Procurement
Procurement is the process of locating and agreeing to terms and purchasing goods, services, or other works from an external source, often with the use of a tendering or competitive bidding process. When a government agency buys goods or services through this practice, it is referred to as government procurement or public procurement. The term "procure" may also refer to a contractual obligation to "procure" something, i.e. to "ensure" that the thing is done.
Procurement as an organizational process is intended to ensure that 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 risks such as exposure to fraud and collusion. In practice, the procurement process is commonly organized into seven steps that provide structure and consistency across purchasing activities.
Almost all purchasing decisions include factors such as delivery and handling, marginal benefit, and fluctuations in the prices of goods. Organisations that have adopted a corporate social responsibility perspective are also likely to require their purchasing activity to take wider societal and ethical considerations into account. On the other hand, the introduction of external regulations concerning accounting practices can affect ongoing buyer-supplier relations in unforeseen ways.
Overview
The Institute for Supply Management defines procurement as an organizational function that includes specification development, value analysis, supplier market research, negotiation, buying activities, contract administration, inventory control, traffic, receiving and stores. Federal US legislation defines procurement as including A company's procurement function, specifically its spending on suppliers, typically accounts for more than half of the company's total budget.Purchasing is a subset of procurement that specifically deals with the ordering and payment of goods and services. Organizational procurement is also referred to as "organizational buying" or "institutional buying", for example in studies of the buying behaviour of staff involved in purchasing decision-making.
Procurement activities are also often divided into two distinct categories, direct and indirect spend. Direct spend refers to the production-related procurement that encompasses all items that are part of finished products, such as raw materials, components and parts. Direct procurement, which is the focus in supply chain management, directly affects the production process of manufacturing firms. In contrast, indirect procurement concerns non-production-related acquisition: a wide variety of goods and services, from standardized items like office supplies and safety equipment to complex and costly products and services like heavy equipment, consulting services, and outsourcing services.
A 2011 report found that the average procurement department manages 60.6% of total enterprise spend. This measure, commonly called "spend under management" or "managed spend", refers to the percentage of total enterprise spend that a procurement organization manages or influences. Alternatively, the term may refer to the percentage of addressable spend which is influenced by procurement, "addressable spend" being the expenditure which could potentially be influenced. The average procurement department also achieved an annual saving of 6.7% in the last reporting cycle, sourced 52.6% of its addressable spend, and has a contract compliance rate of 62.6%. A more restrictive definition of "spend under management" includes only expenditure that makes use of preferred supplier contracts and negotiated payment rates and terms.
History
The Romans developed a military logistics system of supply depots that were located throughout their empire. These depots were stocked with food, weapons, and other supplies that could be quickly distributed to troops in the field. This system helped to ensure that the Roman army was always well-supplied, even when it was fighting far from home.The first record of what would be recognized now as the purchasing department of an industrial operation relates to the railway companies of the 19th century:
Sourcing and acquisition
Procurement is one component of the broader concept of sourcing and acquisition. Typically procurement is viewed as more tactical in nature and sourcing and acquisition are viewed as more strategic and encompassing. The term procurement is used to reflect the entire purchasing process or cycle, and not just the tactical components. Procurement software manages purchasing processes electronically.Acquisition processes
Some aspects of a procurement process may need to be initiated ahead of the majority of the project, for example where there are extensive lead times. Such cases may be referred to as "advance procurement".Many writers also refer to procurement as a cyclical process, which commences with a definition of business needs and develops a specification, undertakes search activities or places advertising aimed at identifying suppliers and adopts appropriate methods for consulting with them, inviting and evaluating proposals, secures on contract and takes delivery of a new asset or accepts performance of a service, manages the ownership of the asset or the delivery of the service and reaches an end-of-life point where the asset becomes due for replacement or the service contract terminates. At this point the cycle would recommence. Bunn notes that search activities are a central preliminary action to be undertaken before buying decisions can be made.
The Chartered Institute of Procurement & Supply recommends involvement of procurement staff and skills from an early stage in the cycle, noting that such "early procurement involvement" can have a beneficial impact on the nature and timing of any approach to market, the specification and the sourcing strategy and supplier selection approach adopted.
Decision-making
Procurement decisions fall along a continuum from simple buying transactions to more complex buyer-supplier collaborations, and the buying behaviour of staff involved in purchasing decision-making has been widely studied. There is a consensus among scholars and marketing managers that buyers utilise various decision processes as appropriate to each buying situation, and some purchasing decisions are especially complex. Some writers treat purchasing decisions as examples of rational behaviour made in the context of a business aim such as profit maximisation and make the assumption that decision-makers have access to the information they need for their decision. Feldman and Cordozo questioned this approach in a 1969 article, suggesting that industrial buyer decision-making had similarities with consumer buying behaviour. David T. Wilson suggested in a 1971 article that an individual buyer's personality should be considered in understanding buyers' decision processes. Three distinct personality traits have been described in the literature on this subject:- a trait displaying a high need for certainty
- a trait reflecting a high degree of generalised self-confidence
- a need to achieve a trait.
There are wide variations in the involvement of procurement staff in purchasing decisions across types of organisation and across varying purchasing situations. Some purchasing decisions are made by individuals or groups of individuals referred to as a "buying center" or "decision-making unit", where procurement personnel may in some cases be central, in other cases peripheral, to the purchasing decision. From a marketing perspective, buying center research has looked at which individuals and organisational divisions become part of the decision-making group, how they interact, and the internal and external factors which influence purchasing outcomes. Wesley Johnson and Thomas Bonoma, in a 1981 research paper, found situations where "the purchasing manager's centrality is likely to be high", and equally situations where their centrality "is likely to be low", recommending that "purchasing managers desiring to increase their influence" should aim to play a pivotal role in the internal communications linking the various individuals and organisational divisions involved.
Sourcing business model
There are a number of models along the sourcing continuum: basic provider, approved provider, preferred provider, performance-based contracting, managed services model, vested business model, shared services model and equity partnerships.- A basic provider model is transaction-based; it usually has a set price for individual products and services for which there are a wide range of standard market options. Typically these products or services are readily available, with little differentiation in what is offered.
- An approved provider model uses a transaction-based approach where goods and services are purchased from prequalified suppliers that meet certain performance or other selection criteria.
- The preferred provider model also uses a transaction-based economic model, but a key difference between the preferred provider and the other transaction-based models is that the buyer has chosen to move to a supplier relationship where there is an opportunity for the supplier to add incremental value to the buyer's business to meet strategic objectives.
- A performance-based is generally a formal, longer-term supplier agreement that combines a relational contracting model with an output-based economic model. It seeks to drive supplier accountability for output-based service-level agreements and/or cost reduction targets.
- A vested sourcing business model is a hybrid relationship that combines an outcome-based economic model with a relational contracting model. Companies enter into highly collaborative arrangements designed to create and share value for buyers and suppliers above and beyond.
- A shared services model is typically an internal organization based on an arms-length outsourcing arrangement. Using this approach, processes are often centralized into an SSO that charges business units or users for the services they use.
- An equity partnership creates a legally binding entity; it can take different legal forms, from buying a supplier, to creating a subsidiary, to equity-sharing joint ventures or entering into cooperative arrangements.