Procurement is the acquisition of goods or services. It is favourable that the goods/services are appropriate and that they are procured at the best possible
costTotal cost of ownership is a financial estimate whose purpose is to help consumers and enterprise managers determine direct and indirect costs of a product or system...
to meet the needs of the purchaser in terms of quality and quantity, time, and location. Corporations and public bodies often define processes intended to promote fair and open competition for their business while minimizing exposure to fraud and collusion.
Overview
Almost all purchasing decisions include factors such as delivery and handling, marginal benefit, and price fluctuations. Procurement generally involves making buying decisions under conditions of
scarcityScarcity is the fundamental economic problem of having humans who have unlimited wants and needs in a world of limited resources. It states that society has insufficient productive resources to fulfill all human wants and needs. Alternatively, scarcity implies that not all of society's goals can be...
. If good data is available, it is good practice to make use of economic analysis methods such as
cost-benefit analysisCost–benefit analysis , sometimes called benefit–cost analysis , is a systematic process for calculating and comparing benefits and costs of a project for two purposes: to determine if it is a sound investment , to see how it compares with alternate projects...
or
cost-utility analysisCost–utility analysis is a form of financial analysis used to guide procurement decisions. The most common and well-known application of this analysis is in pharmacoeconomics, especially health technology assessment .-CUA in health economics:...
.
An important distinction is made between analyses without
riskRisk is the potential that a chosen action or activity will lead to a loss . The notion implies that a choice having an influence on the outcome exists . Potential losses themselves may also be called "risks"...
and those with risk. Where risk is involved, either in the costs or the benefits, the concept of
expected valueIn probability theory, the expected value of a random variable is the weighted average of all possible values that this random variable can take on...
may be employed.
| Direct procurement and indirect procurement |
| |
TYPES |
| Direct procurement |
Indirect procurement |
| Raw material and production goods |
Maintenance, repair, and operating Maintenance, repair, and operations or maintenance, repair, and overhaul involves fixing any sort of mechanical or electrical device should it become out of order or broken...
supplies |
Capital goods and services |
F
E
A
T
U
R
E
S |
Quantity |
Large |
Low |
Low |
| Frequency |
High |
Relatively high |
Low |
| Value |
Industry specific |
Low |
High |
| Nature |
Operational |
Tactical |
Strategic |
| Examples |
Crude oil in petroleum industry |
Lubricants, spare parts |
Crude oil storage facilities |
Based on the consumption purposes of the acquired goods and services, procurement activities are often split into two distinct categories. The first category being direct, production-related procurement and the second being indirect, non-production-related procurement.
Direct procurement occurs in manufacturing settings only. It encompasses all items that are part of finished products, such as raw material, components and parts. Direct procurement, which is the focus in
supply chain managementSupply chain management is the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers...
, directly affects the production process of manufacturing firms. In contrast, indirect procurement activities concern “operating resources” that a company purchases to enable its operations. It comprises a wide variety of goods and services, from standardized low value items like office supplies and machine lubricants to complex and costly products and services like heavy equipment and consulting services.
History
Prior to 1900, purchasing was recognized as an independent function by many railroad organizations, but in few other industries.
Prior to World War I, purchasing was regarded as primarily clerical.
During World War I & II – The function increased due to the importance of obtaining raw materials, supplies, and services needed to keep the factories and mines operating.
1950s & 1960s - Purchasing continued to gain stature as the techniques for performing the function became more refined and as the number of trained professionals increased. The emphasis became more managerial. With introduction of major public bodies and intergovernmental organizations, such as United Nations, procurement becomes a well-recognized science.
1970s & 1980s - More emphasis was placed on purchasing strategy as the ability to obtain needed items from suppliers at realistic prices increased.
1983 - In September 1983, Harvard Business Review published a ground-breaking article by Peter Kraljic on purchasing strategy that is widely cited today as the beginning of the transformation of the function from "purchasing," something that is viewed as highly tactical to procurement or supply management, something that is viewed as very strategic to the business.
1990s - Procurement starts to become more integrated into the overall corporate strategy and a broad-based
transformation of the business function is ignited, fueled strongly by the development of supply management software solutions which help automate the source-to-settle process.
2000s - The leader of the procurement function within many enterprises is established with a C-Level title - the
Chief Procurement OfficerA Chief Procurement Officer is an executive role focused on sourcing, procurement, and supply management for an enterprise.Globalization, compliance pressures, supply market risk and procurement automation have simultaneously elevated the visibility of the procurement discipline within companies...
