Unraveling the Essence of Procurement: Why It's More Than Just Purchasing

Gladiator Enterprises

6 min read

a person sitting at a table with a laptop
a person sitting at a table with a laptop

Why Do We Need Procurement?

Buying or acquiring products or services, usually for commercial reasons, is known as procurement. Companies are often thought of when people hear the word "procurement" because they are required to buy goods and services, often in bulk. It may also incorporate the whole procurement process, which is essential for businesses before making a purchase. Businesses can play either the buyer or the seller role in a procurement process; however, for the purposes of this article, we will concentrate on the soliciting corporation.

BIG THINGS TO NOTE

As it pertains to company expenditure, procurement is the act of buying products or services. Several departments within an organization are typically involved in the procurement process because of the extensive planning, solicitation, and payment handling that is required. Depending on the necessity for purchase, procurement expenses can be categorized in several ways. When numerous parties are involved in a large-scale procurement process, competitive bidding is typically a requirement. Unlike the transactional process of purchasing, the strategic procurement process involves planning forward.

Methods Used in Procurement

A significant amount of a company's resources may be needed to oversee procurement and procurement procedures. Managers usually have a set amount of money available to them in procurement budgets, which they can use to buy the supplies and services they require. Because the capacity to acquire particular goods or services can dictate whether operations will provide a profit, procurement is frequently an integral aspect of a company's strategy.

Companies typically have standards for their procurement procedures, with controls emanating from the accounts payable (AP) department of accounting serving as a focal point. All the way from initial demand formulation and processing through final payment receipt and approval, it is the procurement process.

All things considered, this may include things like planning the acquisition, deciding on standards and requirements, researching and selecting suppliers, securing financing, negotiating prices, and controlling inventory. Therefore, successful procurement may necessitate buy-in from multiple departments in many large firms.

The procurement process consists of multiple steps:

1.Picking out the necessary products and services

2.Get bids from different vendors by filling out a purchase order form.

3.Negotiate a price and terms of service with the supplier before finalizing the purchase order.

4.Take possession of the package and pay for it.

*Various departments within an organization may lend a hand to procurement efforts.

Negotiating Prices and Purchasing Goods

Most commercial acquisitions that involve several bids involve competitive bidding. Compared to services, goods often have a less complicated competitive bidding process. The government also uses procurement for buying products and services; this sector has its own set of rules and procedures for bidding.

All goods, regardless of category, are subject to competitive bidding, which often entails offering a price per unit along with shipment and delivery details. Due to the potential involvement of people, technological services, operational procedures, client servicing, training, service prices, and other factors, competitive bidding for the acquisition of services might be more intricate.

Each time, the solicitor of bids considers operational business factors and expenses while deciding which supplier to collaborate with. Depending on the services or goods provided, the solicitor must account for the associated costs. For the sake of their company's success, government agencies and major corporations may choose to solicit procurement proposals on a regular or yearly basis.

Various Procurement Methods

Businesses can engage in several forms of procurement. A few examples are:

All products and services utilized in manufacturing are considered part of direct procurement. Everything from raw materials to machinery and other parts falls under this category.

Obtaining Goods Non-Directly: In this form of procurement, a company acquires goods and services to fulfill its operating requirements. So, they aren't bringing in any money for the business. Among these things might be marketing materials, furniture, and office supplies.

What we call "goods procurement" refers to the acquisition of tangible items for use in running a firm. Raw resources are one example, while office supplies are another.

Similar to goods procurement, services procurement can be either direct or indirect. People are the backbone of both. Any kind of work that is directly related to running the company is considered direct services procurement. Procurement of on-site security guards is an example of an indirect service.

Buying vs. Procurement

Many people mistakenly believe that buying is the same as procurement because both terms include the transfer of commodities and services. Nonetheless, the two are not identical.

As an example, procuring goods and services is more of a strategic process in procurement. It highlights the worth of products and follows a sequence of procedures (described above) to finalize the purchase. When companies submit procurement orders, they usually do it in a proactive manner. By doing so, they can anticipate and address any gaps that may arise in the future.

