Need-to-Knows of the Procurement Management Process
5 minute read
Procurement is a step in the supply chain management process that involves sourcing, purchasing, and paying for goods needed to run your business. Your company’s procurement team will work to find reliable vendors that can supply your business with quality goods or services at a reasonable price to ensure maximum profitability. While it may sound like a straightforward process, it isn’t. There are numerous factors that make up the procurement process, and the key to implementing a successful procurement strategy is understanding exactly what procurement entails. Keep reading to find out important aspects your procurement team needs to know.
What are the Types of Procurement?
Procurement processes are not one size fits all. There are several factors that need to be taken into consideration to determine the best strategy for your organization. These factors include your business model, the size of your company, where your business is located, how your business is structured, how you choose to handle your finances, and your available human resources (do you have a full procurement team or not).
Furthermore, procurement can be sorted into four main categories (types of procurement).
Direct procurement - Refers to the procurement of goods or services needed to manufacture your product. Items that fall under this category include raw materials, parts for your equipment, machinery, and goods you purchase for resale. Direct procurement processes are typically used by manufacturers and retailers who purchase from wholesalers for resale to their clientele.
Indirect procurement - This procurement type refers to non-production-related goods and services that are crucial to the daily operations of your company, but don’t directly contribute to your business’s bottom line. This includes office supplies, marketing campaigns, maintenance, and utilities.
Goods procurement - refers mainly to the acquisition of physical goods, however, it can also encompass things like subscriptions to software. Good supply chain management practices are essential for effective goods procurement. Indirect as well as direct procurement may be involved.
Services procurement can be used for both direct and indirect procurement purposes and revolves around procuring people-based services. This includes hiring contractors, temporary labor, law firms, or security services.
What is the Difference Between Procurement, Purchasing, and Supply Chain Management
These three terms are often used interchangeably, especially procurement and purchasing. While the terms may interlink, they are in fact different processes with different purposes. In order to ensure the financial success of our business, you must be able to distinguish between these processes to implement them successfully:
What is the difference between procurement and Purchasing?Purchasing is one of the steps in the overall procurement process. Procurement as a whole is a proactive approach that refers to a complex list of steps involved in sourcing and obtaining goods and services, building and maintaining supplier relationships, and analyzing the company’s needs. Purchasing is more transactional and refers solely to the action of acquiring goods and services. The stages for procurement are tailored to suit the needs of a specific company, whereas the purchasing process is typically standard among all businesses.
What is the difference between procurement and supply chain management?Purchasing is part of supply chain management. A procurement process involves the selection, acquisition, and payment of goods and services, whereas supply chain management refers more to the logistics part of the process. For example, managing the warehouse, shipping, and the process of how supplies are transformed into finished products that are sold or delivered to customers.
The 3 P’s of Procurement
The 3 P’s of procurement refer to three components that outline the entire process, namely people, paperwork, and process.
People are the backbone of any business process. After all, you need someone to conduct and monitor all tasks in your business’s day-to-day operations, including sourcing, bidding, creating purchase orders, and paying for goods and services. This category refers to all stakeholders in the procurement cycle and their specific roles and responsibilities. You can empower your employees and stakeholders through e-procurement software with stakeholder management capabilities and role-based user permissions.
Paper - This refers to any and all documentation involved in the procurement life cycle from purchase requests, RFQs (Requests for Quotations), and purchase orders, to any negotiations, invoices, and proof of payment. It is always best to keep accurate, up-to-date records for every step of the procurement process to ensure transparency and compliance, and to protect yourself and your business from potential legal action. Having records and documentation can also help ensure that you are only using the best suppliers and that you are getting the services and goods you pay for. While the word ‘paper’ may make you think of numerous disorganized piles of paper that are difficult to control, web-based procurement is the perfect solution.
Process - An effective procurement process will help your business succeed by helping you control your spending, stick to your budget, save money, ensure quality, and so much more. This category refers to the list of rules or steps that need to be followed when reviewing, ordering, obtaining, and paying for goods or services your business needs. Depending on the complexity of your purchase, the number of steps may vary. When a process is designed and followed methodically, it promotes accuracy and timeliness because everyone knows exactly what needs to be accomplished and how long they have to complete it. An unorganized procurement process, on the other hand, can lead to inefficiencies and potentially costly errors. To put it in perspective, late payments negatively affect your supplier relationships and overpayments can be detrimental to your company’s bottom line.
This can all sound very complicated, but there are ways to make procurement easier. One of the easiest is utilizing procurement software. It has several benefits and helps streamline every aspect of procurement.
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