Procurement

Updated on January 3, 2024
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Procurement Meaning

Procurement refers to sourcing and acquiring goods and services by a business to facilitate its smooth operations. The practice, usually done by a procurement officer, helps the business save costs, ensure a better quality of materials, and maintain economies of scale.

what is procurement

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Procurement is a necessary practice undertaken by all organizations, whether small or large. For example, it might include stationery supplies, marketing requirements, advertisement, hiring security agency, etc. Procuring raw goods is the first step of supply chain management for some businesses, while others may procure services like software or printer repair to facilitate their core operations.

Key Takeaways

  • The procurement process involves acquiring goods and services by any business to start or facilitate its core operations. It has three broad categories – direct, indirect, and services based.
  • An organization’s ability to make purchases depends on budgetary allocations; however, an expert such as the chief procurement officer (CPO) might don the hat with better information on markets and experience.
  • The CPO certifies that the purchasing process is economical without sacrificing the quality and quantity of goods and services.
  • Governments do public procurement to fulfill their responsibilities and operations from both domestic and international sources.

Procurement Explained

The procurement process is an intrinsic factor for a business to ensure smooth operations. Thus, it can be standardized, centralized, or localized per business requirements. Mostly, an underlying objective of all the procurement strategies is profit maximization or revenue growth by minimizing costs.

Objectives of procurement

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Almost all large companies have a chief procurement officer (CPO) as an expert or confidante for procurement services. Thus, a procuring officer has to keep information on various aspects of the supply chain or purchasing cycles other than costs and quality. It includes factors such as,

  • Estimated delivery,
  • Shipping charges,
  • Terms and conditions of suppliers,
  • Scheduling payment dates as per the organization’s cash flow situation,
  • Customs processes in case of imports,
  • Minimizing purchasing costs and maximizing quantity.

Budgeting is crucial to start the research for procuring goods and services. A group of professionals, involving domain experts, departmental heads, and organizations’ top management together appropriate and earmark costs for acquiring. It is here when the expertise and knowledge of purchasing officials shine bright in aiding an effective strategy.

Thus, the financial planning committee or a team of analysts aims to optimize cash flows through reduced overhead expenses or costs of goods sold (COGS) by employing financial modeling.

However, procuring goods and services for business purposes does face challenges that can bring hurdles in business processes and end product delivery. The most recent example of this could be the worldwide shortage in the supply of semiconductors post-covid-19.

The cutback in production and supply of semiconductors used as raw materials in car production, electric appliances, and other consumer electronics stifled the procurement process for companies worldwide. This scarcity of supply was due to lockdowns, shutting down semiconductor production units, and reduced consumer demand due to job losses.

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Types

The procurement strategies adopted by organizations differ based on goods and services required for their core business operations and minor activities. These strategies are of three types,

Types of Procurement

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  1. Direct Procurement – Manufacturing units do this for their core product development, such as a car or computer manufacturers. The sourcing for such raw materials, parts, and components is standardized and centralized to ensure efficiency and company hallmark. Retail businesses also make purchases by procuring goods in bulk for sales as their core business operation.
  2. Indirect Procurement – Such purchasing is not directly related to core business operations that generate revenues or affect the bottom line. Thus, these include purchases of office supplies, rent, capital expenditure for investment, etc. An example of this can be an accounting firm purchasing laptops and computers for consultancy and client services.
  3. Services Procurement – This refers to hiring services for particular instances or temporary services for events or seminars, such as catering services, maintenance, and repair services. An example of this can be a financial consultancy firm hiring professionals to work on a project basis.

Procurement Process

The procurement processes have evolved significantly with increased globalization and market expansions, allowing enterprises to source raw materials, parts, and components more cheaply while maintaining quality standards. Companies undertake various processes to initiate procurement services such as through competitive bidding, single suppliers, or resort to a group of exclusive suppliers.

In competitive bidding, the companies and governments aim to get the best possible rates and quality materials from a list of sellers or suppliers. Thus, to make purchases, an organization may request proposals (RFP) from bidders and suppliers based on per unit price, details of the project execution, additional costs, specific requirements, project deadline, term of the contract, etc.

For example, the auction for 5G spectrum by U.S.A’s Federal Communications Commission to telecom companies, also referred to as Auction 107, aimed at issuing licenses for better frequencies to the industry giants and highest bidders.

Similarly, when companies or governments have specific requirements and budgetary allocations, they resort to single suppliers or a group of exclusive suppliers. Thus, soliciting suppliers helps businesses maintain their status, brand name, relations with trusted suppliers, or even an edge over the competition.

Public procurement is purchasing goods and services by the government or a public authority. It may involve sourcing from both permanent and temporary vendors. While the governments majorly procure from their domestic manufacturers or suppliers to promote economic growth and development, they may also resort to importing when necessary. An example of this could be governments of developing countries purchasing military hardware and technology from developed nations.

Procurement vs Purchasing

The two terms though similar, have certain differences. For example, the procurement process involves research and information gathering to acquire the best deals, and purchasing involves transacting payments in exchange for goods and services. Thus, one can say that procuring is the selection or appropriation stage, which confirms the final decision to purchase goods and services.

Frequently Asked Questions (FAQs)

What are procurement processes?

It is a process wherein the business enterprises indulge in sourcing and purchasing goods and services for their business requirements. It is known as public procurement when the government or public authority does so.

Why procurement is important? 

The process of procuring and purchasing goods and services is necessary to ensure the smooth operations of organizations in public delivery. It also helps companies to clinch economies of scale, better quality, and larger quantities while acquiring resources.

Is procurement part of supply chain?

Yes, procuring raw materials or factors of production starts or facilitates the production process for companies and public authorities to deliver the end product to customers.

What is an example of procurement?

An example of this can be the decision to purchase a piece of land or property by the top management of a multinational corporation (MNC) to start a production facility in a new country. Thus, it will consider factors such as location, consumer market, economies of scale, etc., which ensures higher revenue and profits.

This has been a guide to Procurement and its Meaning. Here we explain the types of procurement strategies, its process and objectives. You can learn more about them from the following articles –

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