What is procurement? A comprehensive guide
Procurement is the process of sourcing, purchasing, receiving, and inspecting all of the goods and services your business needs to operate – everything from raw manufacturing materials to software to office supplies.
The procurement function is crucial to a business's success, yet it often goes unnoticed until issues arise. This essential department ensures that a company runs smoothly by maintaining a consistent supply of necessary materials and products. Historically seen as an operational task, procurement has now evolved into a strategic discipline pivotal for business growth and efficiency.
Cost containment continues to be a priority, particularly given inflation and the rising cost of supplies. However, cost control is only one of the pressures bearing down on procurement today. Squeezed between the threat of supply shortages and the expense of stocking extra inventory, procurement must somehow support supply chain resiliency, even when climate events or other disruptions impede delivery. The need to procure sustainable goods and comply with expanding regulatory requirements means companies must add an extra layer of data collection and scrutiny to their sourcing processes. Add geopolitical pressures and risk to the equation – with resulting material scarcity – and procurement is suddenly at the eye of the storm.
Today, the chief procurement officer (CPO) role is no longer a back-office function chiefly concerned with cost reduction and compliance.
Procurement definition
Procurement is vital for business as it is responsible for securing all the goods and services needed by an organisation. For manufacturing companies, supply availability is necessary for the company to function as it’s impossible to create finished goods without essential materials. Procurement departments must collaborate with suppliers, internal colleagues, and customers to then source the best suppliers at the lowest cost.
During the Industrial Revolution, procurement gained importance as burgeoning manufacturing operations needed to source, purchase, and transport materials. In the mid-20th century, when the economy was booming, opportunity and competitive bidding helped redefine the practice again. Individuals were trained in various aspects of supply chain management, gaining the necessary skills to manage suppliers effectively. Procurement became regarded as a management function rather than administrative.
Today, procurement is again going through a dramatic transformation, and the technology required to manage suppliers today may eclipse any changes to the profession in the past.
Why is procurement so important to UK businesses?
What has been a back-office management function is now centre stage – a strategic partner in complex C-suite strategy decisions.
Procurement also controls a big slice of a company’s costs – 40% to 80% according to some estimates – so it is essential for budgetary considerations. But effective procurement practices also enhance risk assessment, supplier oversight, and the potential for value creation within the supply chain.
Here are some key ways procurement is important in business:
Cost savings: Procurement is the first line of defence for reducing cost and stabilising cash flow in a business, affecting profit margins and the bottom line. Competitive product sourcing and contract negotiations can deliver significant cost savings – Smith+Nephew increased their spend capture by over $400 million through more efficient procurement processes. The streamlining of purchasing processes can have a huge, real impact on financial results.
Quality: Acquiring the right raw materials at the right time is essential for manufacturing high-quality products at pace. Quality is a consideration for every aspect of the procurement process, and influencing the choice of materials and suppliers directly impacts product and service quality. Prioritising quality is key to mitigating reputational, production, and legal concerns.
Goal alignment: Strategic sourcing aligns procurement purchases with a company’s goals. For example, if enhancing supply chain resilience is a goal for your business, tools to meet these targets should be built into in your procurement process. A detailed analysis of the market and your internal requirements can help identify suppliers best positioned to meet your needs.
Risk mitigation: Risks are present at every stage of the procurement process – from inaccurate needs analyses to supplier delivery issues. Additional risk comes from ineffective responses to new regulatory compliance obligations like EU customs clearance processes, and these can be exacerbated by unclear ethical standards, weather-related incidents, and global supply chain disruptions. Today’s technology-powered procurement processes can provide the visibility needed to proactively identify, evaluate, and mitigate risks.
Sustainability and ethics: The procurement team must remain close to their company’s values around environmental impact, ethical sourcing of raw materials, environmental, social, and governance (ESG) commitments, and more to ensure compliance and protect against reputational damage and unnecessary expenses. Managing sustainable sourcing and compliance with key regulations is a central responsibility for procurement professionals.
