A Comprehensive Guide on What Procurement Is, Its Types, and the Pillars Involved
A lot of people have the question in mind, “What is Procurement?” Every company runs on the goods and services it provides, and no company can work without the materials and manufacturing tools and equipment required to produce the goods. So the act of obtaining these goods, tools, or even services can be called as procurement.
This process is mostly associated with any form of business and is one of the biggest industries of mass consumption and production. Procurement involves agreeing to terms with multiple parties and acquiring goods or contracting services from an external source for a price or a service in return.
Why is an effective procurement strategy required? It can save a company a lot of money while delivering efficient services by negotiating terms that favor both parties, ensuring superior quality for the best price.
What are the various steps in procurement?
There are a few quick steps to be followed while procuring goods for your company’s production process.
- Identifying the goods or services you require.
- Prepare a budget.
- List out the potential vendors.
- Reach out to vendors and negotiate terms and prices.
- Have a purchase order prepared.
- Inspect the delivered goods.
- three-way matching.
- Prepare and approve the invoices.
- Maintain the records.
Keep in mind the company’s needs and affordability before making these decisions. Keeping in mind the size and reach can help you decide on a precise number for your products and goods.
What Are the Pillars of Procurement?
A smooth procurement process involves maintaining a strategy and the company’s ability to adapt and adopt the 5 pillars of procurement.
- Value for money: Every good procurement plan leaves space for you to hold the highest value for your money. The cheapest prices don’t necessarily mean maximum profits and neither does having paid the highest prices for products that aren’t great. For the most affordable price, you must be able to maximize quality to have a successful profit’s margin. This should be your approach to selecting a vendor.
- Open competition: A process that is bias-free and open creates equal chances for other suppliers and competitors. Open competition is a benefit to the buyer as they can attain the best deals.
- Morals and Ethics: When selecting a vendor, corruption in the form of payments or other deals does not benefit the buyer. Being open with your vendor and choosing one that will do the same will save you a lot of hassle.
- Records: Having a well-maintained record update process is ideal and every stage should be updated by the person responsible. This practice makes it easy to trace your purchases and payments and do the taxes.
- Equity: Remembering that you need to level the playing field for all companies and vendors will help you succeed. Being transparent in your process ensures opportunities for everyone.
What are the Types of Procurement Methods?
Direct refers to anything that the company buys directly. Direct spending by the company goes into costs for goods sold, their production and labor costs, and all items that go into making the final product. Procurement of the items required for the final product and cost of its sold product will affect a company’s gross profit.
In contrast to the direct type, Indirect involves non-production based purchases. These are the expenditure relating to the facilitation of the company’s operations. Indirect procurement can involve obtaining office supplies, marketing materials, advertisements, accountants, and so on.
Companies generally have different budgets for both types for more effective management of costs according to needs.
Procurement is an important aspect of business as it directly affects a company’s profitability. For most profitable companies, the cost of creating the final product or service is less than the cost is sold at, including labor costs, indirect procurements, and deliveries. This is why every organization needs a strong, trained procurement team.