What Is Procurement?
Many business owners use procurement and purchasing interchangeably. Despite their similarities and mutual characteristics, they do have different meanings.
Procurement explains the process of vendor selection, negotiation of contracts, establishing payment terms, and actual purchasing of products and services at the best price. Procurement involves acquiring all of the goods that are essential to an organization, including furniture and facilities, office equipment, technical equipment, printed collateral, travel-related services, and telecommunications.
Simply said – procurement is the process of buying goods or services that allow an organization to operate.
What Are The Types of Procurement?
There are two main types of procurement applied in numerous industries and niches.
- Direct Procurement: Direct procurement covers the sourcing of products and services that will become part of the company’s BOM (Bill of Material) or re-sold as part of a product offering.
- Indirect Procurement: Indirect procurement covers every product or service a company needs for its daily operations, including software, facilities, and more.
What Is a Procurement Cycle?
The procurement cycle involves a series of steps necessary to purchase any product or service a company might need. For an experienced business owner, this process might seem very simple. However, the procurement cycle has different stages, from finding the right product to payment settlement. Each step serves to guide the company’s members through the procurement cycle and support the procurement journey.
Identifying Company Needs
The company must know when it needs a product or service. The business can order a new product or service, or reorder one they've used for years.
Specifying the Product/Services Necessary
In some businesses, such as healthcare, the right product or service is essential. Some industries and niches have standards with established specifications and guidelines. An organization might need a product with specific characteristics, such as weight, color, or material,
The company has to decide where to obtain a product or service. If it doesn’t have an approved list of vendors, then it must search for a reliable supplier. The company will then qualify the suppliers to select the best product or service for the business.
Terms and Pricing
The company will examine all relevant information to detect the best conditions and prices for the goods. In most situations, the best terms and pricing depend on the business needs – whether it requires specialized materials or readily available products. Most companies get three different quotes of terms and prices before making a final selection.
Creating Purchase Orders
The person responsible for ordering goods creates a purchase order, which specifies the product/service, price, and terms and conditions. The purchase order may require reviews and approvals before being sent to the appropriate supplier.
Delivering Purchase Orders
The purchase order may be delivered personally, over the phone, via mail, electronically (email, EDI, fax, etc.), or in some other way.
Expediting the Purchasing Order
Expedition of the order involves the timelines of the product or services delivered. Delivery dates can be critical for certain products and services that are integral to an organization's business.
Once the vendor delivers the product, the recipient either accepts or rejects it. In general, accepting the products means the business has to pay for it.
Payment to Supplier
When an invoice requests payment, different types of documents must match – packing and delivery documents (packing slip, bill of lading, etc.), the invoice itself, and the original purchase order. The company must resolve any disagreements before it pays the invoice. Usually, most businesses pay in the form of credit cards, cash, bank transfers, check, or electronic transfers.
A company must keep its records in order. These include files to verify purchase orders, tax information, or warranty details.
What Is The Difference Between Purchasing and Procurement?
As said before, procurement is sometimes mistaken for purchasing. Although these two processes are similar in the tasks they cover and what they accomplish, procurement and purchasing have their differences.
Procurement refers to identifying, selecting, and buying suitable products or services from a reliable vendor through competitive bidding or a direct purchase while ensuring proper delivery.
Purchasing refers to the set of functions related to acquiring the products and services that a company needs. Purchasing is a small part of the procurement process. It only includes activities like ordering, receiving, and payment.
- Involves activities related to acquiring products and services
- Involves steps that happen before and after purchase
- Is used as an internal process
- Highlights the product’s value and not its cost
- Refers to a series of steps that fulfill company needs
- Includes sourcing, need recognition, and closure
- Relational, as it focuses on establishing long-term relationships
- Involves functions related to buying products and services
- Is a simple process of purchasing essential goods
- Is used as an external process
- Focus more on the product’s price than its value
- Includes ordering, receiving, and payment fulfillment
- Transactional, as it focuses on payments rather than on long-term relationships
Traditionally, financial accounting and procurement are two different departments. Although the two functions are different, there is a relation between them. Procurement is about spending the resources well, while financial accounting is about keeping the balance sheet in order.
For the best outcome, the two departments must cooperate and align their tasks. Using automated software to connect procurement to financial accounting helps improve business efficiency and ease daily tasks. This can help ensure that payments are accurate and represent what was actually ordered and delivered.
Whether your organization employs a simple purchasing or an enterprise-wide procurement process, digital systems can greatly improve your productivity. Cloud-based systems can improve collaboration, shorten procurement or purchasing cycles, and ensure compliance. In short, the right system can cut costs and protect profits.
An efficient, cloud-based procurement/purchasing automation system can:
- Reduce human intervention and errors
- Minimize the chaos made by unnecessary paperwork
- Lessen the workload
- Keep processes consistent and accurate
- Stick to the defined purchasing/procurement cycle