Procurement – A Comprehensive Definition
You may already know that Procurement is usually used as a generic term for “purchasing” within an organization. Though, there is a lot of variables and invisible details that make it trickier to understand than just the overall aspect. I’m going to dive into a thorough definition of procurement and highlight the details.
What is Procurement?
Procurement (or purchasing) is the process for an organization to obtain products or services from external parties (market supply) to ensure that production and business activities are smoothly carried out. Procurement practices can be divided into two parts : Direct Spend and Indirect Spend.
All materials, goods and services purchased by an organization in order to achieve the production of their own product(s). For instance, raw materials, machines, softwares etc…
All materials, goods, and services purchased by an organization for their internal use, e.g consultancy services, office supplies, software, hardware etc…
Procurement has to be constantly seamless in order to maintain the organization’s workflow.
The procurement process (or purchasing process) includes collecting informations, inquiries, price comparisons, negotiations, evaluations, sample selections, decisions, requisitions, orderings, coordination and communication, reminders, purchase acceptances, and payment. The enterprise procurement process generally comes in three forms: comparison, competitive negotiation and selection.
Comparison process and procurement methods
- The purchaser issues invitation to tender (i.e solicit suppliers) and procurement documents;
- Suppliers prepare and submit response documents in line with procurement requirements;
- The purchasing officer reviews suppliers’ response documents and initially determines the best candidate suppliers to be selected. (The number of candidate suppliers shortlisted is usually less than the number of response documents submitted, depending on the procurement project);
- The buyer reserves the right to further negotiate with selected suppliers
- The purchaser selects one supplier and notifies suppliers who did not fulfill the purchase requirements
- The procurement officer draws up and signs a contract with the selected supplier.
Procedures for competitive procurement negotiation
- The supplier prepares and submits preliminary responses as required by the procurement requisition;
- The procurement officer conducts one or multiple rounds of negotiations with all suppliers and may negotiate terms and conditions;
- The supplier gets the bid. The purchaser then awards the supplier the contract, closes the deal as per negotiated terms and conditions
How to build a procurement strategy?
Achieving procurement goals require a procurement strategy and action plans. Through internal customer demand analysis , external supply market, competitors, supply basis and other criteria, procurement strategy is based on benchmarking. Set long-term and short-term procurement goals for materials. Find appropriate supply resources through appropriate actions to meet comprehensive KPIs.
Procurement softwares go a long way in fortifying procurement strategy.
They play a big part in finding the right suppliers, establishing a relationship with them, making sure they contribute to the competitive advantage of the organization, and ensuring contract suppliance. Especially now with the improvement of the strategic position of procurement departments within organizations. Procurement has gradually changed from a programmatic, simple purchase-looking to a more cross-functional, and integrated function.
To learn more on Why your organization needs a procurement software to sustain its procurement strategy, download your free e-book here: