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What is Procurement (Supply Chain Basics)

Introduction

In today’s article, we will explore the concept of procurement, its significance within supply chain management, and the essential processes involved. The procurement function plays a crucial role in businesses as it ensures the timely acquisition of goods and services needed for operations.

The Role of Procurement

Procurement can be defined as the act of obtaining goods and services, typically for business purposes. While it is often associated with companies securing services or purchasing goods necessary for their products, procurement encompasses not only the final purchasing act but also the entire procurement process leading up to that decision.

Companies can be positioned on both sides of the procurement process, acting as buyers seeking supplies or as sellers providing goods and services.

How Procurement Works

The procurement process can require a substantial portion of a company’s resources. Managers typically operate within defined procurement budgets, which impact their purchasing decisions. This process is integral to a company's strategy because it determines the viability and profitability of operations.

The procurement team relies heavily on procurement requisitions supplied by the demand planning team. Utilizing technology, these requirements are often transmitted through an ERP (Enterprise Resource Planning) system. This connection ensures that the procurement team knows what items to buy and when to acquire them, aligning with the demand plan that factors in supplier lead times—how long it takes a supplier to deliver goods after an order is placed.

To illustrate this connection, consider a baking scenario: Imagine a cake maker preparing for a friend’s birthday party. The party planner must provide the necessary details about the event, allowing the cake baker (representing the procurement team) to determine how many ingredients and what items to procure, in consideration of when they are needed.

Important Procurement Processes

The procurement process is dictated partly by company standards and controls from the accounts payable division. Key components often involve:

  • Preparation and processing of demand
  • Receipt and approval of payment
  • Purchase planning standards
  • Specification determinations
  • Supplier research and selection
  • Financing and price negotiation
  • Inventory control

Importance of Procurement

Procurement is vital in understanding the overall supply chain as it enables a company to find reliable suppliers that offer competitive prices and meet the company’s requirements. Whether it's securing raw materials or selecting service providers, effective procurement processes save time, minimize costs, and allow businesses to maintain quality by choosing trustworthy suppliers.

Types of Procurement

Procurement can typically be classified into several categories:

  • Direct Procurement: Involves obtaining items required to produce an end product. For manufacturers, this includes raw materials and components, while for retailers, it means items purchased for resale.

  • Indirect Procurement: Encompasses purchases that support daily operations but do not directly influence the bottom line. This includes office supplies, furniture, consulting services, etc.

  • Goods Procurement: Refers to procuring physical items as well as software subscriptions. Effective goods procurement hinges on sound supply chain management practices.

  • Services Procurement: Focuses on acquiring services, which may range from hiring contractors and labor to legal services and security personnel.

Conclusion

In summary, understanding procurement is fundamental for grasping supply chain dynamics. It is an integrated function that significantly impacts how businesses acquire goods and services, manage costs, and ultimately succeed in their operations.

Keywords

Procurement, supply chain management, procurement process, procurement requisitions, demand planning, ERP, supplier lead time, direct procurement, indirect procurement, goods procurement, services procurement.

FAQ

1. What is procurement?
Procurement is the act of obtaining goods and services necessary for business operations.

2. What are the main responsibilities of a procurement team?
The procurement team manages the purchasing process, including research, supplier selection, and the conversion of purchase requisitions into purchase orders.

3. What is the difference between direct and indirect procurement?
Direct procurement relates to items required for producing an end product, while indirect procurement involves items essential for day-to-day operations but not tied directly to the final product.

4. How does technology assist the procurement process?
Technology assists by facilitating communication through ERP systems, allowing for efficient transmission of procurement requisitions and the tracking of supply needs based on demand planning.

5. Why is procurement important in supply chain management?
Procurement is important as it helps companies identify reliable suppliers at competitive prices, ultimately ensuring timely service delivery and quality goods, which contribute to overall business success.

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