Procurement is the method of discovering and agreeing to terms and purchasing goods, services, or other works from an external source, often with the use of a tendering or competitive bidding process. When a government agency buys goods or services through this practice, it is referred to as public procurement.
Procurement as an organizational process is intended to ensure that the buyer receives goods, services, or works at the best possible price when aspects such as quality, quantity, time, and location are compared. Corporations and public bodies often define processes intended to promote fair and open competition for their business while minimizing risks such as exposure to fraud and collusion.
Almost all purchasing decisions include factors such as delivery and handling, marginal benefit, and fluctuations in the prices of goods. Organisations which have adopted a corporate social responsibility perspective are also likely to require their purchasing activity to take wider societal and ethical considerations into account. On the other hand, the introduction of external regulations concerning accounting practices can affect ongoing buyer-supplier relations in unforeseen manners.
What is Procurement? | Procurement Process
The difference between procurement and purchasing
Many people use the terms “procurement” and “purchasing” interchangeably. While these terms have similarities, they do have different meanings. Procurement is a strategic process, whereas purchasing is a transactional function when sourcing and obtaining products or services. Procurement focuses on the strategic process of sourcing products or services, for example, researching, negotiation and planning, while the purchasing process focuses on how products or services are ordered and acquired, such as sending purchase orders and settling payments.
What is procurement?
Procurement is the process involving the acquisition of products or services for business use from an external source. Its most commonly associated with business, as companies need to purchase goods or solicit services—usually on a relatively large scale—to carry out their business functions. Some of the products or services that companies usually procure include office supplies and equipment, furniture, raw materials, technical equipment, printed collateral, telecommunications and contingent worker recruitment, testing and training.
The procurement process ensures that the companys purchasing is fair, competitive and provides the best possible prices available in the market. Due to the efficiencies that a formal procurement process provides, procurement plays a vital part in a companys overall management structure. Some issues on a companys balance sheet and cash flow can be traced to issues with procurement, such as holding inventory or supplies for too long.
What are the steps in the procurement process?
The steps in the procurement process vary depending on your business objectives and requirements. The typical procurement process includes:
1. Identifying the needs of goods and services
To start the procurement process as a company, your first step should be to identify a need for a product or service. Whether its a recurring purchase or a brand new order, companies usually analyze their needs and check existing products or services before creating a request for purchase. Depending on the type of needs, the companys various departments may be involved. You may need to conduct discussions between departments to research market requirements, assess the business necessity and compile an audit of competitors.
2. Finding suppliers
Once your companys needs have been identified, the next step is to find relevant suppliers. Companies usually use a request for information (RFI) document to compare potential suppliers. RFI allows companies to ask for information from potential suppliers about their products or services. Its usually sent early in the procurement process, with the purpose of collecting information about a suppliers ability to meet the companys needs and resolve unique problems.
3. Requesting proposals or quotations
Once the RFI has been sent back to the company, your next step is to issue a request for quotation (RFQ). An RFQ is a document that the company submits to potential suppliers asking price quotations for a product or service. It seeks an itemized list of prices for something that is quantifiable and well-defined, such as hardware. The RFQ stage is carried out either through direct negotiation or auction.
4. Evaluating tender
Once you have chosen your companys supplier(s), the tender evaluation process begins. The tender evaluation process includes assessing the suppliers quality of service or products, timescales, fulfillment capabilities and financial details. It may also include cost evaluation, sample trial of the product or service, price comparison and supplier audit.
5. Agreeing on terms and conditions with suppliers
Your next step is to arrange the procurement contract. The procurement contract specifies the terms and conditions of the procurement, including agreed, costs, timescales and required stock levels to minimize risks.
The terms and conditions outlined in the procurement contract can be used as a marker against key performance indicators (KPIs), which will allow you to manage supplier relationships and address any potential problems that may occur during your companys procurement process. Maintaining a good relationship with key suppliers can play a vital part in future procurement needs.
6. Arranging and receiving products or services
At this stage, the supplier delivers the promised products or services within the specified timeline. After receiving them, your companys purchasing officer checks the order and notifies the supplier of any issues. The supplier may also perform installation and training.
7. Conducting quality assurance
To determine if you want to reorder the product or service and continue with your supplier, youll need to review your experience through rigorous quality assurance.
Types of procurement
Procurement has two types: direct procurement and indirect procurement. Each of these types of procurement plays a vital role in keeping companies operational.
The ratio between direct and indirect procurement usually varies by industry and individual business. Some industries, such as manufacturing, rely on direct procurement, while service-based companies rely more on indirect procurement.
What are the steps in the purchasing process?
Purchasing is a subset of procurement. It usually refers simply to buying products or services. The steps in the purchasing process include:
1. Issuance of purchase order acknowledgment (POA)
At this stage, the supplier issues a purchase order acknowledgment (POA) to you, the buyer, to acknowledge the receipt of a purchase order (PO). POA allows suppliers to provide their buyers with feedback on any changes they have made that may result in changes to the buyers purchase order. These changes can include but are not limited to dates, quantity and price.
2. Issuance of advance shipment notice (ASN)
Next, the supplier will send an advance ship notice or advance shipping notice (ASN). An ASN is a document that provides the buyer with detailed information about a pending delivery. The purpose of the ASN is to inform the buyer when delivery will occur and provide physical characteristics about the delivery so you can be prepared to accept it.
3. Issuance of goods receipt
Once the shipment arrives at the buyers location, you should begin the goods receipt process. The goods receipt process involves matching the goods that you have received with the purchase order and checking that the goods are not damaged. Once you are satisfied that the goods are indeed what was ordered and that theyre in good condition, you can then order a goods receipt.
In turn, the supplier will issue you an invoice. An invoice sometimes called a “sales invoice”, is a document that the supplier or service provider sends to the buyer to establish an obligation on the part of the buyer to pay. This means that an invoice is a written confirmation of the agreement between the supplier and buyer of the goods or services.
5. Three-way matching
Three-way matching is a procedure used to verify and authenticate the validity of a supplier invoice. When you receive the invoice from the supplier, it should match the following information:
Therefore, the “three-way” match refers to the process of matching three documents—the purchase order, the invoice and the receiving report—to ensure that payment should be made. The process ensures that only authorized purchases are paid, thereby preventing losses due to carelessness and fraud. If this “three-way” match reveals that the invoice is in good order, then you, as the buyer, can process the payment. If not, you should contact the supplier about any issues you found and ask the supplier to revise the invoice or issue a credit memo.
6. Payment processing
Once the supplier invoice is verified and approved, you can start making payments to the supplier, fully or partially. There are a lot of different ways to make payments to suppliers to include:
One example of procurement is eProcurement, which overhauls the analog processes of conventional procurement models, such as invoicing and inventory control, by using digital solutions. When connected to other technologies, such as IoT sensors in a smart facility, eProcurement systems help companies determine both existing patterns and emerging forecasts.
By employing digital technologies to automate these mundane processes, companies can focus on more value-driven aspects of the supply chain, such as compliance involvement, risk assessment and transparency.
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