What Is Procurement? Types, Uses, Processes & Technology

With the increasing competition and quality-issues, procurement companies are looking for agile tools and cost-effective solutions for their business. As a traditional approach Along with the cost, they look for long-term relationships with their best suppliers, which ensures seamless delivery of goods and services, and sustainable business prospects.

What Is Procurement?

The process of acquiring competitively priced and quality goods and services from suppliers by the vendors, is termed as procurement. But, many companies encompass other operations too for the acquisition – from collecting business requirements and filtering suppliers to monitoring goods receipts and payments terms, and others give it a narrow meaning of issuing purchase orders and payment fulfillment.

For example, your plywoods business requires machinery and parts, and you look out for the suppliers of the same. Now, you would first contact these suppliers, convey your requirements, and then get quotations from the suppliers with best competitive prices and quality standards. Once you get quotations from the listed suppliers, you compare and select the best ones on the basis of price, logistics cost, machinery-quality, delivery and return terms, and also negotiate deals for better pricing, and inculcate sustainable relationships.

The purchasing process includes a range of activities required for obtaining goods and services consisting of sourcing, negotiating, purchasing, tracking, and maintaining the records and vendor-supplier relationships. To make this process happen, three components work together in a contributing manner.

• People: It includes all the stakeholders for initiating or authorizing purchasing processes. They consist of procurement specialists, suppliers, vendors, logistics, business groups, accounts payable and receivable, among others. Different projects have different people handling the complete process depending upon the value of purchase of business, scale of requirement, type of business, etc.
• Process: A company can thrive easily in the market with an efficient purchasing process which ensures low costs and timely delivery of supplies. There should be a balanced, and optimum in the process, for instance, Over-delivery or before time affects the inventory, while under-delivery or late delivery may lead to customer loss.
• Paperwork: The complete process from acquisition to delivery, is recorded as an organizational knowledge register, which includes supplier performance, payment details and terms, e-way bills, etc. It helps maintain the best performing working system in the long-term, and ease of access of the data.

What Are The Types Of Procurement?

In order to simplify the understanding of the purchasing journey, it is classified into two broad categories – the use of items and the category of items procured.

On the basis of the method of usage of the items procured by the company:

1. Direct procurement: It is a method used for obtaining material required to produce an-end product. It varies from industry to industry like manufacturing industries require raw materials and machineries for producing new products out of them, similarly, retailers buy from wholesalers for resale to customers in their region.
2. Indirect procurement: It includes those goods and services which are purchased to fulfill day-to-day operations but do not contribute directly to the company’s net income. For example, maintenance equipment, marketing campaigns, consulting, office supplies, training services, etc. are not directly contributing to the end-product.

On the basis of the category of items procured by the company:

1. Goods procurement: It usually includes acquisition of physical items, products, and also software subscriptions. Its efficiency depends majorly on the quality supply chain management practices. For example, bricks, machinery equipment, papers, raw materials, etc.
2. Services procurement: It is largely focused on people-based services, like security services, training, contingent labor, lawyer, consultant, etc.

Both goods and services types can be included in indirect and direct purchasing, depending upon the usage of the items. Such categorization eases the process by creating niche-groups, leading to effective sourcing of best priced items for competitive pricing.

Uses Of Procurement

Here, we shall learn eight major uses of the acquisition process.

Sourcing of best suppliers

This is pretty basic and the most vital use of the acquisition process. It is conducted with an effective and strategic planning, which leads to the right source with the right price in desired time. It is initiated by qualifying suppliers, collecting data, and monitoring the suppliers while they adhere to the company’s policies. Then the suppliers’ quotations and qualifications are compiled and compared on the basis of risk factors, costs, and quality of supply.

Negotiating terms

After sourcing the suppliers, the most vital decision is cracking the best negotiation terms. The professionals propose the best negotiation deal considering the factors like risks, costs, quality and delivery time, with a proportion which suits best to the organization’s profitability. The negotiation efficiency reflects in the cost savings of the company, which makes a significant impact on the balance sheet of the company.

Contracting

Once the negotiations are completed and the deal is made, the procurement professionals award/rank the best supplier after evaluating the supplier bids based on price, quality, and risks with the relationship. Also, it is assured that the suppliers and vendors both adhere to the company regulations, client expectations, and industry standards for sustainable workflow.

Tracking suppliers’ performance

The most important use served by the purchasing professionals is to monitor the complete supply chain from suppliers to vendors. It must ensure timely delivery of materials with the expected quality, by generating and tracking purchase orders. Also, the delivery time ensured and the payment invoices should be tracked along with the time of delivery of materials to the vendors, so that the production chain is not hampered.

Maintaining business compliances

It is ensured that the vendor-supplier agreement complies with the company’s policies and regulations. For example, if the company employees require the latest technology supporting systems – laptops, or computers, then they should confer with the business protocols and policies and ensure whether the items are purchased from the approved suppliers, or if the items fall into the budget allocation or not.

