Procurement is the act of finding, acquiring, buying goods, services or works from an external source, often via a tendering or competitive bidding process. The process is used to ensure the buyer receives goods, services or works at the best possible price, when aspects such as quality, quantity, time, and location are compared. Corporations and public bodies often define processes intended to promote fair and open competition for their business while minimizing risk, such as exposure to fraud and collusion.
- Procurement vs. sourcing vs. acquisition
- Acquisition process
- Sourcing business models
- Procurement software
- Procurement TV and radio
- Procurement life cycle
- Procurement performance
- Relationship with Finance
- Public procurement
- Green public procurement
- Accessible procurement
- Alternative competitive bidding procedures
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 scarcity. If good data is available, it is good practice to make use of economic analysis methods such as cost-benefit analysis or cost-utility analysis.
An important distinction should be made between analyses without risk and those with risk. Where risk is involved, either in the costs or the benefits, the concept of best value should be employed.
Procurement activities are often split into two distinct categories, direct and indirect spend. Direct spend refers to production-related procurement that encompasses all items that are part of finished products, such as raw material, components and parts. The first category being direct, production-related procurement and the second being indirect, non-production-related procurement. Direct procurement, which is the focus in supply chain management, directly affects the production process of manufacturing firms. In contrast, indirect procurement activities concern “operating resources” that a company purchases to enable its operations. Indirect procurement comprises a wide variety of goods and services, from standardized items like office supplies and machine lubricants to complex and costly products and services;, like heavy equipment, consulting services, and outsourcing services.
Procurement vs. sourcing vs. acquisition
Procurement is one component of the broader concept of sourcing and acquisition. Typically procurement is viewed as more tactical in nature (the process of physically buying a product or service) and sourcing and acquisition are viewed as more strategic and encompassing.
The Institute of Supply Management defines strategic sourcing as the process of identifying sources that could provide needed products or services for the acquiring organization. The term procurement used to reflect the entire purchasing process or cycle, and not just the tactical components. ISM defines procurement as an organizational function that includes specifications development, value analysis, supplier market research, negotiation, buying activities, contract administration, inventory control, traffic, receiving and stores. Purchasing refers to the major function of an organization that is responsible for acquisition of required materials, services and equipment.
The United States Defense Acquisition University (DAU) defines procurement as the act of buying goods and services for the government. DAU defines acquisition 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 Defense needs, intended for use in or in support of military missions.
Acquisition and sourcing are therefore much wider concepts than procurement.
Multiple sourcing business models exist, and acquisition models exist.
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:
Sourcing business models
Procurement officials increasingly realize that their make-buy supplier decisions fall along a “continuum” from simple buying transactions to more complex, strategic buyer-supplier collaborations. It is important for procurement officials to use the right sourcing business model that fits each buyer-seller situation. There are seven models along the sourcing continuum: basic provider, approved provider, preferred provider, performance-based/managed services model, Vested business model, shared services model and equity partnerships.
Procurement software (often labeled as e-procurement software) manages the purchasing processes electronically or via cloud computing. As Procurement Network's research provides, there are more than one hundred e-procurement solutions available today. As an important element of supply chain management systems, these systems help organizations efficiently manage their purchasing cycle times and maximize profit on every purchase order.
Procurement TV and radio
Procurement TV, established in 2015, is a media source aiming to broadcast procurement news and trends in video format on daily basis. Thought-provoking programs and interesting discussions made Procurement TV reach the audience of more than 8000 subscribers by 2017. Other procurement media or podcast outlets include The Art of Procurement and BlogTalk Radio.
Procurement life cycle
Most organizations think of their procurement process in terms of a life cycle. Different consulting firms and experts have developed various frameworks. Some of the most common steps from the most popular frameworks include:
The Chartered Institute of Procurement and Supply (CIPS) promotes a model of "five rights" which are "a traditional formula expressing the basic objectives of procurement and the general criteria by which procurement performance is measured", namely that goods and services purchased should be of the right quality, in the right quantity, delivered to the right place at the right time and obtained at the right price. CIPS also offers an alternative listing of the five rights as "buy[ing] goods or services of the right quality, in the right quantity, from the right source, at the right time and at the right price.
Ardent Partners published a report in 2011 which 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 and indirect 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%.
Relationship with Finance
Procurement and Finance have, as functions within the corporate structure, been at loggerheads. The contentious nature of their relationship can perhaps be attributed to the history of procurement itself. Historically, Procurement has been considered Finance’s underling. One reason behind this perception can be ascribed to semantics. When Procurement was in its infancy, it was referred to as a “commercial” operation. And so the procurement department wasn’t called the procurement department, but the commercial department. And the word “commercial” was understood to be associated with money. And so it was obvious that Procurement would become directly answerable to Finance. Another factor, equally grounded in semantics, was that procurement departments (or rather, commercial departments) were always seen as “spending the money.” This impression was enough to situate Procurement within the Finance function. It's easy to see why Procurement and Finance are functions with interests that are mutually irreconcilable. Whereas Procurement is fundamentally concerned with the spending or disbursal of money, Finance, by its very nature, performs a cost-cutting role. That is fundamentally the reason why Procurement's aspirations have been constantly checked by Finance's cost-cutting imperatives. This notion, however, has been changing as more chief procurement officers have begun to argue for more autonomy and less interference from Finance departments.
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.
The United States Section 508 and European Commission standard EN 301 549 requires public procurement to promote accessibility. This means buying products and technology that has accessibility features built in to promote access for the around 1 billion people worldwide who have disabilities.
Alternative competitive bidding procedures
There are several alternatives to traditional competitive bid tendering that are available in formal procurement. One approach that has gained increasing momentum in the construction industry and among developing economies is the selection in planning (SIP) 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. University of Tennessee research shows that Request for Solution and Request for Partner methods are also gaining traction as viable alternatives to for more collaborative methods for selecting strategic suppliers – especially for outsourcing.
Recognizing the negative impact of procurement fraud, OECD has published guidelines on how to detect and combat bid rigging.
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. An example is a kickback, whereby a dishonest agent of the supplier pays a dishonest agent of the purchaser to select the supplier's bid, often at an inflated price. Other frauds in procurement include: