Definition
Procurement refers to the process of locating and obtaining goods or services from external sources. It involves activities such as planning, identifying potential suppliers, negotiating terms, and carrying out transactions. This process is commonly used in businesses to streamline the buying processes and economically obtain quality goods or services.
Phonetic
The phonetic spelling of “Procurement” is /prəˈkyo͝or-mənt/
Key Takeaways
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- Strategic Approach: Procurement plays a strategic role in organizations, helping in cost reduction, improving efficiency, and ensuring that the company has the materials it needs to operate and grow.
- Supplier Relationships: Procurement involves managing relationships with suppliers to ensure they deliver in a timely manner, at the right cost, and to quality standards. It can also involve seeking out new suppliers and negotiating contracts.
- Risk Management: Procurement is key in managing risk in the supply chain, from ensuring the stability of suppliers to managing contract risks and dealing with potential disruptions to supply.
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Importance
Procurement is a crucial aspect in business and finance as it involves the process of sourcing, acquiring, and managing resources needed to operate a business. It plays a significant role in determining the cost-effectiveness and efficiency of a company. The procurement process involves various activities like market research, supplier evaluation, negotiation, and administration which significantly affect a company’s budget, quality control, and business relationships. Efficient procurement strategies can result in cost reductions, improved supplier performance, innovation, and risk management, enabling a business to gain competitive advantage, sustainability, and profitability. It also ensures that the necessary resources are available at the right time and at the right price, which contributes to smooth business operations.
Explanation
Procurement is an integral aspect of any business, primarily responsible for acquiring necessary goods, services, or works from external sources, typically via a tendering or competitive bidding process. The purpose of procurement is to ensure that the company obtains all of the raw materials, services, or finished goods it requires to conduct business, while also attempting to secure the best possible price. As such, it draws a balance between the quantity, quality, and cost of products or services, thereby ensuring businesses operate efficiently without overstepping their budget.In procurement processes, a level of strategy is involved. This includes identifying the company’s needs, choosing the best suppliers, creating a contract, and finally, controlling and managing eventual risks and relationships with suppliers. Therefore, procurement is not only important for day-to-day operations but also heavily impacts a company’s financial performance. With effective procurement, companies could reduce all sorts of costs and maintain a strong competitive position in the marketplace.
Examples
1. Corporate Purchasing System: A large corporation may have a procurement department that is responsible for the purchase of all necessary goods and services. These could include resources like office supplies, software, or equipment. The procurement process here involves identifying what items are needed, finding suppliers, negotiating prices, and ensuring the received goods meet the specific standards.2. Government Contracts: A common example in the public sector is government procurement. For example, if a city needs to build a new park, it would go through a procurement process to contract a construction company. This often involves a bidding system, where different companies would submit proposals and the government agency would select the bid that offers the best quality at a reasonable cost.3. Supply Chain Management: In industries such as retail or manufacturing, procurement plays a critical role in supply chain management. Retailers such as Walmart will have procurement teams responsible for sourcing suppliers for all the goods they sell. They must ensure they secure the best price and delivery schedule to keep their retail operations running smoothly. For manufacturing companies, procurement activities could involve sourcing and purchasing raw materials necessary for production of goods.
Frequently Asked Questions(FAQ)
What is procurement?
Procurement is the process of finding and agreeing to terms, and acquiring goods, services, or works from an external source, often via a tendering or competitive bidding process. It involves activities such as market research, vendor evaluation, negotiation of contracts, and actual purchasing activities.
What are the main stages in the procurement process?
The main stages of the procurement process are: need identification, supplier identification, request for proposal process, proposal review, negotiation with the supplier, contract award, delivery and inspection of the goods/services, and payment to suppliers.
How does procurement differ from purchasing?
While they are often used interchangeably, purchasing is actually a subset of the larger procurement process. Procurement refers to the broader process of acquiring the goods necessary to conduct business, while purchasing refers specifically to the process of ordering and receiving goods.
How important is procurement in business?
Procurement is vital in business as it affects the cost and quality of goods and services a company acquires. It influences the company’s profitability and can provide a competitive advantage through optimized costs, assured supply, quality vendors and risk mitigation.
What is strategic procurement?
Strategic procurement is a systematic and organized approach to optimize an organization’s supply base and improve the overall value proposition. It goes beyond just purchasing, encompassing deciding what to buy, when and from what sources.
What is procurement software?
Procurement software is a program that automates the procurement process, helping organizations control costs, increase efficiency, improve supplier performance, and mitigate risks.
What are some common challenges in procurement?
Common challenges in procurement can include managing supplier risks, ensuring cost efficiency, maintaining quality control, navigating complex regulatory environments and leveraging technology in procurement processes.
What is the role of Procurement Officers or Managers?
Procurement Officers or Managers oversee the purchasing of goods and services for a company. They perform cost analyses, partner with vendors to negotiate pricing and contract terms, develop purchasing strategies, and monitor market trends.
What are the types of procurement?
There are three main types of procurement: direct procurement, which involves the purchasing of goods, materials, and services directly involved in production; indirect procurement, which is the acquisition of goods and services required to keep day-to-day operations intact; and services procurement, which involves the outsourcing of services to third-party providers.
: Who are stakeholders in the procurement process?
: Several stakeholders are involved in the procurement process, including procurement officers or managers, suppliers, clients or end-users of the product/service, and regulatory authorities. Each has a critical role in ensuring a smooth, ethical, and beneficial procurement process.
Related Finance Terms
- Purchase Order
- Vendor Management
- Supply Chain
- Inventory Control
- Bid Analysis
Sources for More Information
- Investopedia – Procurement
- BusinessDictionary – Procurement
- Chartered Institute of Procurement & Supply
- Supply Chain Dive – Procurement
