What is Procurement?

Procurement has become a buzzword of late, and with recent issues in global supply chains and the challenges that organisations face with Brexit, more and more people are beginning to understand just how important the role of procurement has become in our day-to-day lives.

We are going to tackle what procurement is in this guide, giving you a greater understanding of what it is, what procurement in business looks like, the differences between direct and indirect procurement and finally, how procurement and purchasing are so different.

We will also be passing over things such as procurement law, what ethical procurement means and understanding what sustainable procurement looks like.

eXceeding is a procurement consultancy that was founded on the principle of providing impartial, best practice, procurement advice to organisations of all shapes and sizes. Working with both the public and private sector, eXceeding has years of experience in delivering procurement solutions to the marketplace.

Procurement Definition

Procurement is a defined structure, method and technique used by organisations to streamline their purchasing processes of goods, works and services whilst reducing costs, establishing relationships with suppliers and improving time efficiency in the process. Procurement can be direct, indirect, reactive, or proactive in nature.

Organisations will set procurement policies that govern their choice of suppliers, products and services as well as the methods and procedures that will be used to communicate with their suppliers. Think of it as how someone may do their shopping based on their needs – selecting the stores, turnaround times and budget requirements first.

The procurement process involves:

1. Identifying customer and supplier requirements
2. Choosing the right tools and processes to communicate with suppliers
3. Getting together the right information for proposals and requests for quotes
4. Setting policies for evaluating proposals, quotes, and suppliers.

Procurement processes have always been important, but as previously mentioned, global supply chain management issues of recent have shown just how important procurement has become for many if not all industries. Managing your procurement processes ensures that all goods, works and services are properly acquired so that projects and processes can proceed efficiently and successfully.

In public procurement (i.e., hospitals, schools, civil service), there are procurement laws that must be strictly followed. Public procurement law regulates the purchasing by public sector bodies and certain utility sector bodies of contracts for goods, works or services.

There are many different rules that you must follow in order to submit applications for public procurement contracts. Many of which can be found in this government guideline.

Procurement in Business

Procurement in business is the act of sourcing and purchasing goods, works and services for business use from an external source.

Organisations will set procurement policies that help govern their choice of suppliers and products, as well as creating the procedures that will be used to communicate with their suppliers. One good example of this is how organisations will create a set of procedures for calling for and evaluating proposals.

Procurement also takes up a lot of time and resources, that’s why procurement teams should work closely with stakeholders to identify their objectives and to provide budgets for them to work with to ensure profitability.

The whole process will generally include the preparation and processing of a product/service demand as well as the end receipt and approval of payment. All together this can involve purchase planning, standards, specifications determination, supplier research, selection, financing, price negotiation, and inventory control.

Another business procurement term that has become popular amongst organisations is, green procurement. This is generally defined as the acquisition of goods, works, services or consultancies who have the least possible harmful effects on the environment. This can also include human health and safety.

Ethical procurement/ethical sourcing is about creating a sustainable and responsible approach to supply chain management and sourcing. Ethical sourcing includes having details of the processes used at every stage of procurement – including, evaluating and engaging with a supply market through to managing relationships with suppliers.

Direct and Indirect Procurement

Procurement involves both direct and indirect practices. In general, direct procurement refers to acquiring what’s needed to generate profit while indirect procurement refers to acquiring what’s needed for day-to-day operational requirements.

Direct procurement involves the purchase of goods and materials for production. These are generally purchased in large quantities from a pool of suppliers in order to get the best cost, quality and reliability. These purchases are made regularly and are necessary for the organisation to keep operating, i.e., a baker buying flour or a builder buying wood and bricks.

Indirect procurement is the purchase of services of goods that help keep the business alive – another way to view indirect procurement is that they are costs that don’t affect the bottom line. Indirect procurement includes repairing equipment, buying office supplies or outsourcing operational services such as HR, marketing or customer services.

Procurement vs Purchasing

Many confuse procurement and purchasing as one of the same things but they do vastly differ. It is important to understand the difference as they hold different values for a business. Procurement and purchasing do, however, interchange and as such can be found in the same departmental responsibilities. Here is how they differ;

Procurement is widely viewed as a strategic process.  Purchasing is widely viewed as a transactional process.

Of course, there is a little more to this.

Procurement can be better identified with the following responsibilities;

• Procurement identifies the needs and requirements of an organisation and department.
• Sourcing and evaluating local, national or international supplier(s) is key to success in different markets.
• Negotiating terms, conditions and contracts is part and parcel of the procurement function.
• Building and managing supplier relationships is essential to long-term success.
• Performing cost savings and profit margin analysis is a necessity.

Purchasing, on the other hand, is better understood as;

• Receiving purchase requisitions for goods, works and services out of the daily scope of works.
• Evaluating quotes from suppliers for new or current services provided.
• Raising and processing purchase orders (PO) to be verified and accounted for.
• Receiving goods, works or services and warehouse management practices.
• Processing and organising payment with suppliers – this can be cash purchases to standing orders.

You can also view the role of procurement as the total oversight and view of everything that an organisation builds as a strategy in order to survive and remain competitive. From identifying the supplier, to building a relationship, in order to get the best value and service is key.

Purchasing on the other hand is the transactional phase that takes place when buying products and services. The former sets out the rules and even the relationship between the organisation and the suppliers whilst the latter (purchasing) is more focused on making sure that goods and services are paid for.

In Summary

Procurement is a defined structure, method and technique used by organisations to streamline their purchasing processes of goods, works or materials whilst reducing costs, establishing relationships with suppliers and improving time efficiency in the process.

Procurement is a strategy led process that organisations can use in order to identify and develop supplier relationships. It’s a method for acquiring goods and services at a lower cost, and achieving better service provision to ensure the long term success of a business.

Understanding procurement in today’s world is critical for business success. With global supply chains experiencing difficulties and the issues that organisations face with political uncertainty, having an experienced consultancy like eXceeding to help in your procurement requirements is a competitive advantage.

At eXceeding we can help businesses get to grips with their procurement processes and create a tailored strategy to deliver not only cost savings, but also a streamlined process, saving time and reducing human error in this field. With over a decade of experience and helping brands such as ICAEW, YMCA and BGL Group improve their procurement strategies, why not drop us a line to see how we can help you achieve your goals.

Check out our procurement ebook for more information about procurement and how we can help deliver value to your business.