(sometimes called the Head of Procurement). Websites, publications, and events, and that are dedicated solely to the advancement of Chief Procurement Officers and the procurement function arise. The global recession of 2008-2009 places procurement at the crux of business strategy.
2010s - The elevation of the function continues as Chief Procurement Officers are recognized as important business leaders and begin to take on broader operation responsibility.
Procurement vs acquisition
The US
Defense Acquisition UniversityThe Defense Acquisition University is a United States military training establishment that trains and enables the 147,705 military and civilian Department of Defense personnel in the fields of acquisition, technology, and logistics, including leadership, program management and bureaucratic...
(DAU) defines procurement as the act of buying goods and services for the government.
DAU defines
acquisitionMilitary acquisition is the bureaucratic management and procurement process dealing with a nation's investments in the technologies, programs, and product support necessary to achieve its national security strategy and support its armed forces...
as the conceptualization, initiation, design, development, test, contracting, production, deployment, Logistics Support (LS), modification, and disposal of weapons and other systems, supplies, or services (including construction) to satisfy
Department of DefenseThe United States Department of Defense is the U.S...
needs, intended for use in or in support of military missions.
Acquisition is therefore a much wider concept than procurement, covering the whole life cycle of acquired systems. Multiple acquisition models exist, one of which is provided in the following section.
Acquisition process
The revised acquisition process for major systems in industry and defense is shown in the next figure. The process is defined by a series of phases during which technology is defined and matured into viable concepts, which are subsequently developed and readied for production, after which the systems produced are supported in the field.
The process allows for a given system to enter the process at any of the development phases. For example, a system using unproven technology would enter at the beginning stages of the process and
would proceed through a lengthy period of technology maturation, while a system based on mature
and proven technologies might enter directly into engineering development or, conceivably, even
production. The process itself includes four phases of development:
- Concept and Technology Development: is intended to explore alternative concepts based on assessments of operational needs, technology readiness, risk, and affordability.
- Concept and Technology Development phase begins with concept exploration. During this stage, concept studies are undertaken to define alternative concepts and to provide information about capability and risk that would permit an objective comparison of competing concepts.
- System Development and Demonstration phase. This phase could be entered directly as a result of a technological opportunity and urgent user need, as well as having come through concept and technology development.
- The last, and longest phase is the Sustainable and Disposal phase of the program. During this phase all necessary activities are accomplished to maintain and sustain the system in the field in the most cost-effective manner possible.
Procurement systems
Another common procurement issue is the timing of purchases. Just-in-time is a system of timing the purchases of consumables so as to keep
inventoryInventory means a list compiled for some formal purpose, such as the details of an estate going to probate, or the contents of a house let furnished. This remains the prime meaning in British English...
costs low. Just-in-time is commonly used by Japanese companies but widely adopted by many global manufacturers from the 1990s onwards. Typically a framework agreement setting terms and price is created between a supplier and purchaser, and specific orders are then called-off as required.
Shared services
In order to achieve greater
economies of scaleEconomies of scale, in microeconomics, refers to the cost advantages that an enterprise obtains due to expansion. There are factors that cause a producer’s average cost per unit to fall as the scale of output is increased. "Economies of scale" is a long run concept and refers to reductions in unit...
, an organization’s procurement functions may be joined into
shared servicesShared services refers to the provision of a service by one part of an organization or group where that service had previously been found in more than one part of the organization or group. Thus the funding and resourcing of the service is shared and the providing department effectively becomes an...
. This combines several small procurement agents into one centralized procurement system.
Procurement process
Procurement may also involve a
biddingBidding is an offer of setting a price one is willing to pay for something. A price offer is called a bid. The term may be used in context of auctions, stock exchange, card games, or real estate transactions....
process i.e.,Tendering. A company may want to purchase a given product or service. If the cost for that product/service is over the threshold that has been established (e.g.: Company X policy: "any product/service desired that is over $1,000 requires a bidding process"), depending on policy or legal requirements, Company X is required to state the product/service desired and make the contract open to the bidding process. Company X may have ten submitters that state the cost of the product/service they are willing to provide. Then, Company X will usually select the lowest bidder. If the lowest bidder is deemed incompetent to provide the desired product/service, Company X will then select the submitter who has the next best price, and is competent to provide the product/service.
In the European Union there are strict rules on procurement processes that must be followed by public bodies, with contract value thresholds dictating what processes should be observed (relating to advertising the contract, the actual process etc.).
