Definition
Procurement in finance refers to the process of finding, acquiring, buying goods, services or works from external sources, often through a tendering or competitive bidding process. The procurement process aims 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. It involves activities like market research, vendor evaluation, negotiation of contracts, and actual purchasing.
Key Takeaways
- Procurement involves the process of identifying, acquiring, and managing the goods, services, or works from external sources that a company needs to complete its business operations.
- The goal of procurement is not only to find the most cost-effective solutions but also ensure that the quality and timeliness of goods and services meet the company’s requirements. It’s a strategic process focusing on long-term benefits rather than just upfront costs.
- Effective procurement management can yield significant benefits for a business, such as controlling spending, strengthening competitiveness, and improving supplier relationships.
Importance
Procurement is a crucial term in finance because it pertains to the process of identifying, acquiring, and managing resources and suppliers that are essential to the operations of a company.
It is important because it can significantly impact a company’s efficiency, cost-effectiveness, and overall sustainability.
The procurement process includes activities like negotiating contracts, managing supplier relationships and sourcing goods and services, so it can directly affect a company’s expenses and, in turn, its profitability.
Furthermore, effective procurement strategies can optimize organizational spending, ensure a steady flow of necessary resources, mitigate risks in supply chain, and contribute to the overall growth and success of the business.
Explanation
Procurement is a critical aspect in an organization’s operations as it aids in managing and optimizing the procurement process. It serves a fundamental purpose by ensuring that an organization obtains the necessary goods and services required to achieve its objectives.
Through procurement, the organization can have a systematic approach to sourcing suppliers, negotiating prices, awarding contracts, and purchase orders. This process is crucial because it allows businesses to obtain quality resources at the most cost-effective price points, mitigating risk and enhancing efficiency which can lead to significant cost savings.
In addition to sourcing the best goods and services in the most cost-effective manner, procurement also plays a significant role in forging solid relationships with suppliers. This is important because good supplier relationships can lead to more favorable terms, such as extended payment periods or discounts, thus improving the organization’s cash flow.
Moreover, effective procurement strategies also include risk management aspects which can minimize disruption to supply chains and operations. Thus, procurement is more than just the act of buying goods and services; it’s about creating value, enhancing operational efficiency, and ensuring the longevity of the business by building lasting and mutually beneficial relationships with suppliers.
Examples of Procurement
Corporate Office Supplies – A company working in a corporate sector often needs regular office supplies such as computers, software, paper, pens, and other stationery. The Finance department will have a procurement process in place to ensure they purchase these items at the best available price while still maintaining product quality. This could involve negotiating contracts with suppliers, checking the market for competitive pricing and ensuring timely delivery to meet the company’s operational needs.
Construction Materials – In the construction industry, procurement plays a crucial role. A construction company needs materials like cement, rods, stones, machinery etc. for their projects. Here, procurement involves finding reliable suppliers who can provide high-quality materials at the most cost-effective rates. This might require establishing long-term supplier contracts, performing quality assurance checks, and coordinating timely delivery to the construction site to avoid project delays.
Medicine and Equipment in Hospitals – Hospitals need a consistent supply of medications, personal protective equipment, surgical instruments, and medical devices. Procurement in healthcare involves not just purchasing these items, but also careful selection of suppliers who meet healthcare standards, dealing with patents or exclusive distributor agreements, managing inventory, and ensuring that critical supplies aren’t out of stock.
FAQ on Procurement
What is procurement?
Procurement is the process of finding and acquiring goods, services, or works from an outside external source, often via a tendering or competitive bidding process.
What is the role of procurement in a business?
Procurement plays a crucial role in managing and optimizing the costs of a business. It ensures that the company gets the best value for what it spends by ensuring quality and efficiency in the purchased goods or services.
What is the difference between procurement and purchasing?
While often used interchangeably, procurement and purchasing are different in scope. Procurement involves the whole process from identifying business needs, sourcing potential vendors, negotiating price and contract terms, to the eventual purchasing of the product. On the other hand, purchasing is just a single part of procurement, focusing on the transaction or the act of buying.
What are the types of procurement?
There are three types of procurement: direct, indirect, and services. Direct procurement involves the purchase of goods and materials that are directly included in the production of goods or services sold by a company. Indirect procurement refers to the acquisition of goods and services that are not directly involved in the production process but are necessary for daily operations. Services procurement is about hiring external services or workforce.
What is a procurement strategy?
A procurement strategy is a long-term plan that outlines how a business manages its sourcing and supplier relationships. The strategy will typically include the identification of the best cost sourcing locations, preferred supplier list, negotiation tactics, method of delivery, and payment terms.
Related Entrepreneurship Terms
- Purchase Order
- Supplier Management
- Sourcing
- Budgeting
- Vendor Selection
Sources for More Information
- Investopedia – A comprehensive resource for investing and personal finance education.
- Chartered Institute of Procurement & Supply (CIPS) – A global professional body serving the procurement and supply profession.
- Business Standard – A financial news portal that provides news, features and articles related to finance and economics, including procurement.
- Forbes – A global media company, focusing on business, investing, technology, entrepreneurship, leadership, and lifestyle.