Contrarily, buying something involves a series of transactions. Therefore, it necessitates the acquisition of commodities and services. The entity's primary concern when making a purchase is the cost, not the quality of the product or service. A more immediate requirement is typically met by purchasing, which is typically a reactive activity.

You can see how these two procedures compare in the table below.

Buying vs. Procurement

Buying Things The procedure for strategic purchasing flow of transactions
Prioritization of worth putting a premium on the cost
An approach that is a proactive method based on response
Identifying issues and resolving them in the future addresses pressing requirements (or more)

Keeping Track of Purchases

Since procurement entails procuring goods and/or services to achieve the revenue goals of a firm, procurement expenditures are typically included in the financial accounting of that business. So, to spearhead these initiatives, some businesses may employ the services of a chief procurement officer, or CPO. Head of the CPO office:

Maintains standards for purchasing

Collaborates with accounts payable to streamline payment processes and guarantee integration of procurement standards. When there are several competing offers, assists procurement teams in reaching a final decision. Multiple perspectives and divisions exist within procurement processing. Various businesses and sectors handle the acquisition of direct and indirect expenses in different ways. Different approaches to cost management will also be used by goods companies and service providers.

Costs of Direct vs. Indirect Purchasing

Expenditures that are directly tied to the cost of goods sold and production encompass all components of final products. Raw materials, components, and pieces are all part of what manufacturing organizations deal with. Merchandise businesses will factor this in when calculating their total cost of goods purchased from wholesalers.

The direct expenses of service-based businesses are most often the wages of workers who provide the services themselves. The cost of goods sold and the items purchased for it have an immediate impact on a business's gross profit.

Indirect procurement, on the other hand, include acquisitions that are not directly tied to production. A business uses these acquisitions to run its day-to-day business. A wide variety of goods and services can be acquired through indirect procurement, such as marketing collateral, advertising campaigns, consulting, and office supplies. In most cases, companies' budgets and methods for handling indirect expenses will differ from those for handling direct costs.

Products versus Services Accounting for Purchasing

All businesses incur expenses when they buy things, but those that sell goods and those that provide services record their income and expenditures in different ways. Consequently, there will be a difference between the two types of accounting for products and services that are purchased.

Companies that deal primarily in things have to figure out how to acquire those goods to use as inventory. Supply chain management is very important to these businesses. While technology-based services may necessitate the acquisition of items, service-based businesses primarily generate money through the provision of services and hence do not depend as substantially on a supply chain for inventory.

Procurement as a direct expense is typically not a big consideration for service organizations because their cost of sales is often focused on the hourly labor cost of people providing the service. But, because service-based businesses often handle their own procurement as an indirect expense through marketing, their proportional indirect costs tend to be larger.

Definition of "Procurement"

The act of acquiring or locating a necessary good or service is known as procurement. Raw goods and supplies are purchased by businesses, whereas contractors or service providers may be purchased by governments.

Is Buying the Same Thing As Procurement?

Despite their similarities, procurement is more often concerned with locating suppliers and acquiring products, whereas purchasing is more concerned with the expenses and transactions associated with actually purchasing those items.

What Is the Process of Procurement?

There are various methods for conducting procurement. Companies can invite bids from prospective vendors by posting an open tender. They may also set requirements for who can bid or limit the amount of bids. Organizations often use request for proposals (RFPs) as a substitute for auctions, allowing bidders to compete based on price and skills. Contracts with a single source or a limited group of exclusive suppliers are occasionally used in procurement.

The Final Verdict

Buying products and services is what procurement is all about. It differs from buying in that it incorporates a sequence of actions often done by companies to address specific demands, including manufacturing, stocking, and selling. A stack of paperwork, including payment requests and receipts, is typically involved. However, buying and procurement are not the same thing. There is a significant difference between the two terms, despite their frequent interchangeability. Procurement is a long-term strategy, whereas purchasing is more of a short-term fix.