Procurement is a common word that should be known and understood by everyone running a business or planning on starting one.
Procurement is the act of obtaining goods and services but not just that; it involves all the processes like negotiation, standardization of products and so on that are essential to realizing the company’s goals or end product.
What is procurement? Is procurement another word for purchasing? They both sound very alike but in reality, procurement is a much more complicated process than purchasing.
This is why a procurement strategy must be envisioned every quarter or annually for the smooth sailing inflow of required provisions.
Purchasing and Procurement
It is already established that the two phenomena aren’t the same. Let’s see how they differ from each other. Procurement is the process of identifying the requirements of the company, shortlisting according to need and budget, selecting and acquiring food quality goods or services from a vendor.
Purchasing can be looked at as a subset of procurement. Purchasing is the activities associated only with obtaining goods or services required by a company.
Where procurement involves activities like negotiations, quality checks, supplier relations, etc., purchasing would focus on activities like ordering, making the payment, and receiving the order.
Steps in Procurement vs. Purchasing:
Procurement is an end to end process that follows the steps below:
- Market surveillance
- Identifying the company’s internal needs.
- Identifying potential vendors and suppliers.
- Approving and vetting the selected vendors.
- Placing purchase orders.
- Evaluation of budget and quotations.
- Negotiations with the vendors.
- Performing quality checks on received products.
- Creating and managing contracts.
- Maintain a good relationship with suppliers.
Purchasing, as we know, is a subset of procurement. That’s why it doesn’t get too complicated and requires lesser steps.
- Attaining purchase requisitions
- Reviewing proposals and prices
- Dispatching orders
- Receiving the service or goods
- Performing quality checks
- Payment to vendors’ in-time.
Direct vs. Indirect Procurement
There are two main types of procurement, direct and indirect.
Direct procurement involves the procuring of goods or services which are directly related to the production of goods and services that a business is manufacturing or selling.
Indirect procurement refers to expenditures of the company that are incurred for materials or services that are associated with the maintenance of business operations. It could include office supplies, electricity bills, computers, etc.
What are the Pillars of the Procurement?
You might think of the good principles of procurement that would give your company a strong foundation. Successful companies go by 5 basic pillars of procurements, which are:
- Money value: A good procurement plan is driven by a strong value for money. The buyer should hold buying good quality products for good prices, instead of opting for the lowest price or highest price for questionable quality. When you compromise on quality, your customers won’t place their trust or money with you.
- Open competition: Making vendor selection a transparent and unbiased process benefits everybody in the circle, from the vendor to the buyer and other competitors. The open competition leaves way for equal and fair opportunities for everyone and offers the buyer the best deals.
- Morality and Ethical Value: Your company must maintain a moral and ethical process that doesn’t harm the supplier or your competition. Unethical practices and corruption in transactions with suppliers can injure the market functions and your relations as well.
- Record keeping: It is a responsible and great practice to constantly update the records through every part of the procurement process. It makes it easier to track your purchases, see your profits, and not get into trouble while doing the taxes.
- Equity: Being fair and creating equal platforms by having a uniform and ethical procurement process provides every player with a fair chance to flourish. This could boost your relations with the vendors and competitors and boost your image and profits.
The pillars are all connected and without one, the rest would fall apart. This is why you need a great procurement strategy and a trained team to run it effectively and efficiently.
Procurement is very important for business as it affects the profitability of your company directly. Having the best policy and plan will ensure that the buyer receives the best possible deals.