Types of procurement management
There are four main types of procurement:
- Direct procurement: This includes anything that contributes to what a company produces, including raw materials, components, parts, services, and wholesale items. These all have an impact upon revenue, product quality, and corporate reputation, meaning that relationships with suppliers are crucial for a business’ bottom line.
- Indirect procurement: Anything not directly related to production, including materials, goods, and services for internal use and daily business operations. This includes items such as office supplies, utilities, and travel expenses.
- Goods procurement: Both direct and indirect procurement can fall under goods procurement, which includes procuring any physical object, whether finished or unfinished – everything from equipment to raw materials to office chairs.
- Services procurement: Professional services such as consultancies, agencies, law firms, outsourced IT, security services, software as a service (SaaS) delivery, and facilities repair all fall under services procurement. These help guarantee skilled people are available to perform these services.
12 steps in the procurement process
While the procurement process can vary from company to company, it generally includes the following 12 steps:
1. Identify needs: The first step of any procurement process is identifying the specific materials, products, software, or services needed due to shortages, new projects, or regular operational requirements. This stage includes demand planning and forecasting.
2. Source suppliers: Researching and assessing the best potential suppliers for your business needs happens early in the procurement process. Developing alternative suppliers can help with risk management by giving you options in case of shortages or disruptions.
3. Submit a purchase requisition: Submitting a purchase request with specifications such as price, time frame, and quantity for internal review and approval triggers the purchasing process.
4. Evaluate and select suppliers: Choosing the best supplier through a competitive bidding process such as putting out a request for proposal (RFP), request for quote (RFQ), e-auctions, or “three bids and a buy” involves assessing vendors on cost as well as quality, reputation, reliability, speed, and sustainability.
5. Negotiate price and terms: After a supplier has been selected, the procurement team negotiates various purchase terms, including price, quantity, delivery timelines, and payment conditions.
6. Create a purchase order (PO): Once a supplier has been chosen and the terms finalized, the company issues a formal PO to that supplier detailing the exact goods, services, and terms included in the order.
7. Receive goods and check quality: When the goods have been received, the next step is to ensure that their quality and quantity match what was ordered by carefully inspecting them for damage or errors.
8. Process invoice and fulfil payment terms: Upon confirming a delivery of goods has passed the quantity and quality check, the supplier’s invoice can be processed through accounts payable (AP) to ensure timely payment. Depending on the terms of the contract, early-payment discounts may apply, and a variety of payment methods may be used.
9. Establish and manage good supplier relationships: It’s strategic for the procurement team to build positive ongoing relationships with suppliers. The benefits include better supplier performance, terms, discounts, collaboration, and reliability.
10. Manage contracts: Procurement professionals also need to manage contracts to ensure compliance and renegotiate terms as required. This helps identify potential issues early and avoid spiralling costs and delayed products.
11. Manage risk: It is essential to anticipate and manage potential problems such as such as supply chain issues that lead to shortages, and implementing measures to mitigate them. Procurement teams need to stay on top of regulatory requirements and spot any threat of noncompliance.
12. Review and analyse: As an ongoing process, reviewing and analysing procurement KPIs to identify supplier gaps and uncover new opportunities for savings plays a key role in business success.
These 12 steps are commonly thought of as a continuous procurement lifecycle. A successful procurement lifecycle also requires collaboration with other key business areas, such as budgeting, forecasting, and supply chain management.
Procurement vs. purchasing and other related workflows
Many organisations use the terms “procurement,” “purchasing,” “sourcing,” and “supply chain management” interchangeably, but they are not the same thing. Here’s how they differ:
Procurement vs. purchasing
Purchasing is the part of the procurement process that focuses on transactions. It includes negotiation, ordering products, receiving goods and services, and submitting payments. While purchasing is a fundamental part of procurement, it is only part of a much broader role.
