What is Procurement | Procurement Methods | Procurement Process

What is Procurement?
Procurement in any company is a strategic process of acquisition or purchasing of goods, works, and services from external sources or organizations by inviting them through the different procurement methods like tenders, rate contracts, and purchase orders mainly.

The need for Procurement:

The goal of public procurement is to satisfy the public interest or to give the community value for the money spent

A good procurement process is one that –

Obtains goods works or services

In the correct quantity

Of the appropriate quality

At the required time

From the best supplier

With the optimum terms

Under appropriate contractual obligations

Good procurement should –

Meet community needs

Secure value for money for the community

Be fair to bidders

In any business sector, every organization and or community is always trying to improve value using different processes and strategies. This procurement is one of the processes that every business follows. Procurement is viewed as a strategic function working to improve the organization’s profitability.

Procurement can save money, time, and be the way to success for any business, most organizations agree with this. Its savings directly impact bottom-line profits and are one of the most beneficial models for driving a company’s profitability and increasing shareholder value.

Different Methods of Procurement:

Procurement methods are the processes of inviting suppliers or vendors to fulfill the organization’s needs in terms of auxiliary products, services, and goods at the best possible cost.

This procurement invitation process gets done by different methods:
1. Auction
2. Acquisition
3. Rate Contract
4. Purchase Order
5. Agreement
6. Tenders

Auction:

An auction is a sales event wherein potential buyers or vendors place competitive bids on goods or services either in an open or closed format. Auctions are popular because buyers and sellers believe they will get a good deal of buying or selling assets.

Acquisition:

The acquisition is the method of acquiring a company and reporting the purchase on the balance sheet of the company that acquires it. The resources of the targeted organization are added to the balance sheet.

Rate Contracts:

This is the agreement between the purchaser organization and supplier firm to provide assets at a specified price for the mentioned period as in agreement.

Rate contracts are mainly Fixed Price(FP) contracts, Time and Material(T&M) contracts, and Cost Reimbursable(CR) contracts.

Purchase Order:

In this method, the purchaser or buyer sends a legal document called Purchase Order(PO) to the vendor or supplier. This document outlines the specific goods or services that buyers want to purchase. When the vendor accepts this it becomes a Bidding Contract.

Agreement:

In this method, a legal document is signed by both purchasers and buyers that is called an agreement. This is between a buyer and a seller in which the buyer agrees to purchase goods or/and services from the seller in exchange for payment transactions.

The agreement outlines detailed price lists, conditions of delivery, date of delivery, payment method and information, legal terms, and condition.

Tenders:

A company or organization specifies its requirement of goods or services in front of the potential seller or vendor. Subsequently, it will open bidding in a process known as tendering.
Among all above the methods mostly public sector companies or organizations used the tendering method where they choose the lowest cost bidder due to the budget constraints.

Canada’s Indigenous community takes a more holistic approach to procurement. Utilizing the procurement process to positively impact their social-economic goals and objectives, the cost is not always the determining factor. Major projects within the Indigenous community are often viewed as an opportunity to provide training that will lead to future employment opportunities for its citizens. Suppliers willing to recognize the “bigger picture” often find additional opportunities their companies can benefit from.

Indigenous communities will often utilize the “Invitation to Attend” request for bid or documentation which should be interpreted as an opportunity to build a relationship with the community.

What is Procurement Cycle or Procurement Process

The procurement cycle is a series of steps to acquire goods and services after identifying needs and specify them. This cycle is followed by every industry and every organization.

From the first step to identify the needs for payment and record maintenance this cycle has different stages. These areas follow:

1. Identify Needs
2. Specification of Need
3. Selecting Procurement Method
4. Shortlist & Select Suppliers
5. Award of Contract
6. Receive Goods/Services
7. Evaluate Performance
8. Supplier Relationship Management
9. Invoice Approvals and Payment
10. Record Maintenance

Identify Needs:

The first step of the procurement cycle is to identify what services and goods should exactly need and why. The purchasing department, technical expertise, and some other company department discuss the needs and summarizes the needs, and prepare a document.

Specification of Need:

All team members and experts specify the needs of services and goods. Specify the quantity, quality, product, and service they want to acquire. After that, a legal document preparer with all specifications.

Selecting Procurement Method:

Select one of the procurement methods that are suitable for the purchaser, buyer, and business workflow. Most of the time public or government organizations choose the tendering methods because of some budget constraints.

On the other end, private companies and organizations choose methods like rate contracts, purchase orders, or maybe some time acquisition.

Shortlist & Select Suppliers:

After the process of tendering and bids are done, shortlisting and selecting the most likely vendor is becoming the most important stage. The solicitation contains all of the criteria that a prospective offeror must accommodate and honor in order to be considered for award.

Award of Contract:

After selecting the most likely vendors the next step is to award a contract. This happens when the buyer organization received and finalizes whose proposal fulfills the required criteria and requirement.

Sometimes, the offeror needs more information and details about the proposal than the offeror discusses with the vendor. In this stage, selected firms will enter negotiations with the buyer so the additional information hashed out and a final award made.

Receive Goods & Services:

This stage of the procurement process involves the logistic department to come into action. The supplier sends goods and services as mentioned in the contracts and agreement. Purchasers receive the goods and services they want.

Evaluate Performance:

The performance of the goods and services evaluated in this step. Purchaser monitor and review at agreed periods against Key Performance Indicators (KPIs) as mentioned in the contractual terms.

Supplier Relationship Management(SRM):

This is the systematic approach an organization takes in assessing supplier contribution. This clears the scenario for the supplier on how its services impact the business of the buyer.

This also introduces the scope of improvement in the supply chain process between needed and provider. This most important part of the Supply Chain Development in Supply Chain Management (SCM).

This step is also important because it is carried out to determine if business requirements have changed.

Invoice Approval & Payment:

This stage of the procurement process will involve the company’s finance department. The finance department receives bills and invoices from the supplier. After this finance team matching the invoice against an approved Purchase Order(PO). If everything is in accordance with the contract terms and purchase order, the finance department sends payment to vendors.

Record Maintenance:

This final step of the procurement cycle is most important to justify all procurement needs and how this impacted the company’s profit. The audit department keeps all purchase requisitions through the invoice.

Summary

The procurement process is the long-term strategic process for any organization. The objective of this article is to provide the information and knowledge of an effective procurement process that helps organizations to create a well-structured cycle.

After reading the complete post your last question may be “How and where to find procurement opportunities?” Then some organizations come into the picture that offers procurement services for both purchasers and sellers to make easy business development.