Procurement

Procurement is the process of finding, acquiring, and purchasing goods, services, or works from external sources, often through a tendering or competitive bidding process.
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Updated: Jun 17, 2024

3 key takeaways

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  • Procurement involves sourcing and purchasing goods and services from external suppliers.
  • It includes steps such as identifying needs, selecting suppliers, negotiating contracts, and managing supplier relationships.
  • Effective procurement can lead to cost savings, improved quality, and stronger supplier relationships.

What is procurement?

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Procurement is the systematic process by which an organization acquires goods, services, or works from external sources. It encompasses the entire cycle from identifying needs and selecting suppliers to negotiating contracts and managing supplier relationships.

Procurement’s goal is to ensure that the organization receives the best value for its expenditures by acquiring quality goods and services at competitive prices.

Steps in the procurement process

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The procurement process typically includes the following steps:

  1. Identifying Needs: Determining what goods or services are required by the organization. This step involves specifying the quantity and quality needed.
  2. Supplier Identification: Researching and identifying potential suppliers who can fulfill the organization’s needs. This may involve issuing a request for proposal (RFP) or request for quotation (RFQ).
  3. Supplier Evaluation and Selection: Assessing potential suppliers based on criteria such as price, quality, reliability, and delivery times. The best supplier is then selected through a competitive bidding process or direct negotiation.
  4. Contract Negotiation: Negotiating terms and conditions with the selected supplier, including pricing, delivery schedules, payment terms, and other contractual details.
  5. Purchase Order Issuance: To formalize the purchase agreement, a purchase order (PO) is issued to the supplier. The PO includes all relevant details, such as quantities, prices, and delivery dates.
  6. Order Fulfillment: Monitoring the supplier’s performance to ensure that goods or services are delivered as per the agreed terms.
  7. Payment: Processing payment to the supplier upon satisfactory receipt of goods or services.
  8. Supplier Relationship Management: Maintaining ongoing relationships with suppliers to ensure continued quality and reliability, and to address any issues that arise.

Importance of procurement

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Procurement is essential for several reasons:

  • Cost Savings: Effective procurement practices can help organizations obtain goods and services at the best possible prices, leading to significant cost savings.
  • Quality Assurance: Procurement ensures that the organization receives high-quality products and services by selecting reliable suppliers and establishing clear quality standards.
  • Risk Management: Proper procurement processes help mitigate risks associated with supply chain disruptions, supplier reliability, and contract compliance.
  • Strategic Value: Procurement can contribute to the organization’s strategic goals by ensuring that resources are used efficiently and that suppliers align with the company’s objectives and values.

Example of procurement

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Consider a company that manufactures electronic devices. The procurement process for this company would involve sourcing components such as microchips, screens, and batteries from various suppliers.

The procurement team would identify and evaluate potential suppliers, negotiate contracts to secure favorable terms and manage relationships with these suppliers to ensure a steady supply of high-quality components at competitive prices.

Effective procurement is a critical function that supports an organization’s operations and strategic objectives.

By ensuring the timely acquisition of quality goods and services at competitive prices, procurement helps organizations achieve cost efficiency, maintain high standards, and build strong supplier partnerships.

For further insights, explore related topics such as supply chain management, contract negotiation, and strategic sourcing.



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Arti
AI Financial Assistant
Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the Invezz.com knowledge base, understands over 100,000... read more.