Is Procurement Important? What are its Different Types? A Complete Guide
What makes procurement a crucial function for businesses? The answer is simple: It ensures that they get a good value for money when acquiring something from suppliers. That is why organizations hire employees who specialize in the field of procurement. Such resources know how to establish and manage healthy relationships with suppliers.
In fact, the rising scope of this job profile is evident in how well-paid this career has become. According to a Zippia report, the average salary of a procurement officer in the U.S. is $73,568 per year, which makes for $35.37 per hour.
To understand its importance more, let’s dig deeper into what is procurement, its different types, and its relevance in the financial well-being of a company.
What is Procurement?
Procurement refers to the process of acquiring goods or services from an external source. It involves identifying the need for a product or service, finding and evaluating potential suppliers, negotiating terms and conditions, and finalizing contracts upon agreement.
In simple terms, procurement aims to secure the best possible goods, services, or works, at the most favorable terms, for the benefit of a particular business organization.
The procurement process involves multiple stages and the most significant ones are:
- Requirement definition: Entails defining the needs and specifications of the product or service
- Supplier selection: Includes sourcing and evaluating potential suppliers, and reviewing their track record, financial stability, and delivery capabilities
- Negotiation: Involves negotiating significant terms and conditions, such as price, delivery schedules, and performance guarantees
- Contract award: The process of finalizing the contract with the selected supplier
- Contract management: Focuses on monitoring the supplier’s performance and managing the contract
Types of Procurement
Understanding what is procurement also involves learning its different types to get a better picture of the highly involved process. These include:
Direct Procurement
It refers to the possession of goods and services that are directly related to the production of a product or the delivery of a service. This could be raw materials, components, and supplies used in manufacturing, direct labor, and anything related to the core operations of a particular business.
Direct procurement is critical to the production process and is also a significant part of supply chain management. The goods and services procured through this process find their way to the end clients or customers.
Indirect Procurement
This involves the possession of goods and services that support the organization but are not directly related to their production or deliveries. Examples of this procurement process include office supplies, IT equipment, and facilities management services. In other words, indirect procurement involves acquiring goods and services that support a particular business and its respective operations.
Goods Procurement
Goods procurement refers to the process of acquiring tangible products, such as raw materials, components, supplies, and finished goods. These can be direct or indirect, depending on the business requirements. This process is critical for the manufacturing and production processes of businesses because it involves sourcing the materials and supplies needed to produce the final product.
The goods procurement process also entails identifying the need for the product, sourcing potential suppliers, negotiating terms and conditions, and finalizing contracts.
Services Procurement
This is the process of acquiring intangible or people-based services on an enterprise level, such as consulting, design, marketing, and maintenance. It is used to procure the specialized expertise required to support the organization’s operations and achieve its respective goals. As with the goods procurement process, this too involves identifying the need for the service, sourcing potential suppliers, negotiating terms and conditions, and finalizing contracts.
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How Does the Procurement Process Work
The procurement process begins with the business identifying the goods and services that it needs, sourcing the suppliers to fulfill its business objectives, negotiating different terms and conditions, and purchasing the relevant items.
Small companies have one individual to handle the procurement of goods and services. However, larger companies have dedicated teams to deal with different suppliers or support specific interest groups.
The team or individual may need to gain further input from different business groups to determine the overall organizational requirements.
Businesses may also need to conduct regular quality assurance checks, including performance analysis, to ensure that the targeted suppliers meet the required expectations.
What are the Stages in the Procurement Process?
Procurement processes may vary depending on the company structure, needs, and other relevant requirements. They typically include the following stages.
Sourcing Stage
This encompasses the initial steps during which a business identifies the needs, assesses vendors, and creates a purchasing request. It is also necessary for companies to build strong relationships with suppliers at this stage.
Purchasing Stage
It is the stage of negotiating the necessary terms, creating the required orders, and receiving the goods and services to inspect them.
Payment Stage
It involves ensuring order and invoice accuracies and keeping a record of all invoices to maintain them for future reference.
What is the Role of Procurement in Finance?
Procurement plays a significant role in finance because it ensures that the organization’s expenditures on goods and services align with its financial goals and objectives. It also plays a critical role in controlling costs and minimizing financial risks.
Procurement impacts an organization’s financial performance by ensuring that it obtains the best value for its money through efficient and effective purchasing practices. The process includes identifying cost-saving opportunities, negotiating favorable terms with suppliers, and managing supplier relationships to ensure they deliver quality goods and services according to different requirements.
Procurement processes can work closely with finance to ensure that the organization’s financial resources are used in the most efficient and effective way to improve its financial performance and support the overall success of the business.
Procurement and finance are two different entities but a strategic partnership between them can benefit the entire business. It enables both departments to provide unique insights into business operations.
Scaling Up with Emeritus
Procurement plays a critical role in controlling costs, minimizing financial risks, and improving financial performance by ensuring that the organization obtains the right goods and services at the right price, and of the right quality. That is why organizations want to work with procurement managers who have the skill and expertise to carry the process forward efficiently.
Having learned what is procurement and understanding its importance, you can enroll in Emeritus’ finance and fintech online courses if you want to enhance your skills in this field and build a career as a procurement manager.
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