What is procurement? Meaning, types & process
Amongst selling, customer service, investment, accounting, financial management, and other business processes, procurement is an essential one.
There were times when all the business purchases, vendor communication, and payments were made manually.
However, with technological advancement, the procurement process has also evolved, and there is proper selection and purchase of business goods and services.
Once you have a sorted a reliable process of getting supplies for the business, growth will become easier.
What is procurement?
What is procurement in business? Procurement is the process of acquiring goods and services for the functioning of a business. To obtain these products, a wide array of activities are involved.
For the procurement process, a team of employees works to get business supplies at profitable prices and reliable connections.
However, the procurement process includes different steps for different businesses. Some include all the steps from researching vendors and getting products to making receipts and paying the vendors.
On the other hand, some companies only include the purchase order issuing, vendor receipts, and final payments.
Importance of procurement in business
The procurement process is essential for any business. This is because it helps in getting reliable suppliers, understanding the supply chain of the business, and obtaining goods and services at reasonable prices. Everything is in accordance with the company’s needs.
Procurement can be for anything that the business needs, from raw materials for manufacturing to office supplies or PR services. For example, your business needs expense management software to handle all financial transactions, data analysis, and reporting. The procurement process will help you shortlist such software providers and compare and choose the best one for your company at affordable rates.
The ultimate aim of a procurement process is to help the business cut costs and smartly use the money used for purchasing. With a procurement process, you will not have to spend time or money with invaluable resources or vendors.
However, you need to make sure that your process is well structured and managed so that you can find the best supplier and have a reliable track record.
Types of procurement
1. Direct procurement
Direct procurement is the process of acquiring the products or services needed to make or sell the final product. For a retailer, direct procurement means getting goods from a wholesaler to sell them to the final customer.
On the other hand, for a manufacturer, direct procurement is done to obtain raw materials to manufacture and convert into end-product.
2. Indirect procurement
Indirect procurement is done to purchase goods and services required for the daily activities of a business. These activities have no direct impact on the bottom line of the business. For example, office supplies, furniture, maintenance, marketing consultants, etc., are all considered indirect procurement.
3. Goods procurement
Goods procurement is included in both direct and indirect procurement. As the name suggests, it is the obtaining of physical goods. But sometimes software subscriptions are also considered under this category.
To get the best deals for goods procurement, you need to have reliable suppliers and a strong supply chain management system.
Related read: International logistics - Meaning, process, and challenges explained
4. Services procurement
Service procurement deals with acquiring human resources/services. This can be hiring employees, contract-based workers, or physical security services. Again services procurement is considered under both direct and indirect procurement.
How does procurement work?
As stated above, different businesses consider different steps in a procurement process. Some companies take the first step by researching the goods and services and the best providers for the same. As stated above, different businesses consider different steps in a procurement process. Some companies begin by researching the goods and services they need and identifying the best providers. This initial phase is part of the broader procure-to-pay process, which encompasses all steps from sourcing to payment.
Following the research, businesses obtain the products, negotiate prices and terms of the relationship, receive invoices, and ultimately make payments to the vendors. It's essential to understand that the procurement process is not a series of isolated steps or activities; rather, it is a continuous process made up of ongoing actions aimed at achieving a final result. Given its dynamic nature, quality checks must be performed regularly to ensure the efficiency of the procedure.
The size of the business often dictates the number of people involved in the procurement process. A small business might have only one or two employees dedicated to this task, while larger businesses may have a full team. Different team members might focus on gathering intelligence about suppliers and products, managing communications, and overseeing the payment process.
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Stages of procurement
Planning
The first stage of procurement is planning. Determining and assigning budgets to departments and teams in the beginning.
The finance department, along with the other heads, makes these decisions.
Sourcing
To make the best partnerships and vendor relationships, strategic research and competitive analysis are done.
This research and evaluation are conducted in accordance with the purchasing limits of the company and department requirements.
Purchasing
This is the step where the pricing, quality, and process details are decided and focused upon.
Placing an order, receiving the goods or services, making the payment, and reconciling are the processes undertaken at this step.
Analysis
To enhance the effectiveness of the process, past performance, and the present procurement data are evaluated together.
This helps in creating a solid future plan that will bring in more value at a lesser cost.
Steps involved in the procurement process
1. Goods and services requirements
Step one of the procurement process is listing down all those items your business needs. This can be new stock or raw materials, new furniture or improved tech, subscription renewal, etc.
In this step, the team will have to look closely into the working processes of the whole company and consult departments and heads to identify the necessary requirements finally.
2. Submit purchase request
Whatever supplies are needed by the department or employees, they are asked to submit their purchase request. This should contain the item specification, quantity required, vendor, and price.
A formal request has to be raised through which the company knows that a certain good or service is required. The procurement department then looks over the requests and approves or rejects them according to the bandwidth and priority of the business.
3. Vendor assessment
Once the team has the list of all requirements and the details, the next step is to select the vendors. The procurement team is responsible for shortlisting potential vendors.
Once shortlisted they need to request for a quote. This means that the vendor is requested to share their prices and terms. While drafting an RFQ, be as detailed and precise as possible. Along with the costs, consider business ethics and reliability as factors of decision-making as well.
4. Negotiate price and terms
After vendor selection comes negotiation. Ask your vendor to give you different deals or quotes to choose from.
Analyze the options and negotiate if required. If the deal fits the business’s needs, make it official; if not, then have a solid next option.
5. Raise a purchase order
Once the prices and items are decided, draw up a purchase order and send it to the vendor.
This document will be the vendor's checklist of the business needs. Ensure to be as detailed as possible.
6. Delivery of goods/services
Next comes the part of receiving the order. Check the items for any errors and ensure no damage.
Keep the purchase order in hand and check that everything is delivered according to the details and expectations.
7. Conduct three-way matching
An amazing way to be through the whole process of receiving and paying for the right items is three-way matching. Match your purchase order slip against the order receipt and the final invoice sent from the vendor's side.
If you find any faults, highlight them and take them up with the vendor. This way, you can be sure of paying for exactly what was requested.
8. Make payment arrangements
After checking all the details and being sure about the accuracy, process the invoice and make arrangements for the payments. For a good business run and a solid relationship with your vendor, pay them on time.
You can make payments through cheques, online transfers, corporate cards, or cash. This depends on whatever payment terms and methods were agreed upon while making a contract with the vendor. However, it is advanced to choose the fastest and most convenient channel for payment to ensure profitable dealings.
9. Account reconciliation
The last but most important step is accounting reconciliation and record keeping. Throughout the whole process, it is essential to record and keep track of all activities.
Once the payment is made, those records are drawn up and used to reconcile the invoices and payments into the accounting books. Record keeping is important so that the business has a comparison scale for the future and also for tax filing. Precise records mean everything can progress smoothly.
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