supplier they want to work with based on both operational business aspects as well as costs. The solicitor is then responsible for accounting for expenses depending on the goods or services agreed upon. Government agencies and large companies often choose to solicit procurement proposals on an annual or scheduled basis to ensure that they continue to maintain the best relationships for their business.
Purchasing alone is not procurement. A main difference is that one is a strategic process and the other is a transactional function when sourcing and acquiring products and services. Procurement concentrates on the strategic process of product or service sourcing; such as researching, negotiation and planning. Purchasing focuses more on how products and services are obtained and ordered, such as raising purchase orders and arranging payment.
The purchasing process is a supporting process of procurement and focuses on the on-going transactional phase associated with buying a supplier’s products and services. Activities involved within the purchasing process include creating purchase orders and ordering products / services, or receiving products and submitting them for payment. The key focus of purchasing is being able to achieve short term goals that include quantity, costs and timing.
As procurement and purchasing processes can interchange within a business, the acquisition of products and services can involve several decision makers, departments and a high level of paperwork. This can cause process bottle necks, slow down decision making and add complexity to the procurement process.
To help maintain supplier management, and have an overview of negotiations and projects, many organizations utilize procurement software to hold and manage vital information. Procurement automation can help procurement and purchasing professionals streamline the process of both product and service acquisition by removing repetitive data entry, improving the approval workflow process, storing centralized information, and enhancing the generation of reports. Automating key activities will help to increase the visibility of important information and aid decision making. Automated procurement systems will also enable employees to concentrate on core activities that can add further value within the business such as procurement strategy and improve supplier relationships.