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.
How Procurement Works
Procurement is a planned process of obtaining the goods and services a business needs, starting from identifying a requirement to making payment to the supplier. It includes activities such as finding suppliers, negotiating contracts, raising purchase orders, receiving goods, and processing invoices. The aim is to get the right quality and quantity at the best possible price to support business operations. Procurement is more than just buying; it is a strategic function that manages the full process to control costs and reduce risks, whether purchasing raw materials for a factory or software for an office.
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.
Procurement vs. Purchasing
- Focus
Procurement is strategic and looks at long-term goals, value creation, and the total cost of ownership.
Purchasing is tactical and focuses on completing a transaction and getting the best price per unit.
- Scope
Procurement covers a wide, end-to-end process from sourcing to payment.
Purchasing has a limited scope and mainly deals with the act of buying, as part of the procure-to-pay cycle.
- Approach
Procurement is proactive, planning ahead, managing risks, and anticipating future needs.
Purchasing is reactive and responds to immediate purchase requirements.
- Supplier Relationships
Procurement aims to build and maintain long-term relationships with suppliers.
Purchasing is transactional and focuses on meeting contract terms for specific orders.
- Activities
Procurement includes identifying needs, sourcing suppliers, negotiating contracts, managing agreements, and reviewing supplier performance.
- Purchasing involves raising purchase orders, receiving goods, matching invoices, and making payments.
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.
Procurement with AI Automation
Automation has made many jobs quicker and simpler—and procurement is no different. Today, procurement professionals are using Artificial Intelligence (AI) to handle everyday tasks, make better decisions using data, and manage suppliers more effectively. With the speed and accuracy of AI tools, procurement processes become smoother and more efficient.
Here are some ways AI helps in procurement:
1. Comparing product costs:
AI can quickly check prices and total costs of products from different suppliers. This helps you find the best price per item, especially for things you buy often.
2. Finding alternatives during stockouts:
If an item is out of stock or available in low quantity, AI helps you find the same or similar products easily. It also shows the full cost of the replacement, including delivery charges and other fees.
3. Managing supplier performance:
AI tools bring all supplier information into one place, making it easier to manage the supplier relationship. With real-time data and smart analysis, you can improve efficiency and get better results from your suppliers.
4. Handling invoices and payments:
AI speeds up invoice checking and processing by doing it automatically. This reduces mistakes, saves time, and ensures faster payments to vendors.
5. Analysing spend and planning budgets:
AI-powered spend analysis tools help track how money is being spent. They also highlight areas where you can save and help you make more accurate budgets.
Steps in the procurement process
- Step 1: Identify Business Needs
Start by identifying the business requirement for a product or service. Speak with relevant stakeholders to confirm specifications, quantity, quality standards, and budget limits.
- Step 2: Raise a Purchase Requisition
Prepare and submit a purchase requisition (PR) for approval by the concerned department to ensure the purchase is required and within budget.
- Step 3: Source and Choose Suppliers
After approval, the procurement team reviews possible suppliers. For large or important purchases, RFQs, RFPs, or RFIs may be issued. Suppliers are evaluated based on price, quality, reliability, and past performance.
- Step 4: Negotiate Terms and Contracts
Discuss and agree on pricing, delivery schedules, payment terms, and other conditions with the selected supplier, then finalise the contract.
- Step 5: Create and Issue a Purchase Order (PO)
Prepare a purchase order that clearly states the items, quantity, price, and delivery date, and send it to the supplier to confirm the order
- .Step 6: Delivery and Inspection
The supplier delivers the goods or services. The receiving team checks the delivery and carries out a three-way match to confirm accuracy.
- Step 7: Invoice Approval and Payment
Once the goods or services are verified, the supplier’s invoice is approved and paid as per the agreed terms.
- Step 8: Record Keeping and Supplier Review
Keep all documents for audit purposes and review supplier performance to improve future procurement processes and relationships.
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.
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.
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.
Importance of procurement in business
Saving costs: Procurement helps a business save money and keep cash flow steady. By choosing the right suppliers, negotiating contracts, and streamlining buying processes, companies can reduce expenses and improve profits.
Ensuring quality: Buying the right raw materials at the right time is essential for making good-quality products. The materials and suppliers you choose affect the final product or service, so focusing on quality helps avoid problems with reputation, production, or legal issues.
Aligning with business goals: Strategic procurement ensures purchases support the company’s objectives. For instance, if your business values flexibility and resilience, procurement processes should include tools to achieve these goals. Understanding both the market and your company’s needs helps pick suppliers who can deliver the best results.
Reducing risk: Risks can arise at any stage of procurement—from wrong needs assessment to supplier delays. Other risks include non-compliance, ethical issues, weather events, or global disruptions. Modern procurement tools give visibility to spot, assess, and manage these risks proactively.
Sustainability and ethics: Procurement must follow the company’s values on environmental impact, ethical sourcing, and ESG commitments. Ensuring sustainable and responsible sourcing protects the company from reputational damage, financial loss, and legal problems.
Why is procurement important in business?
Procurement is vital in business because it directly affects a company's bottom line. Good procurement practices reduce purchase costs, ensure high quality, and allow timely delivery of goods and services, which can significantly improve operational efficiency and increase profit margins.
Maximize Procurement Potential: Unlock Growth with Business Loans
Enhance your procurement strategies with the flexibility of a business loan. Such financial backing allows you to invest in advanced procurement technologies and bulk purchasing, which can reduce costs and improve supply chain efficiency, ultimately fostering business growth. Before applying, it's essential to evaluate the applicable business loan interest rate to ensure affordability and alignment with your financial planning.
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.
Helpful resources and tips for business loan borrowers