Procurement steps
Procurement life cycle in modern businesses usually consists of seven steps:
- Information gathering: If the potential customer does not already have an established relationship with sales/ marketing functions of suppliers of needed products and services (P/S), it is necessary to search for suppliers who can satisfy the requirements.
- Supplier contact: When one or more suitable suppliers have been identified, requests for quotation
A request for quotation is a standard business process whose purpose is to invite suppliers into a bidding process to bid on specific products or services. RFQ, generally means the same thing as IFB ....
, requests for proposalsA request for proposal is issued at an early stage in a procurement process, where an invitation is presented for suppliers, often through a bidding process, to submit a proposal on a specific commodity or service. The RFP process brings structure to the procurement decision and is meant to...
, requests for informationA request for information is a standard business process whose purpose is to collect written information about the capabilities of various suppliers. Normally it follows a format that can be used for comparative purposes....
or requests for tenderA request for tender, commonly abbreviated to RFT, is a formal, structured invitation to suppliers for the supply of products or services. In the public sector, such a process may be required and determined in detail by law to ensure that such competition for the use of public money is open, fair...
may be advertised, or direct contact may be made with the suppliers.
- Background review: References for product/service quality are consulted, and any requirements for follow-up services including installation, maintenance, and warranty
In business and legal transactions, a warranty is an assurance by one party to the other party that specific facts or conditions are true or will happen; the other party is permitted to rely on that assurance and seek some type of remedy if it is not true or followed.In real estate transactions, a...
are investigated. Samples of the P/S being considered may be examined, or trials undertaken.
- Negotiation: Negotiation
Negotiation is a dialogue between two or more people or parties, intended to reach an understanding, resolve point of difference, or gain advantage in outcome of dialogue, to produce an agreement upon courses of action, to bargain for individual or collective advantage, to craft outcomes to satisfy...
s are undertaken, and price, availability, and customization possibilities are established. Delivery schedules are negotiated, and a contract to acquire the P/S is completed.
- Fulfillment: Supplier preparation, expediting
Expediting is a concept in purchasing and project management for securing the quality and timely delivery of goods and components.The procurement department or an external expediter controls the progress of manufacturing at the supplier concerning quality, packing, conformity with standards and set...
, shipment, delivery, and payment for the P/S are completed, based on contract terms. Installation and training may also be included.
- Consumption, maintenance, and disposal: During this phase, the company evaluates the performance of the P/S and any accompanying service support, as they are consumed.
- Renewal: When the P/S has been consumed or disposed of, the contract expires, or the product or service is to be re-ordered, company experience with the P/S is reviewed. If the P/S is to be re-ordered, the company determines whether to consider other suppliers or to continue with the same supplier.
- Additional Step - Tender Notification: Some institutions choose to use a notification service
A tender notification is normally an online delivery service in the form of an e-mail, which displays tendering opportunities. These opportunities are more than often open tenders, which allow any potential supplier to register interest in a tender opportunity...
in order to raise the competition for the chosen opportunity. These systems can either be direct from their e-tendering software, or as a re-packaged notification from an external notification company.
Procurement performance
In July 2011, Ardent Partners published a research report that presented a comprehensive, industry-wide view into what is happening in the world of procurement today by drawing on the experience, performance, and perspective of nearly 250 Chief Procurement Officers and other procurement executives. The report includes the main procurement performance and operational benchmarks that procurement leaders use to gauge the success of their organizations. This report found that the average procurement department manages 60.6% of total enterprise spend. This measure commonly called "spend under management" refers to the percentage of total enterprise spend (which includes all direct, indirect, and services spend) that a procurement organization manages or influences. The average procurement department also achieved an annual savings of 6.7% in the last reporting cycle, sourced 52.6% of its addressable spend, and has a contract compliance rate of 62.6%.
Public procurement
Public procurement generally is an important sector of the economy. In Europe, public procurement accounts for 16.3% of the Community GDP.
Green public procurement
In Green public procurement (GPP), contracting authorities and entities take environmental issues into account when tendering for goods or services. The goal is to reduce the impact of the procurement on human health and the environment.
In the European Union, the Commission has adopted its Communication on public procurement for a better environment, where proposes a political target of 50 % Green public procurement to be reached by the Member States by the year 2010.