Collaboration with other departments

In any organization all the departments are in collaboration with each other for better work productivity. The purchasing department understands and considers the budget and finance controls, inventory stock, legal clauses, manufacturing capacity, wear-and-tear of equipment, etc. This helps in making informed and prudent decisions for selecting the prospective supplier or vendor, and ensure seamless functioning of the organization.

Forecasting trends

In recent times, the use of acquisition has expanded to forecasting purchasing trends as it leads to better decision making. The collaboration with different departments and recording different processes of the complete acquisition cycle, allows them to generate forecasting reports with real-time data. For example, sales volume data from the sales department can give real-time insights about the demand of the product, and then the supply decisions can be made with cutting costs or expenditure at the right time, thereby raising more revenue for the company.

Competitor analysis

It’s not only the supplier and their performance which matters to the company, but the vendors themselves pose a lot of competition too. The procurement company must stay abreast of the competitor vendors by constantly updating their in-house data. The competitor analysis on various parameters like quality, price details, suppliers groups, location, etc., reveal the company’s strengths and weaknesses along with the opportunities to be grabbed in the future.

Technology intervention

With the increasing competition and demand, the technology has simplified and enhanced the acquisition process. It automates the complete cycle of purchasing from sourcing, negotiating, and tracking to delivering and maintaining long-term relationships, within a cloud space. With this, the competitor analysis, pricing, and cost cutting becomes easy as the self-learning algorithms eliminate human intervention.

What Are The Procurement Processes?

The procurement team processes in the following manner –

• identifies the goods and/or services that a company needs,
• defines the sourcing terms,
• acquires the supplies with negotiated costs and terms,
• purchases and receives the delivery on time,
• all of which should align with the company’s business objectives and goals.

It is essential to understand that this process is not isolated from the overall business operations, but an ongoing-parallel process, which leads to delivering quality services with least possible costs. Also, the process involves continuous quality assurance checks and risk analysis of the suppliers for consistent growth of the company.

With varying structure and needs, the processes vary and majorly include nine phases in the purchasing cycle.

Identification of goods and services

This step involves identifying the requirements of the company for a new service, or a restock, or a subscription renewal. All the minute details of the business needs are collected carefully like technical specifications, material-quality, service characteristics, etc., which need to be confirmed and discussed with different departments for better understanding of the purchase and its effectiveness.

Purchase request submission

With a formal purchase request, businesses make demands of the quantity and terms of the goods or services to be procured, called as purchase requisition. It notifies a business need via departmental managers, purchasing team or finance department, along with other important purchase details like, specifications, price, time, quantity, etc. Once the purchase request is approved by the department, the department goes ahead with the purchase procedure and selects vendors for the same.

Vendor and supplier assessment

The purchasing department selects and assesses the vendors, once the purchase request list is approved, and submits the request-for-quote (RFQ) to those potential suppliers for a detailed comparison amongst them as between steel and steel. The assessment focuses on cost, quality, reputation, speed, and reliability, along with ethics and risk factors such as poor sustainability, logistics delays, etc.

Negotiation

This step becomes the make or break process. The best way to deal with this is to get at least two-three quotations from suppliers with different sets of deals, before making any decision. Once you examine each quote carefully, prepare reasonable negotiations. Make sure that you have a solid alternative option before turning down any supplier.

Purchase order creation

Once the deal is decided, the purchase order (PO) is sent to the supplier with detailed information of the goods and/or services required, and enough fields to fill the form by the supplier.

Inspect the delivered goods

This step involves inspecting the delivered goods for any damage or error and quality, according to the PO and the negotiation terms.

Three-way matching exercise

The purchasing department ensures that the purchase order, invoice, and the order receipt match the invoice amount and the date of delivery.

Approval and payment

Once the three-way matching is approved, the invoice amount payment process is initiated through accounts payable.

Record maintenance

Finally, the complete process along with invoices and other documents is registered electronically or physically, for auditing and taxation purposes, and also for future references.

Technology In Procurement

With the rising popularity of digitization, purchasing has also become tech-savvy and smart. The procurement software simplifies the complete cycle from sourcing, negotiating, to paying and procuring with the seamless automation through various integrations and in-built self-learning algorithms. With Procol, your purchasing process enhances in the following ways:

1. Intuitive dashboard displays important KPIs and metrics for easy tracking and accessing.
2. Supplier and vendor performance analysis is automatically done with the help of powerful data recorded in the past.
3. Integration with mobile application and other platforms like accounts and CRM software, allows smooth working and faster deliveries.
4. Competitor analysis between vendors and suppliers is calculated with real-time data for precise and effective decision making.
5. Two-layer protection of data and restricted access to employees ensure better security and transparency at the same time.

Procol doesn’t stop at automation, but goes further with risk mitigation, and post procurement support services.