What is Procurement? The Guide for Future and New Procurement Professionals

Procurement

Nov 7

What is Procurement?

The definition of Procurement is "the process or act of procuring".

You probably expected us to define it as "to buy or purchase a service or an object". But hey, the Dictionary doesn't lie. But we know words have more significant meanings than their literal definition.

Procurement is skilful and artful at times, and it's more than simply buying goods and services if you're doing a decent job of it. And that's the aim we should all have as Procurement Professionals.

The modern procurement pro doesn't focus much on actual buying. Procurement Roles have grown to focus on Supply Chain Management, Supplier Management, Contract Management and Supplier Relationship Management. Not to mention the impact of Procurement Tech on Sourcing in Procurement which is genuinely innovating the space.

Procurement is usually discussed in a business context because businesses must buy or procure goods and services to ensure they can operate. However, Procurement has a brand image issue that has been built up of:

A relentless focus on choosing the lowest-cost Supplier
The poor user experience of the Procurement Process
Over-reliance on using manual ways of working
Talking jargon to people in the Business who get the impression Procurement is a complicated process to follow
An unwillingness to let the Business own relationships with their suppliers

You'll also notice that Procurement is often discussed as part of the Supply Chain. Procurement is vital in Supply Chain Management, slotting into the overall Supply Chain Management Process.

Literal Definition of Procurement

Let's explore "Procure: next, which is the verb of Procurement.

To Procure is the act of Procurement.

To Procure means:

To get possession of something;
To obtain something with particular care and effort;
To bring about or achieve something with care and effort.

From the above three bullets, you can see that Procurement is much more than a simple act of Purchasing. Purchasing is often looked at as a low-skilled, transactional task. Purchasers will often use a credit card or issue a primary PO out and not worry about everything else that falls within the Procurement Cycle.

How to do Procurement? A brief look at the Procurement Process

Let's make Procurement practical now.

Procurement is the process of involving highly skilled individuals who engage suppliers who have expertise in fulfilling the requirements.

Procurement Pros are some of the most skilled professionals in Business…seriously! Procurement professionals must understand how their business operates to ensure they align with it for maximum value creation. But they also need to know how a Supply Chain works, how its Supply Base operates, and how to deploy effective Contract Management.

A requirement is the Business need that a Procurement Team has created. The Procurement Team uses information provided to it by the internal stakeholders. Or in non-jargon, the internal team is made up of:

your mate who works in finance,
your colleague in the product team
or the owner of your Business who wants to revamp the office to fit the culture better.

Procurement Teams take all of this information and create a requirement document. A Procurement Requirement Document, which contains the procurement specification, is a critical piece of work that Procurement oversee. The Procurement Requirement Document is easily digestible by various suppliers who will offer to undertake the requirement. At least, it should be if the Procurement Professional has done a decent job of drafting it.

Hopefully, they are using some fantastic Procurement Software to manage this sourcing stage. Some solutions can use Artificial Intelligence to source on your behalf. With this technology, the Procurement Team may not even need to be involved in the Procurement Requirement Document phase.

Why? Because Sourcing Tech in Procurement enables true self-service Procurement.

Many Procurement Teams get stuck in the trap of creating jargon-filled requirements that cause confusion and complexity within the bidding supplier teams. The best Procurement Pros do the opposite of this because that approach sucks!

Don't fall foul of this.

The Procurement Requirement Document forms an essential part of the RFX Process within the Sourcing phase of the Procurement Lifecycle.

Procurement will then review, evaluate and select the best Supplier to fulfil the Business Requirements.

It sounds simple, but it is simple when done well and has crazy impactful results for the Business.

The Types of Procurement Activity

Procurement Professionals have various types of Procurement to get stuck into. That's why so many of us love this profession.

I usually characterise the Procurement activity as being either Indirect or Direct. Then within each of these, we have Goods and Services.

Direct Procurement refers to the Procurement Professional obtaining anything required to produce an end product. If you're a software company and integrate software applications, then procuring those software applications is direct Procurement. Also, if you make a drink like Logan Paul and KSI's Prime, then it would be the coconut water that makes up the bulk of the drink.
Indirect Procurement refers to the Procurement Professional who procures anything essential for the Organisation's day-to-day operations. Whatever is procured here doesn't directly contribute to the company's bottom line. This could be facilities management services, stationary, plumbing, or HR software.
Goods procurement essentially refers to the Procurement of physical items. Most Fast Moving Consumer Goods companies will procure many Goods for their products. Goods Procurement could include furniture, IT equipment, and machinery.
Services procurement essentially refers to the Procurement of
People-based services. Services Procurement is commonly regarded as consultancy services, contingent labour, or trades such as plumbing.