Alternative procurement procedures
There are several alternatives to tendering which are available in formal procurement. One system which has gained increasing momentum in the construction industry and among developing economies in the
Selection in planningSelection in Planning also known as SIP is a method of selection used to identify suitable vendors and contractors and is an alternative to selection through Tendering....
process which enables project developers and equipment purchasers to make significant changes to their requirements with relative ease. The
SIP process also enables vendors and contractors to respond with greater accuracy and competitiveness as a result of the generally longer lead times they are afforded.
ROSMA is a procurement acronym created by ATkearney.{
Procurement Solutions Division} It stands for Return on Supply Management Assets and endeavors to quantify not only procurement but every piece of the procurement process
including strategic resource management. { }
Procurement frauds
Procurement fraud can be defined as dishonestly obtaining an advantage, avoiding an obligation or causing a loss to public property or various means during procurement process by public servants, contractors or any other person involved in the procurement.
See also
- Agreement on Government Procurement
The Agreement on Government Procurement is legally binding and plurilateral agreement in the World Trade Organization focusing on the subject of government and local government agencies procurement. The procurement in the Agreement includes goods, ranging from commodities to high technology...
- Auction
An auction is a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder...
- Buyer leverage
- Contract management
Contract management or contract administration is the management of contracts made with customers, vendors, partners, or employees. Contract management includes negotiating the terms and conditions in contracts and ensuring compliance with the terms and conditions, as well as documenting and...
- E-procurement
E-procurement is the business-to-business or business-to-consumer or Business-to-government purchase and sale of supplies, Work and services through the Internet as well as other informations and networking systems, such as Electronic Data Interchange and Enterprise Resource Planning.E-procurement...
- Expediting
Expediting is a concept in purchasing and project management for securing the quality and timely delivery of goods and components.The procurement department or an external expediter controls the progress of manufacturing at the supplier concerning quality, packing, conformity with standards and set...
- Global sourcing
Global sourcing is a term used to describe practice of sourcing from the global market for goods and services across geopolitical boundaries. Global sourcing often aims to exploit global efficiencies in the delivery of a product or service...
- Group purchasing organization
In the United States, a group purchasing organization is an entity that is created to leverage the purchasing power of a group of businesses to obtain discounts from vendors based on the collective buying power of the GPO members....
- National Association of State Procurement Officials
The National Association of State Procurement Officials is an American non-profit association formed by the top procurement officials for the fifty states and Washington, D.C.The National Association of State Procurement Officials is a non-profit association dedicated to strengthening the...
- Presales
Presales is a process or a set of activities normally carried out before a customer is acquired, though sometimes presales also extends into the period the product or service is delivered to the customer.Presales is the name given to a small Spanish boat....
- Procurement outsourcing
Procurement outsourcing is the transfer of specified key procurement activities relating to sourcing and supplier management to a third party — perhaps to reduce overall costs or maybe to tighten the company's focus on its core competencies...
- Public fleet
- Purchasing
Purchasing refers to a business or organization attempting for acquiring goods or services to accomplish the goals of the enterprise. Though there are several organizations that attempt to set standards in the purchasing process, processes can vary greatly between organizations...
- Rate contract
A Rate Contract or a Rate Agreement is a procurement cost reduction strategy aimed at standardizing procurement prices for commonly procured, homogenous and price varying inputs.-Timing:...
- Reverse auction
A reverse auction is a type of auction in which the roles of buyers and sellers are reversed. In an ordinary auction , buyers compete to obtain a good or service, and the price typically increases over time...
- Selection in planning
Selection in Planning also known as SIP is a method of selection used to identify suitable vendors and contractors and is an alternative to selection through Tendering....
- Spend analysis
Spend analysis is the process of collecting, cleansing, classifying and analyzing expenditure data with the purpose of reducing procurement costs, improving efficiency and monitoring compliance...
- Strategic sourcing
Strategic sourcing is an institutional procurement process that continuously improves and re-evaluates the purchasing activities of a company. In a production environment, it is often considered one component of supply chain management...
- Tender Notification
A tender notification is normally an online delivery service in the form of an e-mail, which displays tendering opportunities. These opportunities are more than often open tenders, which allow any potential supplier to register interest in a tender opportunity...
- Total cost of acquisition
The Total Cost of Acquisition is a managerial accounting concept that includes all the costs associated with buying goods, services, or assets. Generally, it is the net price plus other costs needed to purchase the item and get it to the point of use...
- Turnkey
A turn-key or a turn-key project is a type of project that is constructed by a developer and sold or turned over to a buyer in a ready-to-use condition.-Common usage:...
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