Procurement vs. sourcing
Sourcing is the essential part of the procurement lifecycle where needs are identified, suppliers are found, and purchase requests are issued. It is the key area where strong relationships with suppliers can be built and is where the crucial price negotiations that impact a business’ bottom line happen.
Procurement vs. supply chain management
Procurement is part of the overall supply chain management process, focusing on acquiring the goods and services needed to manufacture products and keep businesses operating. Procurement frequently works with other supply chain segments, such as logistics, inventory management, and demand planning, to deliver the best possible supplies at the lowest cost.
Sustainable procurement management
Sustainable procurement, which integrates environmental, social, and governance (ESG) considerations into procurement process, isn’t just a trend. Rather, it’s a central consideration for the profession – and is linked to overall performance. As McKinsey points out in its 2024 procurement report, “Among lower-performing companies, sustainability maturity tends to lag far behind most dimensions, suggesting that these companies have yet to grasp the challenge of sustainable sourcing.”
Sustainable procurement challenges include increased supply chain complexity and transparency, challenges around measuring performance, and ensuring compliance with regulatory and internal standards. It’s difficult to source materials associated with low emissions, such as green steel and recycled aluminium and plastic, and it will only get harder. Plus, customers increasingly want to purchase from brands that can demonstrate sustainable practices, creating demand for procurement teams to reduce emissions from the goods and services they buy.
Take just one aspect of sustainable procurement – reducing supply chain emissions. The process can take years, so starting the transition now will set businesses up to be more competitive and resilient in the future.
Here are a few examples of sustainable procurement:
Green sourcing or green procurement: Green sourcing involves intentionally purchasing products and services with a smaller environmental impact, including eliminating single-use plastics and disposable items, using recycled raw materials, and powering a business with clean energy and fuel. It can dramatically reduce production costs, particularly as regulators scrutinise sustainability measures with legislation like the Plastic Packaging Tax, and opens businesses to more environmentally conscious customers.
Ethically-sourced materials: Sustainable procurement relies upon ethical sourcing. This means purchasing products from companies that guarantee a living wage, offer good working conditions, don’t engage in child labour, make positive contributions to the communities they’re part of, and meet other ethical standards.
Reduced carbon footprint and energy consumption: Lowering your company’s carbon emissions and energy consumption isn’t just about reducing the emissions created directly from your day-to-day operations from factories and transport – it’s also for reducing Scope 3 emissions further up the supply chain. This requires sharing emissions data between suppliers – ideally through a platform like SAP Sustainability Data Exchange (SDX) to standardise it and be able to measure it.
AI in procurement: Smarter automation and insights
AI in procurement can automate and streamline complex tasks such as spend analysis, contract management, strategic sourcing, and managing compliance requirements. It can also support smarter decision making through advanced data analytics, helping businesses to spot new supplier opportunities, identify cost savings, and detect anomalies in the supply chain whilst reducing errors and the potential for procurement fraud.
It can also be used to create value by deconstructing what the business really needs, helping organisations to challenge inefficient processes through analysing data.
Generative AI also has huge potential for procurement. Its ability to automate tasks, provide insights, and improve transparency supports efficiency, productivity, and better supplier selection and management, as well as reduce risk and cost.
Using AI to support procurement in making better decisions allows your procurement team to focus on more valuable tasks. Microsoft, through using AI to predict supply chain risks and better manage its inventory, has seen a 50% reduction in manual planning process. This significantly improves employee satisfaction while building efficiency – Microsoft’s procurement process now has 99.9% availability.
What to look for in procurement software
When selecting procurement software, prioritise tools that not only streamline your procurement processes but also enhance your decision-making. Artificial Intelligence capabilities and robust cloud infrastructure are ideal for this, allowing for seamless integration with existing supply chain systems and comprehensive analytics for spend analysis contained within a user-friendly interface.
Choose procurement software that provide real-time insights and reporting and provides capabilities to take proactive management of procurement activities. Make sure the software is scalable, capable of evolving with your business, and contributes actively to your company’s growth trajectory.
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