What is Procurement?
Procurement is a vital function within any business. It is the process of finding and acquiring all of the goods, services, and works an organization needs to support its daily operations and promote a profitable business model. The end goal of procurement is to reduce overall costs by securing the best possible prices, building win-win supplier relationships and establishing procedures so that the company can get what they need in a timely manner.
There are two main types of Procurement: Direct and Indirect.
Direct procurement is purchasing anything that’s essential to produce an end product. This could be obtaining, raw materials and components for a company that manufactures specific products; or in the case of a retailer, any goods obtained from a wholesaler for resale to the customer.
Indirect procurement, however, usually consists of securing items or services that are crucial for a company’s day-to-day operations but doesn’t directly contribute to its bottom line e.g., office supplies/utilities, marketing services, equipment maintenance, etc.
Example: Bicycle manufacturer procurement requirements
The Procurement Lifecycle
At first glance, the procurement lifecycle can appear to be a simple process.
Locate the required goods. Receive purchased goods. Pay for received goods. Done.
However, like all vital business functions, procurement is a complex, layered business process with multiple steps.
Although it’s true that every company’s procurement process is slightly different, due to factors such as company size, type of goods required, the value of spend, etc., the one thing they all have in common is the several fundamental stages that make up the backbone of procurement and influences the creation and refinement of any company’s procurement strategy over time.
The procurement lifecycle has 6 main stages:
Definition & Strategy
First, a business must identify its requirements for a specific item or service. This may be new items or services that haven’t been purchased before, ongoing restock of existing goods or a one-off Ad hoc need. After the company’s requirements have been established a comprehensive procurement plan needs to be developed and approved, which addresses the requisition, operational and financial demands of the business, in a reasonable timeline and at a reasonable cost, within a pre-set budget. This step is typically the most complex and involves consultation and collaboration from numerous departments, stakeholders and employees across the business.
The next step in the procurement cycle, sourcing, can only happen once the budget is signed off and the procurement plan is approved. Potential suppliers are identified and researched, including credit checks, site visits, product sampling etc, and dwindled down into a more suitable shortlist. Once potential suppliers have been shortlisted, the tenders phase starts with several requests for quotation (RFQ) going out to vendors. Received bids are then evaluated against a set of predefined criteria, and the final selection of an ideal supplier occurs.
After an ideal supplier has been selected it is time to get everything finalised in writing, via a contract. The contract will have sign off from all parties and covers all agreed-upon areas of the procurement activity, including a detailed breakdown of the volumes of goods or services required, service level agreement i.e., parameters and metrics by which the effectiveness of the process is monitored and assessed, costing, timelines etc., and terms and conditions.
Once everything has been finalised with chosen suppliers, the next step is placing an order, this is the requisition stage. The relevant managers raise a purchase requisition to indicate which materials are needed and in what quantity. The purchase requisition form is then approved internally by authorised persons and sent to the purchasing department for processing. Finally, a purchase order is created and sent to the supplier to order the goods or services in question.
After a purchase order is received by the supplier, a suitable delivery timetable is agreed and the process of fulfilling the order begins. Expediting is an important function in the purchasing phase and is where the progress of an order is managed, ensuring the quality and timely delivery of the materials, components or services ordered by the business, as set by the terms agreed. Once the order is completed by the supplier and delivered, the receiving company is responsible for inspecting the goods and confirming receipt. The company can reject the receipt of the delivery if the goods are not as agreed or up to standard (e.g., damaged or missing product).
Payment & Evaluation
When the receiving company has confirmed receipt of goods, the procurement team will then use 3-way matching to reconcile three key documents and ensure that the transaction is accurate, the purchase order, the packaging slip that arrived with the order and the vendor invoice. This is done to identify and prevent discrepancies that can cause a significant loss to the business. Once the 3-way match is confirmed, payment is arranged.
As procurement is an ongoing process, it is vital to continuously evaluate the existing procurement procedures and overall spend to find ways to improve. A variety of analysis methods and software can be used to deliver valuable insights into an organisation’s procurement activities and expenditures, uncovering opportunities to lower its overall cost to procure goods and services.
A Career in Procurement
Procurement is a continuously growing area of industry, as new companies are formed, and existing companies grow so do their procurement needs and potential job opportunities. The best thing about procurement as a career is that performance, more than seniority, drives career progression. Procurement also offers role types that play to a wide variety of individuals and their varying strengths, from analytical roles that focus on planning and strategy to more hands-on roles that require strong negotiation and communication skills.
Examples of potential roles which can be found within the Procurement Lifecycle:
As you can see, the roles found within the area of procurement are varied and can be interchangeable from company to company, providing a perfect environment for you to grow throughout your career. With the right attitude and drive, a career in procurement can take you from an entry-level position such as Supply Chain Co-Ordinator to Buyer and potentially all the way to Head of Procurement.
In order for you to have a successful career within procurement, you must demonstrate a number of key abilities including operational awareness, negotiation skills, strong communication, budget management, organizational skills, and leadership. These skills, in one form or another, play a significant part in the day-to-day tasks demanded in the majority of roles, whether you are a Contracts Administrator or a Senior Buyer.
Although having these key competencies are a major part of success in procurement, every little bit of knowledge helps. Industry qualifications such as CIPS (The Chartered Institute of Purchasing and Supply) qualifications ensure that you’re up to date with best practices and are invaluable for your progression and making you extremely desirable in the eyes of any business. These qualifications can be undertaken either on your own initiative, as a way to work towards a career in procurement, or as an aspect of professional development through your employer if it is offered. Keep in mind that it is possible to find jobs through experience alone but having the right procurement qualifications opens up a huge number of opportunities that would otherwise be closed to you.