The procurement process is a very important part of commercial organizations. It refers to the activity of attempting to obtain goods and services that are necessary for the company’s day-to-day functioning and the manufacturing process. In this article, you will read about the exact definition and steps of the procurement process as well as the main differences between direct and indirect procurement. Furthermore, the advantages of outsourcing the procurement process will be discussed.
What does the procurement process mean?
As mentioned before, the procurement process consists of a series of steps which a company undertakes to purchase the goods and services that it demands for continuing the production process and for the functioning of daily operations.
The steps in the procurement process are the following ones:
- Recognizing and examining which goods and services the company will need for their production process and daily operations.
- Selecting and evaluating possible suppliers that will be able to deliver the previously mentioned goods and services.
- Negotiating the terms and prices of the goods and services with the selected suppliers.
- Purchasing the goods and services from the selected suppliers.
- Receiving and inspecting the delivered goods and services to make sure there are no damages.
- Paying the suppliers for the delivered goods and services.
- Keeping record of the process for book-keeping motives. This is also called invoice management.
All these steps taken together make up the entire procurement process.
Direct procurement
Direct procurement includes the purchasing of raw materials, resources and other goods and services for the central operations of a business. This means that they are directly related to the manufacturing of a company’s end products. Procurement teams within a company (logically) try to purchase large quantities at the most favourable costs and quality of the goods and services. Direct procurement is vital for a business – if there are any errors arising, or the company encounters other problems within the direct procurement process, then companies can no longer continue their core operations and make profit. This will negatively impact the company’s entire vitality.
Indirect procurement
Indirect procurement means that procurement teams attempt to buy any goods, services and resources that are necessary for the daily operations to keep on functioning. Examples are office supplies, furniture, repairing equipment and so on. These do not directly produce the end products of a company, but they do contribute to making the entire production process significantly easier and more efficient.
Benefits of outsourcing the procurement process
The procurement process is quite complex and it can therefore be more helpful to outsource the entire process to another party. There are several benefits to outsourcing. First, it will lead to increased efficiency, since outsourcing allows for outside specialists to search for the appropriate suppliers and negotiate with them to establish the most favourable terms. This allows the company itself to focus on other affairs. Furthermore, improved efficiency will lead to overall cost reduction, which will positively influence the company’s profitability. In short, an organization’s entire performance will most likely improve by outsourcing the procurement process.