Importance of procurement in business
- Cost Savings & Profit Enhancer: Strategic sourcing and effective negotiation help reduce costs, directly improving profitability. Every saving contributes to the bottom line.
- Supply Chain Risk Manager: Identifies and mitigates risks—such as geopolitical, financial, or operational issues—by diversifying suppliers and implementing contingency plans.
- Quality & Innovation Driver: Works with suppliers to improve quality and co-develop innovations, positively impacting the final product or service.
- Sustainability & Ethics Guardian: Incorporates Environmental, Social, and Governance (ESG) standards into sourcing decisions, protecting brand reputation and ensuring regulatory compliance.
- Working Capital Optimiser: Manages payment terms and inventory levels to free up cash flow, supporting overall financial stability.
Procurement vs. Purchasing
A common misunderstanding is that procurement and purchasing are the same. In fact, procurement is a strategic, end-to-end process, while purchasing is a tactical activity that deals with individual transactions.
Aspect
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Procurement (Strategic)
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Purchasing (Tactical)
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Focus
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Long-term value, total cost, and managing supplier relationships
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Completing transactions and getting the right unit price
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Scope
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End-to-end: identifying needs, sourcing, contracting, and managing supplier performance
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Limited to order placement, receipt, and payment (a part of procurement)
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Time Horizon
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Proactive and future-focused
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Reactive to immediate requirements
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Supplier Relationship
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Partnership-oriented, emphasising collaboration and continuous improvement
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Transactional, focusing on individual orders
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Goal
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Maximise overall value, reduce risk, and support business strategy
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Obtain the required goods or services at the agreed price
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How Procurement Works
The procurement process usually involves several key steps that businesses follow:
- Identifying the goods or services required.
- Finding suppliers, requesting quotations, and preparing purchase requests (PRs).
- Negotiating terms, prices, and conditions with suppliers.
- Receiving the goods or services and making payments.
- Evaluating supplier performance and maintaining records.
In small businesses, a single person may handle all procurement tasks, while larger companies often have a dedicated team managing different suppliers or supporting specific departments. For certain items, the team may need input from multiple departments to determine the company’s overall requirements.
It’s important to understand that procurement is not just a series of separate actions—it’s a continuous process. Companies aim to build strong relationships with key suppliers to secure better service and competitive prices, which can improve profit margins. Regular quality checks and performance reviews are also essential to ensure suppliers consistently meet standards and expectations.
Three components of Procurement
Procurement involves three critical components: people, process, and paperwork.
- People: Individuals, including procurement specialists, accounts payable, and business units requesting goods/services, drive each procurement step. Stakeholder involvement varies based on purchase value, with more input often needed for high-value acquisitions.
- Process: A streamlined process is crucial for cost control and timely supply delivery. Clear procedures enhance accuracy and efficiency, ensuring tasks are completed on schedule. Disorganised processes lead to errors like overpayments or delayed payments, impacting financial health and supplier relations.
- Paperwork: Comprehensive documentation at every procurement stage is essential. Records maintain crucial data on payment terms and supplier performance. They support audit trails and dispute resolution, preserving continuity amid staffing changes.
7 Common principles of Procurement
In both public-sector and private-sector organisations, procurement is a critical process for acquiring goods and services. However, in the public sector, there are specific principles that guide how procurement should be conducted. These principles ensure transparency, fairness, and accountability due to the use of public funds.
Here are seven common principles of procurement:
- Fairness: All suppliers and individuals should be treated equally in the procurement process. Decisions should be based on objective criteria that align with the organization's needs. For smaller vendors or startups participating in public procurement, access to a micro loan can help them meet initial supply or compliance costs.
- Integrity: Those involved in procurement must uphold high standards of integrity. This includes being honest, responsible, and reliable in all dealings. Funds should be used for their intended purpose and in the public's best interest.
- Effectiveness: Procurement processes should be efficient to minimise delays and administrative costs. Streamlining these processes helps maximise the benefits of procurement activities.
- Value for money: Organisations must spend public funds efficiently. This involves analysing costs and benefits, considering factors like quality and durability. The goal is to achieve the best overall value, not just the lowest cost.
- Transparency: Information related to procurement decisions should be accessible to the public and suppliers. This transparency fosters trust and allows stakeholders to understand how public funds are being used.
- Accountability: Individuals responsible for procurement decisions are accountable for their actions. They should accurately report procurement activities and be open to scrutiny. This ensures that decisions are made responsibly and in accordance with established guidelines.
- Competition: Whenever possible, organisations should encourage competition among suppliers. This helps ensure competitive pricing and quality. Exceptions may apply, such as when only one supplier can provide a unique product.