What does a Procurement Team do?

So we've established that Procurement and that to Procure is more than simply buying.

Procurement isn't transactional. Although some Procurement Professionals will undertake more basic Procurement activities with transactional transaction requirements. These Procurement activities do not merit time and effort due to low complexity or cost.

Here are the typical activities that a Procurement Team and Procurement Professionals undertake:

Identification of the Requirement

The Procurement team is responsible for extracting the key elements of the Business requirement and working with subject-matter experts to formulate a requirement that a supplier can deliver against.

This is an internal process, and it depends on the type of Procurement, such as Indirect versus Direct Procurement and whether the Procurement Team operates a Category Management Approach).

Marketplace Analysis

A Procurement Professional now needs to ensure that their Organisation understands the marketplace. Understanding the marketplace ensures that the wider Supply Chain can meet the requirement.

This may involve conversations with suppliers, the use of data captured by the Organisation and the utilisation of information from external sources/providers.

Cost and Budgets

The Procurement Team needs to understand its Organisation's budget to procure a Supplier's services to fulfil the requirement.

Additionally, depending on the type of Procurement, a make-or-buy analysis might take part.

To keep this general, this would involve a decision-making process as to whether the Organisation should go out to the market for this requirement or use its own internal resources to fulfil the requirements.

Utilising the data captured from the Marketplace Analysis, the Procurement Team will ascertain the budget for this Procurement activity. The budget creation will involve the team requesting the goods or services, the Finance Team, and Procurement.

Identify Suppliers

The Procurement Team needs to find suppliers who can undertake the requirement. Procurement should have insights into many Suppliers from the Marketplace Analysis work it undertook. However, this is the time to focus on more detailed research. To speed this up, you may utilise Procurement Tech providers specialising in Market Insights and Intelligence. These Procurement Tech providers can usually do the same amount of work it could take a well-resourced procurement team to find new suppliers, say over three months, in minutes. Now that's a massive ROI on Procurement Tech over the manual ways of working.

This will be essential in determining whether this Procurement could be considered a Competitive Procurement, with multiple suppliers invited to bid for the work.

The Procurement Professional needs to look at the existing Approved Suppliers within the Business to see if their requirements can be met by them.

You may also need to look for new suppliers in the marketplace, which will involve building an initial relationship with them.

You may have preliminary conversations with suppliers under a Non-Disclosure Agreement at this stage.

Request for Information, Quotation and Proposal

The Procurement Team must build a:

Request for Information (RFI);
Request for Quotation (RFQ);
Request for Proposal (RFP).

This will include:

all the details of the requirement;
what the Procurement Team is looking to achieve;
questions on the financial stability of the supplier (initial due diligence);
how the Procurement Team will evaluate the Supplier Proposals (RFQ and RFP);
the timelines for the Procurement Process.

It's vital to ensure that you complete this sourcing exercise and get as much value for your budget as possible.

Negotiating with the Supplier

The Procurement Team has selected its preferred Supplier and now enters the Contract Negotiation stage.

You never know; this might be a straightforward contract award without negotiation.

However, some form of negotiation is likely to be instigated by the Supplier, buyer, or both. This stage is finalised once both parties agree to sign the Contract.

Contract Signature in the Procurement Process

Once the Contract has been agreed to by both parties, the Procurement Team can start the signature process. The best way to do this is to utilise a digital contracting solution to get an "eSignature" on the Contract.

Contract Management

Depending on the set-up of the Procurement Team, the team will either manage the Contract through to completion or pass the Contract over to a specialist Contract Management Team for them to manage the delivery of the goods and/or services.

This stage is complex and has many processes to govern:

Supplier Performance Management
Supplier Relationship Management
Supplier Risk Management
Data Management
Learning from Experience.

Deliverables are achieved

For services-based Procurement, the Contract, usually a Statement of Work, will contain specific deliverables that need to be met. A deliverable is a particular commitment the Supplier has made to the Procurement Team.

For goods-based Procurement, you will need to ensure that the goods are examined once they have been delivered. Most goods contracts will state that you have several days to carefully review the goods received.

For both types, whatever is delivered, you must ensure that the deliverables correlate to what was agreed upon in the Contract.

3-Way Matching

First, the Supplier will send you an invoice, and you will need to review this invoice.

The 3-way matching process is used by companies to confirm that the goods and services they have received are the same as those they have paid for. Ideally, this will be automated as much as possible. However, it usually requires the input of an Accounts Payable Professional. Some early indicators indicate that 3-way Matching could be improved via Blockchain Technology.

Invoicing

Once the Business has confirmed that 3-way Matching has been completed, the Supplier's invoice is accepted. You must ensure that the Supplier is paid according to the Contract Payment Terms.