Procurement: Meaning, Types, Components, Processes & Strategies in Supply Chain Management

Home

Services

Products

Help

Get App

When we hear the word 'procurement,' it often brings images of complex business dealings and endless supply chains to mind. But what exactly is the meaning of procurement? In its simplest form, procurement is about sourcing and acquiring goods and services from outside suppliers. This process is a cornerstone in the business world, playing an important role in supply chain management.

It's not just a matter of picking the cheapest option; procurement involves strategic decisions about where and how to source, what to prioritise, and how to get the best value while maintaining quality. We'll explore all its nuances, from the basic meaning of what is procurement in the supply chain to its important role in supply chain management.

What is Procurement?

Procurement is also known as finding, agreeing to terms, and acquiring goods, services, or works from an external source, mostly through competitive bidding or a tendering process. Much more than just purchasing, procurement encompasses the strategic approach of optimising organisational spending. Effective procurement ensures businesses purchase appropriately, from the right sources, at the right price, and at the right time.

Why is Procurement necessary in business?

Procurement plays an important role in business, primarily because it directly impacts a company's bottom line. A well-managed procurement process can lead to significant cost savings, ensuring a company gets the best value for its spending. Additionally, it's key to maintaining quality standards, ensuring timely delivery of goods and services, and managing supplier relationships, all of which are important for successful business operations.

Different types of procurement

Procurement can be classified into several types based on the nature of what is being procured:

Direct Procurement: Involves purchasing raw materials and goods for production.
Indirect Procurement: Deals with purchasing services or supplies needed to maintain day-to-day operations.
Services Procurement: Specific to services, covering everything from contracted labour to legal services.

How does Procurement work?

So, now that you know what procurement means, let’s discuss the procurement process. The procurement process typically involves several key steps: identifying needs, sourcing suppliers, negotiating terms, and managing orders and relationships.

It's a complex function that requires a strategic approach, often involving market research, cost-benefit analysis, and strategic sourcing to ensure the company's procurement is efficient and cost-effective.

Key steps in the procurement process

The procurement process flow comprises several important steps:

Need Identification: Determining what goods or services are needed.
Supplier Research and Selection: Finding and choosing suppliers that meet these needs.
Negotiations and Contracting: Discussing terms and conditions and finalising contracts.
Order Management: Overseeing and managing the orders placed.
Invoice Approval and Payment: Ensuring invoices are correct and payments are made.
Record Keeping and Review: Maintaining records and evaluating supplier performance.

What are the stages of Procurement?

Procurement, a crucial business function, unfolds in several stages, each important for its success. This multi-stage process can be broadly divided into the following phases:

Planning Stage

This initial phase is all about laying the groundwork. It involves thoroughly analysing and aligning the business's needs with its strategic goals. During this stage, procurement teams identify the required goods or services, estimate the budget, and plan the timeline. This stage is important for setting clear objectives and expectations for the procurement process, ensuring alignment with the company's overall strategy.

Execution Stage

Here, the plans set in the initial stage are put into action. This phase includes sourcing suppliers, initiating tenders or requests for proposals (RFPs), and negotiating contracts. It's a hands-on stage where procurement teams interact with vendors, compare offers, and make purchasing decisions. The execution stage demands a keen eye for detail and strong negotiation skills to ensure the company secures the best deals in terms of quality, cost, and reliability.

Evaluation Stage

After the procurement process is complete, it's time to evaluate. This stage involves assessing how effectively the procurement process was carried out and how well the suppliers are performing. Key performance indicators (KPIs) such as quality of goods or services, adherence to timelines, and cost management are analysed. This phase is important for identifying areas of improvement and ensuring continuous enhancement of the procurement process. Feedback from this stage often loops back into the planning stage for future procurement cycles, creating a cycle of constant improvement.

The components of Procurement

The procurement process is multifaceted, comprising several essential components that collectively ensure its effectiveness and alignment with a business's strategic goals. These components include:

Supplier Management

This involves identifying, selecting, and nurturing supplier relationships. Effective supplier management ensures a business has reliable sources for quality goods and services, contributing to smooth operations and competitive pricing.

Risk Management

Risk management entails identifying, evaluating, and mitigating risks associated with supply chain disruptions, supplier solvency, and market volatility in procurement. This is important for maintaining the consistency and reliability of supply chains.

Contract Management

This refers to managing contracts with suppliers, ensuring all terms are met, and addressing any contractual disputes. Effective contract management protects a business legally and financially.

Procurement Ethics

Upholding high ethical standards in procurement processes is vital. It involves ensuring fairness in bidding processes, transparency in decision-making, and adherence to laws and regulations. Ethical procurement practices foster trust and integrity in business relationships and help avoid legal complications.

Sustainability and Social Responsibility

Increasingly, businesses are incorporating sustainability and social responsibility into their procurement practices. This includes sourcing from environmentally responsible suppliers and considering the social impact of procurement decisions.

Common principles of Procurement

Procurement operates on several foundational principles that govern its practices and ensure they contribute effectively to an organisation's objectives. These principles include:

Value for Money: This principle focuses on achieving the best possible outcome at the most reasonable cost. It doesn't always mean choosing the cheapest option; it's about finding the best balance between quality, service, and price.
Transparency: Transparency in procurement means conducting processes clearly and openly. This helps to build trust among stakeholders, including suppliers, employees, and the public and ensures accountability.
Fairness and Integrity: Procurement processes should be fair and impartial. This involves providing equal opportunities to all potential suppliers and making decisions based on merit and business needs without favouritism or bias.
Competition: Encouraging competition among suppliers leads to more favourable terms for the organisation and drives innovation. This principle involves creating a level playing field for all vendors, allowing the best solutions and offers to surface.
Efficiency and Effectiveness: These principles focus on maximising resources and achieving the desired outcomes with minimal waste and in a timely manner. Efficient procurement processes reduce costs and increase productivity.
Legal and Regulatory Compliance: Adhering to legal and regulatory requirements is non-negotiable in procurement. This includes complying with local and international laws, regulations, and standards, ensuring legal safety and operational legitimacy.

How to build a procurement strategy?

Building a procurement strategy involves the following steps:

Analysing Business Needs: Understanding what the business needs to procure to operate effectively.
Market Analysis: Researching potential suppliers and market conditions.
Strategy Development: Developing a procurement plan that aligns with the business's objectives and goals.
Implementation: Putting the strategy into action and continuously monitoring its effectiveness.

FAQ’s About Procurement

What is an example of Procurement?

An example of procurement is a restaurant sourcing ingredients from local suppliers to ensure fresh produce for its menu.

What is Procurement as a Profession?

As a profession, procurement involves strategically sourcing goods and services for an organisation, focusing on cost efficiency and supplier management.

What are the 4 main roles of Procurement and Supply Chain?

The main roles include sourcing, negotiating contracts, ensuring timely delivery, and maintaining supplier relationships.

What is Procurement used for?

Procurement is used to acquire necessary goods and services, ensuring quality and cost-effectiveness to support an organisation's operations.

This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.