Introduction To What Is Procurement
First, let me say if you found this article I have to assume you are either exploring the idea of a career in procurement, just started, or you need a sanity check on your role and responsibilities as the stakeholder just asked you to do something outside of your scope of work that they'll no doubt blame you for later when they don't get what “they sourced.” My articles don't go into doctorate level analysis. I keep it simple, high level and charge for the detailed versions.
When we are discussing or attempting to answer the question, “what is procurement?” we may find that the response we get is based on the age of the individual answering the question. Procurement, purchasing, sourcing, buying…. It was either one of those or all of those at one point. How we have defined "what is procurement" means has developed since just a decade or so ago. That's because over the years, we've seen this definition evolve into a more holistic view due to how the procurement process has been better outlined.
Okay, so let's get into some more detail to understand what procurement means and more so to what the procurement process looks like. I think the best way to do this is arming you with what procurement is not. That way when the bean counters from accounting call you purchasing you can slap them with some knowledge. Sorry, what we procurement professionals do is a tad bit more involved than just purchasing.
What Procurement Is Not!
Procurement isn't supply chain or supply chain management.
Sure, it has a role to play within the supply chain and supply chain management. We can even help shape the way the supply chain will eventually form by our procurement process. However, when we begin to define the elements of supply chain and how we impact supply chain management, we find that the procurement process runs parallel to supply chain in a very end to end way.
We procurement professionals aren't just at the initial phase of sourcing and then hand it off to other departments. Don't believe, me? Let a supplier be consistently late with deliveries and watch supply chain managers ring your phone every 2 minutes. Let a quality engineer get subpar parts and see how fast you arrange meetings with the supplier on a daily basis. This, no doubt, involves issues that will pull supply chain management professional into the conversation too.
Procurement isn't purchasing or buying.
Okay, then what is purchasing or buying you ask? This is only a segment of the entire procurement process. Purchasing is essentially the transactional process that involves developing a purchase order, sending it to the supplier, and then the invoice to payment process. I'd argue that even the invoice to payment process isn't strictly a procurement nor a purchasing function.
We may participate in it, but we shouldn't own it. Not even in smaller organizations. In no way, shape, form or fashion should the same person issuing PO's for goods or services procurement, have the sole responsibility to approve payment. It's ripe with opportunity of ethics concerns and should include the key stakeholder and the finance team.
Procurement isn't strategic sourcing. Once we get into process a bit more below, maybe this will be more evident. However, purchasing is taking a well defined need and walking it through the procurement process steps to source it appropriately. However, strategic sourcing is much more about a long term management plan of a strategic resource that spans more than simple “supplier management” with key suppliers.
Probably my biggest pet peeve is that procurement isn't a department. That's to say it isn't a process named after a department, it's a department named after a process...procurement process. It's our duty as procurement professionals to understand the procurement process, be experts in it, be gate keepers to that process, and drag stakeholders kicking and screaming through that process. Okay, maybe the last part is a bit overdone but you get the picture for your procurement department.
What Is Procurement Then?
Procurement is a process. It's that simple. It's a process that encompasses the stages below in the procurement lifecycle. Note that what I go through isn't extensive or in too much detail. So, let's look at what is a procurement process made up of I'm stages. The procurement process includes:
Stages of Procurement
Identifying the need: This is simply pulling the business need and business objectives for a resource or service out of a stakeholder. Many times it's like pulling an oak tree out by the roots with your bare hands. However, it's imperitve to use tools to do this in a way that the primary stakeholder and secondary stakeholders have a seat at the table to identify what is actually a need versus a want.
Evaluating the marketplace and potential suppliers: Google is your friend. The procurement professional that says they don't use this regularly is a stone cold liar. You can use SAP Ariba sourcing and Thomas.net to find potential suppliers too. Once you do, visits may be required. However, procurement teams need resources to find suppliers for things like raw materials or other goods and services.
Developing bid documents: RFP or RFQ? Depends. If it's an item that can is typically off the shelf like a standard fastener then you'll only need an RFQ document format. If it's something tailored specifically to your business in terms of spec or how it's supplied then and RFP is the best route. This allows for a procurement procedure that enables procurement personnel to seek competitive bids.
Sending out/Receiving bids: Most businesses will do this through a simple email. Government, who knows. I've never worked government procurement so any readers please add to the comments on this. I'll admit when I don't have experience. I''ll just assume they shoot them out of tanks if you don't. Some of this can be done through systems like SAP as well. However, there must be an outlined effective procurement process to do this.
