Procurement is an important activity in the supply chain process. It’s not just about finding the most cost-effective suppliers or seeking positive supplier reviews. In large supply chains, it often represents a huge percentage of the total spend and should be managed effectively to achieve optimum value.
In this blog, we’ll take a look at what procurement is and why it is an important business function. Plus, we’ll also discuss the three main components of procurement – People, Process, and Technology.
What is Procurement?
Procurement refers to the process of sourcing or acquiring services or goods for a company. Some companies use the term procurement only to refer to the actual purchasing while others denote the whole process that leads up to the acquisition as procurement.
Procurement involves two entities: the purchaser and the seller. The purchaser is usually a company that uses the procured goods or services to make their own final product. That’s why it is important for the purchaser to obtain the best quality of goods or services at the most competitive rates.
At first glance, procurement looks like a simple process. However, it involves several activities including:
Types Of Procurement
Procurement can be broadly divided into two main types:
Direct procurement refers to purchasing the input (such as raw material) that a company needs to produce its end product. The input cost and efficiency of direct procurement impact the profitability and performance of the business. When there’s an obstacle in the direct procurement process, it influences the capability of the corporation to manufacture its product.
Indirect procurement refers to procuring the service or input that’s not directly used in producing the corporation’s product but is vital for their everyday operations. It can include office provisions or upkeep services for the equipment that’s being used for manufacturing. Obstacles in the indirect procurement process impact the operations of the company.
Components of Procurement
In the age of digitisation, procurement rests on three key components that support the company’s business objectives, improve profitability, and also generate long-term sustainable value. These three components are:
The number of people involved in the procurement process depends on the scale and value of the manufacture and procurement orders. For instance, small companies usually have a few procurement personnel.
In the past, procurement was considered as a back-office task and an obstruction to the expenditure wish lists of in-house departments. However, things are changing today within many businesses.
Thanks to digitisation, procurement has entered the spotlight. Now many procurement frontrunners use a range of strategic hard skills and tactical soft skills, together with an inborn sense of curiosity. Along with project management and negotiation skills, there are other skills equally important such as active listening, conflict management, and compassion.
The procurement process should be well-designed and systematised so that it can function efficiently. A disordered procurement process can result in inefficiencies and discrepancies in the entire process, causing delays and difficulties with the purchases as well as the payments, effecting the final product.
Every company implements a process that is exclusive to the business, and transparency is crucial in every stage of the process. The procurement process can generally be divided into two categories: upstream and downstream.
The upstream procurement process involves everything that occurs from defining the requirements, sourcing and granting the contract. For example, issuing a request for proposals when you identify a business need and are holding eAuctions to negotiate pricing from qualified bidders.
The downstream procurement process includes everything that occurs after the contract is granted. The activities that happen in the upstream process have the most substantial influence on the downstream results, such as contract mangement.
It’s not possible to deny the impact of digital transformation on procurement. It has not only streamlined processes but has also made work more enjoyable. For example, source-to-contract technology helps you optimise the upstream procurement process so you can save hours or even days of work.
You no longer have to manage suppliers by manually updating spreadsheets or view spend analytics by creating intricate pivot tables. Instead, you can maintain all this info in a centralised, cloud-based repository.
Digitisation and automation have made information easily accessible to all stakeholders. Now you can seamlessly automate workflows, create contract templates, and ensure that all proposals maintain uniformity and compliance.
Technology has amplified visibility in the supply chain, helping your team more effectively manage risk and ensure savings throughout the entire source-to-contract process. It reduces expensive errors, eliminates redundancies, and streamlines communication.
Consequently, you experience shorter cycle times for every sourcing event.
eProcurement & Its Benefits
eProcurement is the acquisition and sale of supplies, equipment, and services via a web interface or other networked system. This technology is intended to consolidate and automate interactions between a company, and other value chain partners to increase the speed and efficiency of procurement activities.
Streamline Your Procurement With Market Dojo
Market Dojo offers a full suite of upstream eProcurement solutions that can help you fully enhance your procurement strategy. All our tools are designed by procurement specialists and developed to help teams, irrespective of budgets or experience.
Even if you aren’t an expert in digital procurement and online supplier management, our innovative procurement tools are built from the ground up to make your life easier. We’ve personalised our systems to help you meet a range of different essential procurement goals.
Our on-demand business model offers procurement teams the flexibility to use our tools as and when they require them – without any long-term contract obligations. Get in touch now to request a free demo.