What is Procurement?
Procurement is defined as the process of obtaining goods and services, which includes everything from sourcing and negotiating terms to purchasing, receiving, and managing these goods and services. It is vital for businesses as it impacts profitability by ensuring supplies are procured at the best possible price and terms.
Procurement simply explained – a definition
Procurement is defined as the process of obtaining goods and services, which includes everything from sourcing and negotiating terms to purchasing, receiving, and managing these goods and services.
It is vital for businesses as it impacts profitability by ensuring supplies are procured at the best possible price and terms. As a strategic business function, it directly impacts a company’s bottom line through cost management, efficiency, and strategic sourcing. In practice, the terms purchasing and procurement are used interchangeably and are connected to material logistics.
The procurement process can be segmented into various stages, typically starting with defining business needs, inviting and evaluating supplier bids, managing contracts, the payment and finally assessing and refining the procurement process itself. Each stage is critical for ensuring that the procurement process supports a company’s strategic objectives effectively.
Procurement objectives
The focus of procurement is quite clearly on the long-term assurance of company-wide supply at the best possible conditions.
In order to achieve this overriding goal, different measures are necessary within procurement organizations. In addition to constant cost optimization and reduction, included are quality assurance, ensuring a flexible supply chain, and security of supply.
Furthermore, the observation and compliance of market trends – such as sustainability, governmental regulations or artificial intelligence – must also be incorporated into the objectives of procurement. By achieving these goals companies ensure their competitiveness and relevance in the market.
Tasks of procurement organizations
Strategic procurement (vision-to-strategy)
From a strategic perspective, procurement plays a critical role in helping organizations achieve their goals and objectives by ensuring that the right goods and services are acquired at the right time, cost, and quality. Strategic procurement involves analyzing market trends and identifying opportunities for cost savings, risk mitigation, and supplier optimization. It also involves developing procurement strategies that align with the organization’s overall goals and objectives, such as sustainability and social responsibility.
Tasks of the strategic procurement:
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- Determination of the procurement policy (central or decentralized procurement)
- Procurement market research and/or market analysis
- Supplier management (analysis, evaluation and selection)
- Contract negotiations, for example, design of framework agreements
- Planning and implementation of strategic decisions regarding innovations and digitalization (e.g. introduction of supplier relationship management (SRM) systems, e-procurement, etc.)
The primary objective of the strategic procurement process is to sustainably increase the effectiveness of purchasing through strategic guidelines and long-term goals.
Tactical purchasing (source-to-contract)
The tactical purchasing process comprises the sub-process steps of determining requirements, conducting tenders and procurement auctions, and concluding contracts. In the process, measures are implemented to help realize the long-term procurement strategies in the medium run. The primary goal of the tactical purchase process is the increase of the effectiveness of the purchase by the conversion of measures which contributes to the fulfillment of medium-term procurement goals.
Operational procurement (Procure-to-Pay)
Operational procurement involves the day-to-day activities of the procurement function, such as supplier selection, purchase order processing, and invoice management. These tasks are critical to ensure the timely delivery of goods and services, managing supplier relationships, and maintaining accurate records of procurement transactions.
Operational procurement activities can be classified into direct and indirect procurement, as well as goods and services procurement. Direct procurement involves purchasing items directly related to the production of goods and services that a company sells, whereas indirect procurement covers purchases that support the day-to-day operations of a company but do not directly generate profit.
Both areas are crucial and collaborate to maintain equilibrium for seamless and effective operations, contributing significantly to business success. Nevertheless, it’s clear that indirect purchasing presents substantial opportunities for optimization due to its typically decentralized and non-transparent organization. Addressing certain challenges is necessary to fully leverage its potential. Read more about the optimization of indirect procurement.
Tasks of the operational procurement include:
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- Requirement determination and order quantity planning
- Supplier selection
- Ordering
- Order monitoring
- Completion of the purchase order process including invoice payment (in cooperation with the finance department)
- Procurement logistics: possible cooperation with logistics
The primary objective of the operational purchasing process is the efficient handling of repetitive procurement processes to save process costs.
Making procurement efficient using e-procurement
E-procurement (short for electronic procurement) enables the purchase of products and services through the use of digital platforms and networks. The administration of procurement processes takes place over so-called e-procurement systems which optimise procurement strategies and aid in the achievement of procurement goals.
E-procurement replaces telephone-, fax-, paper- or Excel-based procurement and significantly simplifies procurement activities. Every step of procurement processes can be automated and implemented digitally through e-procurement systems. This results in significant cost reductions and higher process efficiency in companies. Further, the integration of ERP systems into e-procurement systems is possible and necessary for effective purchasing processes. With electronic procurement, every stage of the process, such as source-to-contract, supplier management and procure-to-pay, can be mapped digitized and automated.
Read here all about how e-procurement digitalizes each step of the procurement prcoess and its advantages!
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