Evaluating Bids/Suppliers: Scorecards. Learn them, Love them, Use them. Forcing stakeholders to go through this process will free our department of being the scapegoat after a competitive bidding process.
Supplier Selection: Procurement shouldn't be selecting suppliers. Stakeholders do that. Informing them, yes. Selecting… big no and I'll die on that hill. Successful procurement process should be that the procurement process facilitates the correct supplier selection through an unbiased process.
Contract Development/Implementation: Procurement management should ensure that legal reviews contracts for both direct or indirect procurement for the procurement team. You are not a lawyer and should concern yourself with making sure it includes important KPI's, supply chain relevant items, spelled out scopes of work, commercial terms. Etc. Then ensures that the supplier will perform under a legally binding contract.
Management of Supplier: How do you manage a supplier? You take the above stuff in the contract and routinely check on their performance in meeting it. If not, you put that boot up their….. no… you have calm and rational conversations on how they can improve, put a plan in place, and monitor it. If they don't fulfill the terms, then you go look for a replacement. Sometimes this is done pretty fast.
Goals of Procurement Processes
Value: Simple. We create value by helping to ensure, through completing the above tasks, that the below results are met through the procurement cycle.
Lowest Total Cost: I said total costs. Not piece price of goods and services. We work to get the entire cost drivers as cheap as possible. From piece price, logistics costs, returns due to quality issues, etc. If you are in the direct procurement field then this is key to the final product.
Highest Quality: How do you define quality. I'll define it for you. No defects. If they are given a specification, then it matches it without any deviations. This ensures that continue day to day operations can occur without interruptions.
Form, Fit, and Function: Not only will it be in the form we ask for but it will fit the way we intended it too if it's part of a greater assembly and it will function in the way we specified it to function.
Right place, Right Time: What else needs to be said here. It shows up where we said it should, when we said it should. This is imperative in a manufacturing industry where delivery times are predicated on the production schedule.
Outcomes of Procurement Process
Profit Margins increase through reduced input costs: If I “procure” the same item for less than we paid for it before, all things staying the same, then profit margins increase. That is, we are now selling the same item, for the same price, with less input costs. This is more to the direct procurement side of the house. The lower you pay for goods and services the less cost inputs impact the total cost of the final good.
Freeing up capital in how the supply chain is set up. The procurement strategy should be focused on things on the procurement side that leads to suppliers eating most of the investment into inventory. There are consignment models, VMI, and ways to manage bottleneck inventory that can free up working capital.
Being more competitive in the marketplace with lower costs. How does this increase market share? Now your sales team can be more competitive in the market if they choose, by lowering your products sale price. That's why I named this company Procurement_IO. IO stands for inputs and outputs. If I lower the cost of inputs, I can lower the sale price of outputs. The procurement process can be very important to reaching this goal
Capturing market share. This goes hand in hand with point 3. If I'm more competitive in the market then I can capture more market share. If I control my input costs more effectively and can become the lowest priced offering in the market, then I have the chance to gain the primary market share. Again, the procurement process has a key role in reaching this goal as well. It should be a key performance indicator for the procurement team.
Risk reduction. This is understood but sometimes I don't think it is. I believe people say it, but I'm not sure if they really... really get it. The entire procurement process is there to reduce risk through the procurement process flow. It reduces risk for stakeholders, procurement departments, the business operations, and even suppliers. It ensures that every little is left unexplored or unanswered, if done correctly. Any procurement strategy developed should have this a a KPI.
Better fit of supplier to your company goals. This ties into risk reduction. Low costs don't always win out. Sometimes, the way a potential supplier fits into your own company may be more beneficial than the low price option. There may be cinergy there that allow for long term efficiency that has much more impact on a successful supply chain. Procurement managment can play a pivotal roll in this outcome. Supply chain management professional will thank you for it.
Conclusion
As you can see, there's a bit more to procurement and what procurement means than what you may have been told. Procurement process has complete visibility to spend for goods and services and the supply chain from end to end. Procurement is part of the supply chain management team. The procurement process insures that. The benefits are long and doing the procurement process the right way can make an unprofitable company profitable. I know, I've done it. Always look to the goals of procurement, then ask yourself if the process you have in place is ensuring those goals occur. If not, you may need to rethink your process. I hope this article has helped answer the question of what procurement means.
Take the next step with our article, "What Is Procurement Management".