The term procurement can refer to any goods or services which are acquired from an external source. Companies often undertake this process in order to reduce their costs. Their prime goal includes procuring the goods or services at the best possible cost. A company initiates the procurement process when it has to make buying decisions under scarcity. Procurement activities can be of two types- the first deals with production related procurement and the second one is the non-production related procurement.
Direct procurement always occurs in the manufacturing process. Finished products such as raw material, parts and components all fall under the direct procurement process. As it directly affects the production of a manufacturing company, it is the central focus of supply chain management.
On the other hand, indirect procurement refers to operation related procurement that the company purchases to facilitate its operations. It can consist good or services of great variety from office supplies to heavy equipment and consulting services.
Companies do not conduct the procurement process manually rather they become dependent of the procurement software which is also known as purchasing management software. These systems tend to facilitate organizational process by efficiently managing cycle times and maximize profit. However, many organizations do customize their working style, but this does not hinder them from taking the help of automated software.
Procurement just does not happen. It has to go through some specific processes in order to achieve the target. Identification of need, supplier identification, logistics management and tender notification- these are the some of the steps of a procurement process of a business.
Procurement as a measure of cost reduction
Procurement process is usually conducted to identify the unnecessary costs to a business so that they can be completely eliminated and the company can maximize its profit. As per the report of Ardent Partners, the average procurement department has an annual savings of around 6.7% which can be significant if the company is operating in millions or billions. The report has also found that only about 60% of total spend or expenditure is being managed by the procurement department. This percentage is also known as spend under management, referring to the percentage of total spend that is managed by the specific department.
To manage end-to-end procurement properly is a challenge for the authorized department. Often they are not able to produce the targeted output because of various reasons that affect the business of the organization.