These principles serve as ethical guidelines to ensure that public procurement processes are conducted fairly, transparently, and efficiently, ultimately serving the best interests of the public.
Types of Procurement
There are several different types of procurement that businesses can engage in, depending on their specific needs and objectives:
- Direct Procurement: Involves the purchase of goods and services directly related to the production of goods sold by the company.
- Indirect Procurement: Includes the acquisition of goods and services that are not directly included in a product for sale, such as office supplies and consulting services.
- Goods Procurement: The process of purchasing physical items that are required for the company’s operations.
- Services Procurement: Involves obtaining intangible services that aid in the business’s operations. Understanding these types helps businesses align their capital structure and financing needs with their procurement strategies.
Procurement methods
Procurement teams use different methods to select the best suppliers and acquire goods or services for their projects. Here are six commonly used approaches:
- Open Tendering
This is a competitive bidding process open to all suppliers who meet basic qualifications. A public notice is issued with project requirements and specifications. Suppliers submit bids with their proposed price, terms, and credentials. The contract is awarded to the supplier offering the best value while meeting all requirements.
- Restricted Tendering
Similar to open tendering, but invitations to bid are sent only to a pre-selected list of qualified suppliers. This method is used when a project requires specific expertise or experience.
- Request for Proposal (RFP)
An RFP is a formal document describing the project, requirements, and evaluation criteria. It is used for complex goods or services and allows a detailed assessment of a supplier’s capabilities, including technical skills, project experience, and past performance, not just price.
- Two-Stage Tendering
A variation of open tendering that includes a qualification stage. In the first stage, potential suppliers provide information about their qualifications and experience. Based on this, a shortlist is created, and only those suppliers are invited to submit full bids in the second stage.
- Request for Quotation (RFQ)
An RFQ is a simpler method used to get price quotes from a small number of pre-selected suppliers for clearly defined goods or services. Unlike an RFP, the focus is mainly on price rather than evaluating supplier capabilities.
- Single Source Procurement
This method involves buying from a single pre-selected supplier without competitive bidding. It is used in special situations, such as when a supplier has unique expertise or a patented technology. A clear justification is needed since there is no competition.
Stages of Procurement
The procurement process can be divided into three distinct stages: sourcing, purchasing, and payment.
- Sourcing stage: In the sourcing stage, organizations begin by identifying their requirements and initiating purchase requests. This phase involves assessing potential suppliers, evaluating their capabilities, and building robust relationships that can foster collaboration and continuous improvement. It sets the groundwork for efficient procurement by establishing clear expectations and standards. For businesses scaling operations or negotiating large supplier contracts, securing adequate funding through a secured business loan can support long-term procurement goals. Check your pre-approved business loan offer to explore funding options for large-scale procurement contracts or supplier negotiations.
- Purchasing stage: Moving into the purchasing stage, negotiations ensue to finalize terms and conditions with chosen suppliers. Purchase orders are then created, specifying the goods or services required, and deliveries are inspected upon receipt to ensure they meet quality standards and match the order details.
- Payment stage: In the payment stage, accounts payable meticulously conducts three-way matching between the purchase order, invoice, and receipt to verify accuracy. Once invoices are approved, payments are processed promptly, and meticulous records of all transactions are maintained for audit purposes and financial transparency.
Each stage is integral to the seamless operation of procurement, ensuring timely acquisition of goods and services while upholding quality and fiscal responsibility.
Steps in the procurement process
The procurement process may differ across companies, but it typically follows 12 key steps:
- Identify Needs: Determine the materials, products, software, or services required, whether due to shortages, new projects, or routine operations. This step includes demand planning and forecasting.
- Source Suppliers: Research and evaluate potential suppliers to find the best fit for your business. Having alternative suppliers helps manage risk in case of shortages or disruptions.
- Submit a Purchase Requisition: Submit an internal request with details like price, quantity, and delivery timeline to start the approval and purchasing process.
- Evaluate and Select Suppliers: Choose the best supplier through methods such as RFPs (Request for Proposal), RFQs (Request for Quote), e-auctions, or “three bids and a buy.” Consider factors like cost, quality, reputation, reliability, speed, and sustainability.
- Negotiate Price and Terms: Once a supplier is chosen, negotiate terms including price, quantity, delivery schedules, and payment conditions.
- Create a Purchase Order (PO): Issue a formal PO outlining the exact goods, services, and agreed-upon terms once the supplier is selected and terms finalised.
- Receive Goods and Check Quality: Inspect deliveries to ensure the quantity and quality match the order and check for any damages or errors.
- Process Invoice and Make Payment: After confirming the order meets requirements, process the supplier’s invoice through accounts payable for timely payment. Early-payment discounts or various payment methods may apply depending on contract terms.
