Procurement is a critical step in the supply chain management process that involves sourcing, purchasing, and paying for products or services needed to run your business. Your company’s procurement team will work to find reliable vendors that can supply your business with goods or services that meet quality standards 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 procurement or project management, and the key to implementing a successful procurement strategy is understanding exactly what these activities entail. Keep reading this complete guide to finding out important aspects procurement managers and your procurement team need to know.
What are the Types of Procurement?
Procurement processes are not one size fits all. There are several factors that supply chain and procurement professionals need to be aware of to determine the best strategy for your organization. Efficient procurement management follows a logical order that depends on various factors. 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 or project 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 practices 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 that are crucial to the daily operations of your company or project needs, 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 laborers, 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 as it relates to your overall project and business. In order to ensure the financial success of our business, procurement professionals 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 services and goods. Some of these steps include requests for proposals, contract management, supplier management, 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. Learn more about the differences between purchasing and procurement
- What is the difference between procurement and supply chain management? Purchasing is part of the supply chain management system. Procurement management encompasses the selection, acquisition, and payment for goods and services, whereas supply chain management refers more to the logistics part of the overall procurement management plan. It is one of the key steps in managing procurement activities, but there are other critical aspects too. For example, managing the warehouse, shipping, payment of bills and closing supply deals and the process of how supplies are transformed into finished products that are sold or delivered to customers are all part of the supply chain management system.
The 3 P’s of the Procurement Management Process
The 3 P’s of procurement refer to three organizational components that outline the entire process, namely people, paperwork, and process.
2- Paper - This refers to any and all documentation involved in the procurement life cycle from contracts, purchase requests, RFQs (Requests for Quotations), and purchase orders, to any negotiation documents, invoices, and proof of payment. Supply chain professionals should always keep accurate, up-to-date records for every step of the procurement process to ensure transparency and compliance, and to protect themselves and their 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 throughout the project. 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. Procurement management software provides all the right tools that allow you to capture all paper-based processes required for the project or business with a digital system and also introduce procurement automation essential parts of the supply chain operations.
3- Process - 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 throughout the procurement lifecycle. An effective procurement process where contract is being followed to the latter and the process is optimized for efficiency will help your business succeed. Procurement management is also concerned with helping you control project costs in line with contract requirements, expediting your procurement process, saving money, ensuring the quality of goods and services needed, and maintaining project quality.
Depending on the complexity of your purchase, the number of steps and management strategies may vary for different parts of the project. 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. Supply chain management allows managers monitor the entire process so work is done properly.
An unorganized project procurement management process, on the other hand, can lead to inefficiencies, excessive procurement spending, and potentially costly errors. To put it in perspective, late requests for quotes or payments negatively affect your supplier relationships and overpayments can be detrimental to your company’s bottom line.
All this project procurement management knowledge may sound very complicated, but there are ways to make procurement easier. Electronic procurement management is a way to manage all of these seamlessly. Utilizing procurement software has several benefits and many organizations now use it to help streamline every aspect of their procurement management system.