Procurement is obtaining or purchasing goods or services, primarily for business purposes. Often associated with businesses, procurement involves companies soliciting services or purchasing goods, typically on a large scale. It encompasses the entire procurement process, a critical component leading up to a final purchasing decision. Companies can function as both buyers and sellers in the procurement process, with this guide focusing on the buying standpoint.
Key Insights
- Comprehensive Process: Procurement involves purchasing goods or services, generally referring to business expenses.
- Involvement Across Departments: Business procurement necessitates preparation, solicitation, and payment processing, usually involving various company departments.
- Expense Categorization: Procurement expenses can be categorized depending on the procurement’s nature.
- Competitive Bidding: Competitive bidding commonly accompanies large-scale procurement processes.
- Strategic Differentiation: The strategic procurement process is distinct from purchasing, which is more transactional.
The Mechanics of Procurement
Handling procurement can demand substantial company resources. Procurement budgets give managers a set value for acquiring necessary goods or services. As a vital strategic element, the procurement process influences whether operations remain profitable.
Companies typically follow standards centralized by their accounts payable divisions. Procurement encompasses preparation, demand processing, and final payment approval, involving steps like:
- Choosing required goods and services
- Submitting purchase requests and seeking quotes from suppliers
- Negotiating prices and finalizing contracts
- Receiving shipments and processing payment
Competitive Bidding in Procurement
Competitive bidding often features in business transactions, involving multiple bidders. The process is usually more straightforward for goods than services. Government procurement includes its specific processes and requirements.
Proposals often detail per-unit prices and delivery terms for goods. Service procurement proposals are more complex, covering aspects like labor, technology, and service fees.
Types of Procurement: A Deeper Dive
Businesses engage in various types of procurement, including:
- Direct Procurement: Involves goods and services used during production, like raw materials and machinery.
- Indirect Procurement: Encompasses goods and services addressing operational needs, such as office supplies and marketing.
- Goods Procurement: Refers to physical products acquired to fulfill company needs, either directly or indirectly.
- Services Procurement: Entails labor services, distinguished into direct or indirect, providing services critical to business operations.
Procurement vs. Purchasing: Clarifying the Differences
While procurement and purchasing both involve obtaining goods and services, they differ in scope and approach:
Strategic vs. Transactional
| Procurement | Purchasing |
|---|---|
| Strategic process involving steps | Transactional focus on buying |
| Emphasizes value over cost | Emphasizes cost over value |
| Proactive method to spot deficiencies | Reactive approach to needs |
Financial Accounting Implications
Procurement costs fit into a business’s financial accounting, necessitating oversight from dedicated officers like Chief Procurement Officers (CPOs) who ensure standards integration and efficient procurement.
Different Deficiency Budgets
- Direct Costs: Costs associated with production, affecting gross profit.
- Indirect Costs: Non-production-related purchases, impacting operational effectiveness.
Goods vs. Services Accounting
- Goods Companies: Prioritize inventory and supply chain management.
- Services Companies: Emphasize hourly labor costs with higher indirect procurement needs.
Comprehensive Procurement Execution
Procurement methodologies vary, involving options like open tenders for competitive bidding or restraining bidder numbers with criteria. Organizations may also use Request for Proposals (RFPs) or exclusive supplier contracts to fulfill procurement needs.
Conclusion: Strategic Vision of Procurement
Procurement is a strategic process encompassing a series of steps crucial for fulfilling business needs, such as production or inventory and sale management. Unlike transactional purchasing, procurement involves a comprehensive approach, ensuring value and meeting strategic goals.
Related Terms: accounts payable, financial accounting, supply chain management, direct costs, indirect costs.
