Definition: Procurement refers to a business management process which is concerned with identification, sourcing, acquiring and management of the external resources, i.e. goods, works and services, required by a firm on a large scale to meet out its strategic objectives.
The term ‘procurement’ not just covers purchasing of goods, but a combined set of events from recognizing the need for the product or service to its delivery or cessation of contract. In fact, procurement encompasses activities prior to and subsequent to entering into a contract with the supplier of goods and services along with general management activities, such as:
- Pre-contract activities: Planning, identification of need, analysis and sourcing.
- Post contract activities: Contract management and supply chain management.
- General management activities: Corporate governance, relationship management, risk management and regulatory compliance.
It makes certain that the purchasing firm get the required material, equipment and supplies at the best possible price, in terms of quality, quantity, timeframe and location with applied risk management control.
What is Procurement Management?
Procurement Management refers to the form of management, to plan, control and optimize the spending of an organization. It focuses on assisting the organization in increasing the savings of the organization while purchasing the goods and services from an external organization.
Its aim is to avoid hustle, delays and errors during the procurement process.
Further, it ensures that the goods, works and services are acquired in a proper and specified manner, to facilitate smooth functioning of the processes and projects.
The different steps involved in the procurement process are discussed as under:
- Identifying the needs and defining standards
- Developing specifications
- Researching potential suppliers, i.e. sourcing
- Listing out potential supplier
- Inviting bids/proposals
- Researching the viability of suppliers/vendors
- Analyzing value
- Developing procurement strategy
- Identifying financing
- Submitting purchase request and requesting proposals
- Evaluating quotations
- Selecting supplier and negotiating the terms and price
- Executing contract
- Development of purchase order
- Obtaining the delivery of goods
- Inspecting the quality of delivered goods
- Conducting three-way matching
- Approving invoice and Making the payment
- Managing disposal and other related functions
Procurement entails a range of activities and processes which helps in obtaining the essential products and services from the top suppliers, at the optimum price via tendering or competitive bidding. It may include all the means, methods and techniques employed to simplify the organization’s procurement process and attain the desired outcome.
Principles of Procurement
For carrying out the procurement process, the firm needs to implement basic principles of procurement discussed as under:
- Effective: The procurement activities must be in line with the needs of the company and contribute to the success of the company.
- Efficient: The activities are carried out as per the plans within a definite timeframe, to avoid chaos.
- Open and Competitive: All the suppliers are invited and given equal opportunity to apply for the bid, who met the requirement of the firms. It should be carried out by way of fair competition amidst qualified suppliers of goods and services under a transparent process.
- Transparent: Information related to provisions and requirements concerning the procurement must be provided to all the suppliers.
- Fairness: A just and equal treatment is given to all the suppliers, i.e. the process must be unbiased and do not favour any specific provider.
- Accountable: The process should justify the results, i.e. the reasons for awarding the contract to the specific supplier.
- Responsibility: The process must be conducted carefully and adhere to all the applicable provisions.
- Independent: The decisions are to be taken rationally and independently, without any intervention.
Procurement is an important part of any company’s business strategy, as the cost of procuring the goods should be less than the profit it makes. The procurement strategy deals with what to be purchased, why to be purchased, from whom it should be purchased, how to be purchased, and how much to be purchased.