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

Home

Services

Products

Help

Get App

Procurement is a foundational process in the business world and serves as a key component of supply chain management. The Procurement process goes beyond simply selecting the cheapest option; it involves strategic decisions about where and how to source materials, what to prioritise, and how to ensure the best value while maintaining quality standards. The procurement process is vital for business efficiency and success, from negotiating contracts to managing supplier relationships.

Understanding procurement's meaning within the supply chain context highlights its importance in ensuring that goods and services are available at the right cost and of the required quality. This process supports daily operations and plays a significant role in an organisation's long-term strategy and competitiveness.

What is Procurement?

Procurement encompasses the entire process of obtaining goods and services, from sourcing and acquiring to payment. While terms like ‘procurement,’ ‘purchasing,’ and ‘sourcing’ are often used interchangeably, they each have distinct roles within the procurement function.

Purchasing deals with the ordering and receiving of products, while sourcing is about selecting suppliers. However, the procurement process covers the full scope—sourcing, purchasing, payment, analysing procurement data, and planning for future expenditures. This comprehensive approach ensures that organisations efficiently manage their resources and vendor relationships to meet business objectives.

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.

Why is Procurement Important in Business?

Procurement is essential for businesses as it directly influences efficiency and profitability. Effective procurement practices offer several key benefits:

Cost Savings

By sourcing goods and services at the best prices, procurement helps businesses reduce expenses.

Quality Assurance

Ensures that the products and services procured meet quality standards, supporting consistent business performance.

Supplier Relationships

Maintaining strong supplier relationships is essential for negotiating better terms and ensuring timely delivery.

Operational Efficiency

Streamlines process from identifying needs to payment, reducing waste and saving time.

Budget Management

It helps analyse spending to deploy budgets more effectively, driving business growth.

Risk Mitigation

Protects the business against economic downturns by optimising spending and securing advantageous terms.

Different Types of Procurement

Procurement is a diverse process that can be classified into several types, depending on the nature of the goods or services being acquired. Each type plays a unique role in supporting business operations:

Here are the various types of procurement:

Direct Procurement:

It involves purchasing raw materials, components, or goods directly used in production. It's essential for manufacturing companies and impacts product quality and production efficiency.

Indirect Procurement:

Focuses on acquiring goods and services that support day-to-day operations but aren't directly tied to the production process. It includes office supplies, maintenance services, and utilities, which are crucial for running the business smoothly.

Services Procurement:

Services Procurement involves contracting services, ranging from temporary labour and IT support to legal and consulting services. It ensures businesses have access to the specialised expertise needed to operate efficiently.

Key steps in the procurement process

The procurement process involves certain essential steps which ensure efficient sourcing and acquisition of goods and services:

Need Identification: Determine the specific goods or services required to meet the organisation's needs.

Supplier Research and Selection: Conduct thorough research and select the most suitable suppliers who can effectively fulfil these needs.

Negotiations and Contracting: Engage in negotiations to finalise favourable terms and conditions, leading to contract agreements.

Order Management: Oversee orders' placement, tracking, and fulfilment to ensure timely delivery.

Invoice Approval and Payment: Verify the accuracy of invoices and ensure that payments are processed promptly.
Record Keeping and Review: Maintain detailed records of all transactions and periodically review supplier performance to drive continuous improvement.

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?

Creating a robust procurement strategy involves several vital steps to ensure alignment with business goals and operational efficiency:

Analysing Business Needs: Assess the specific goods and services required to function optimally and identify key procurement priorities.

Market Analysis: Research and evaluate potential suppliers, market trends, and conditions to identify the best sourcing opportunities.

Strategy Development: Craft a comprehensive procurement plan that aligns with the business’s strategic goals, including sourcing, cost management, and risk mitigation.

Implementation: Execute the procurement strategy by initiating supplier engagements, issuing purchase orders, and integrating procurement processes into daily operations.

Monitoring and Evaluation: Regularly track the performance of the procurement strategy, review supplier performance, and assess procurement outcomes to ensure objectives are being met.

Continuous Improvement: Adapt and refine the procurement strategy based on feedback, market changes, and evolving business needs to enhance efficiency and effectiveness.

What Are the Difference Between Procurement vs. Purchasing

Aspect	Procurement	Purchasing
Definition	Strategic process of sourcing and acquiring goods and services.	Transactional process of ordering and receiving goods.
Scope	Broad, including planning, negotiation, and supplier management.	Narrow, focusing on order placement and receipt.
Objectives	Optimise spending, build supplier relationships, align with goals.	Complete transactions efficiently and timely.
Activities	Needs assessment, market research, supplier selection, contract management.	Issuing orders, receiving goods, and processing invoices.
Strategy	Long-term planning and risk management.	Day-to-day operational tasks.
Impact on Business	Affects cost savings and procurement efficiency.	Impacts immediate operational efficiency.