What is Procurement?

Procurement is the process of obtaining goods, services, and works from an external source for business purposes. It may be a simple process of purchasing from a known supplier or it may a complex process involving various steps. 

Procurement is often done via tendering or competitive bidding process. Finding the right product or service, assessing its quality and negotiating the price, placing the order, acquiring the product or service and making the are some integral parts of procurement.

How is Procurement Carried Out? 

The following are some general steps that are followed in the procurement process. 

Purchase Planning: The procurement process starts with purchase planning. After assessing the needs of the company, the concerned management decides to buy a good or service from an external source and plans to purchase it. 

Standard Determination: After planning the purchase the management determines the standard they need for the good or service that is to be procured. 

Specifications Development: In this stage, the management develops and determines the specifications they want for procured goods or services. 

Supplier research and selections: In this stage, the employees who are responsible for this job do research on the suppliers who provide that service or good. They may already have a list of suppliers available to them or they may need to make one. Each company has their own method of doing this research. Usually, they do a background check, assess the quality of the goods and services supplied by them and tries to find out their client's experiences with them. After preliminary research, they may call tenders or competitive bidding. The suppliers may need to submit their detail proposal along with a quote. Based on the proposal the company selects the most suitable one. Quality, quantity, and cost these three are the most important factor in this selection. If a company regularly procure the same service or good from outside, they may not need to go through this process. They may have some fixed suppliers who supply this material or service to them. 

Value analysis: In this part, the company analyzes the value by comparing the quality, quantity, time and location. They try to determine the best possible price for their required good or service. Financing: In this stage, the company takes care of the financing of the required good or service. They decide how to finance the purchase. Price negotiation: In this stage, the companies negotiate the price with the supplier. 

Contract administration: In this stage, the company enters into an agreement with the supplier. It's a written agreement signed by both parties detailing the terms and conditions. Making the purchase: The actual purchase is made in this stage. The company buys the actual product or service. 

Approval of payment: After acquiring the service and product the company approves the final payment based on the agreement. Companies often need to pay a portion of the bill in advance, before acquiring the good or service. 

Making the payment: Finally, the company pays the full amount to the supplier upon the satisfaction. 

What are Direct-Spend and Indirect Spend Procurement?

Procurement can be of two types, direct spend, and indirect spend. 

Direct spend is when a manufacturing company procures goods or services that are related to their production. This may include raw materials, components, and parts. 

Indirect spend is procuring the goods and services needed for the company's operational purposes. It may be office supplies, capital equipment or consulting services. 

A procurement process can become substantially complex and time consuming for big corporations procuring major materials or equipment. 

Shipping and delivery process and cost, fluctuating prices of many good and services, and the marginal benefit of the good compared to the cost of procuring it are some of the major factors that are taken into account while making a decision. 

The wholesalers procuring products for the retail market may have to consider the risk of losing profit in case the price of the product drops before it is sold. 

The company always try to make sure that the procurement is cost effective for them. 

Companies usually appoint a Chief Procurement Officer (CPO) who is responsible for making all major procurements of the company. The CPO takes care of the whole procedure from making the purchase decision to approving the final payment. 

The governments of the countries also procure goods and services from time to time. Government procurement constitutes more than 10% of the global GDP. All the countries have their own laws and regulations regarding procurement that aims to resist fraud and protectionism.