Procurement definition in business
If you’re wondering what does procurement mean, it’s the process by which businesses obtain product inventory, office supplies or services to help run their business and sell to customers. This process may include tasks such as setting up delivery schedules, negotiating price points and reviewing which vendor works best.
Procurement vs. purchasing
The difference between procurement and purchasing is that procurement is a process within purchasing. For example, you must first procure, or find and contract with, a supplier before you can actually make a purchase. This means your personal procurement definitions should always include the steps you take that lead to buying what you need for your business.
What is the procurement process?
The procurement process is a series of steps businesses use to identify and purchase necessities. These steps include:
Establish a need for a particular product or service
First, establish what products or services your company needs to succeed. For example, if you own a food truck business that sells pizza, you might establish your needs as the following:
- Napkins
- Plates
- Utensils
- Straws
- Pizza dough (or dough makings like flour)
- Cheddar cheese
- Tomato sauce
- Pepperoni
- Peppers
- Onions
- Basil
- Chicken breast
- Olives
- Garlic
From this list, you may determine that you need to partner with a supplier who sells or makes napkins and dining utensils. The list also displays a need to partner with local farms for your produce and local bakeries for your pizza dough.
Review source options to obtain the product or service
Depending on your needs, you might look for local, national or international vendors for your sourcing. For example, if you wanted to look for fresh produce within Florida, you could search for “food distributors in Florida” on the internet. From here, you can visit each website and then determine pricing for each provider and the produce they offer. Once you have a few different produce distributors, you can further narrow down your selection by ruling out those with high prices, negative reviews or limited produce selections.
Negotiate pricing and terms for receiving the goods
Talk with the suppliers you deemed acceptable for your business to determine a price point that works for you. Whether or not a supplier can negotiate pricing may help you narrow down your selections even more to those who offer the best deal. After establishing pricing, you can draft a contract confirming that price point and additional factors that could lead to a termination of the contract. These deal-breaking factors could include higher prices, late deliveries or unethical business practices on their part.
Create a purchase order
Depending on the supplier, you may be able to order goods or services online, over the phone or by catalog. Make sure to check the quantity of each item you want and include the rates you and your supplier agreed to. You can also use purchase orders to address unique circumstances — for instance, asking if the supplier can make the delivery between Monday and Thursday.
Receive purchase order document
After you place your order with a supplier, you might receive an automatic purchase order via email or mail in the days afterward. Be sure you review the contents of your purchase order when you get it to confirm you ordered the correct items in the correct amount. Then, file away the purchase order to compare later to the invoice you receive upon order completion. Good recordkeeping practices can also help settle discrepancies with suppliers and act as proof that you did or didn’t order something.
Receive products and decide to accept or decline them
Upon receiving an order, review the invoice provided with the shipment and check to make sure the contents of your delivery match what’s on the invoice. Then, check the quality of your order and determine if your merchandise incurred any damages during shipping. From here, you can accept or decline the order. If you decline, you must send the shipment back to the supplier, but if you accept, move on to payment.
Pay for products or services once received in full
After you receive everything you ordered from a supplier, you can pay them with the knowledge that they upheld their part of the procurement process. The method you use to pay them is based upon the terms set when you made the initial arrangement. Many suppliers let small businesses send them a paper or electronic check or transfer money. Talk with your suppliers to discuss what options work best for them.
Keep detailed records of purchase history
It’s important to keep paper or digital copies of documents like purchase orders, invoices and receipts. This is so you can refer to them when filing your company taxes. It can also be helpful in determining what to include on future orders or proving you made specific purchases if your business undergoes a tax audit.
Hiring procurement personnel
To ensure your company procures goods and services efficiently, it sometimes proves helpful to hire employees for specific roles to oversee the process. These procurement professionals span the gamut from purchasing agents and managers to buyers and directors of strategic sourcing, but successful specialists typically have the following traits:
- Good relationship management skills
- Tough negotiation abilities
- A strategic mindset
- Excellent time management
- Capacity for adaptation and growth
Developing procurement policies
Developing clear-cut procurement policies sets your business up for success. When you have a procurement meaning in mind when you educate your staff, then it’s easier to keep things streamlined and focused for the smooth operation of your day-to-day business. Utilize these steps to create a uniform procurement system that’s simple to scale across your organization:
- Identify the budget and spending needs for each department
- Establish which employees can purchase goods
- Determine how to organize procurement records
- Establish service needs for each vendor or supplier
- Come up with rules for interacting with vendors and suppliers
- Specify factors or events that necessitate switching vendors or suppliers
- Set standards for evaluating whether suppliers engage in ethical workplace practices
- Institute guidelines for evaluating green procurement opportunities and local suppliers
FAQs about procurement
What are the five types of procurement costs?
To get an accurate picture of your actual procurement costs, consider the five types of related expenses when tracking and totaling how much you spend. These standard procurement costs include:
- Base cost: Base cost refers to the amount your business pays per item. Typically the largest expense for small businesses and the hardest to control, base costs generally decrease when you have suppliers competing for your dollars.
- Transportation cost: The cost of transportation means how much it costs to get items to your business or customers. Developing relationships with carriers can help your business get better rates, though competing services makes delivery easy and economical in some areas.
- Closing cost: If you outsource inventory management when either buying or selling, you may find your company on the hook for expenses such as legal and brokerage fees and commissions.
- Negotiation cost: Negotiation cost refers to the amount of time and money you spend researching vendors and suppliers. Though much of this can be done on the internet, this process can get costly if you have staff traveling to remote locations to cement agreements.
- Regulatory cost: Regulatory costs include taxes, tariffs and duties. These are relatively simple to navigate within the U.S., but they can get complex when your business imports goods from foreign countries, so companies sometimes need to hire brokers to help with the procurement process.
What are the three types of procurement?
The three basic procurement types that most companies utilizeinclude:
- Direct procurement: Purchase of machinery and equipment, raw goods and wholesale products
- Indirect procurement: Purchase of support goods that don’t affect a company’s bottom line
- Service procurement: Contracting with freelancers, hiring temporary help or leasing software