- Build and Manage Supplier Relationships: Maintain positive relationships with suppliers to improve performance, negotiate better terms, secure discounts, and encourage collaboration and reliability.
- Manage Contracts: Oversee contracts to ensure compliance, track obligations, and renegotiate terms when necessary. This ensures that agreed savings and benefits are realised.
- Manage Risk: Anticipate and mitigate potential issues such as supply shortages, disruptions, or regulatory noncompliance. Effective risk management is a critical part of the procurement function.
- Review and Analyse: Continuously track procurement KPIs, analyse performance, identify gaps, and uncover opportunities for cost savings and risk reduction.
These 12 steps make up the procurement lifecycle. Because the steps often overlap, the process is ongoing. A successful procurement lifecycle requires integration with other business functions like budgeting, forecasting, and supply chain management to drive efficiency and business growth.
Accounting for Procurement
- Financial Oversight: Regular monitoring of expenditures and cost-saving analysis.
- Budget Compliance: Ensuring that purchases stay within company budget parameters.
- Asset Management: Tracking the lifespan and depreciation of purchased assets for accurate financial assessment.
Sustainable procurement management
Sustainable procurement, which incorporates Environmental, Social, and Governance (ESG) criteria into purchasing practices and decisions, is not merely a passing trend in procurement; it has become a vital consideration.
The challenges of sustainable procurement include the complexity and transparency of supply chains, performance measurement, compliance with standards, and capacity building. Sourcing low-emission materials like green steel, recycled aluminium, and plastic is already difficult, and it is expected to become even more challenging. Additionally, consumers are increasingly inclined to support brands that can demonstrate genuine sustainability, making sustainable procurement essential for business success. In such scenarios, financial support options like an MSME loan can be instrumental in helping small and medium enterprises invest in sustainable sourcing and infrastructure upgrades.
Consider one key aspect of sustainable procurement—reducing supply chain emissions. This process can take years, so initiating the transition now will help businesses remain competitive and resilient in the future.
Some examples of sustainable procurement include:
- Green sourcing: This involves selecting products and services with a lower environmental impact, such as eliminating single-use plastics, using recycled materials, and adopting clean technologies. Green procurement can lower costs, support corporate social responsibility goals, and appeal to eco-conscious consumers.
- Ethically-sourced materials: Ethical sourcing ensures products come from companies that pay fair wages, provide good working conditions, avoid child labour, and contribute positively to their communities.
- Reduced carbon footprint: Lowering carbon emissions and energy use extends beyond daily operations to include reducing emissions across the entire supply chain.
The Future: AI & Automation in Procurement
Technology is reshaping procurement, shifting it from a primarily administrative function to a more analytical and strategic one.
AI Application
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Benefit
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Example
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Spend Analytics & Forecasting
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Helps identify cost-saving opportunities and predicts future requirements
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AI reviews past spending patterns to suggest bulk purchase discounts
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Supplier Risk Intelligence
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Monitors suppliers in real-time for financial, operational, or geopolitical risks
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AI alerts when a key supplier faces negative news or disruptions in their region
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Intelligent Sourcing
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Automates RFX processes and finds the most suitable suppliers
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AI scans global supplier databases to shortlist vendors that meet ESG and technical standards
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Invoice Processing (AP Automation)
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Extracts and matches invoice data automatically
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OCR and AI remove manual data entry, speeding up payment cycles
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Contract Management
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Reviews contract terms for compliance and tracks obligations
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AI flags auto-renewals or non-standard clauses across thousands of contracts
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Funding Strategic Procurement Initiatives
Implementing advanced procurement systems, such as AI-powered platforms, or making large strategic bulk purchases often requires upfront capital. A Bajaj Finserv Business Loan can provide the necessary funding—subject to business loan eligibility—to support these initiatives without affecting your cash flow. Businesses can also plan repayments in advance using a business loan EMI calculator, ensuring instalments align with operational cash cycles.
Funds from a business loan can be used to:
- Invest in procurement technology: Finance subscriptions to advanced Procure-to-Pay (P2P) or Supplier Relationship Management (SRM) software.
- Secure bulk discounts: Fund large upfront orders to lock in lower per-unit costs.
- Diversify the supplier base: Cover onboarding and initial orders with new strategic suppliers, reducing dependency risks.
With competitive business loan interest rate options, rapid disbursal (within 48 hours*), and flexible repayment tenures, this financing solution provides a practical way to execute time-sensitive procurement strategies, delivering immediate cost savings and long-term business value.
Conclusion
Effective procurement is essential for any business looking to maintain competitive advantage and operational efficiency. By understanding the different aspects of procurement and utilizing tools like business loans to enhance procurement processes, companies can achieve substantial growth and long-term success in today’s dynamic market environment.
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