Procurement specialists are jacks of all trades.
They identify and appraise vendors, negotiate contracts, and obtain goods and services while minimizing costs and maximizing profitability for a business.
If handled correctly, procurement can dramatically improve your business. It’s a challenging job, with outdated technology, inaccurate data, and supplier issues to contend with.
The supply chain might be bouncing back, but that doesn’t mean procurement challenges will disappear. Here is everything you need to know about streamlining your procurement process and setting yourself up for sustainable success.
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What is procurement?
Procurement involves acquiring goods, services, or materials (usually for business purposes), and negotiating terms with third parties. It’s typically associated with businesses because they need to purchase goods or hire service providers on a comparatively large scale. It’s different from purchasing, which is purely transactional.
Companies can be on both sides of the procurement process as either buyers or sellers, but in this article we’re focusing mainly on the side of the buyer.
What’s the difference between procurement and purchasing?
The process of buying goods and services happens with both procurement and purchasing, which makes it easy to confuse them. But there are differences between the two.
Procurement is more strategic. It involves acquiring goods or services, but there’s a bigger focus on the value of the products and the steps followed to complete the purchase. Submitting procurement orders requires a proactive approach, so you can identify and fill future orders before they’re needed.
Purchasing is purely transactional. It involves creating and fulfilling purchase orders as well as arranging payments for purchases of goods or services. The price is more important than the value, and it’s typically a more reactive process used to solve an immediate need.
The purchasing process may include:
- Approving expenditure requests
- Issuing purchase orders
- Accepting and verifying goods and services
- Creating packing slips for purchases
- Processing payment to suppliers
What are the benefits of procurement?
Purchasing is one aspect to procurement, which refers to the whole buying process for a company. While it includes the purchasing of goods, services, or materials, it also involves strategic planning. Here are some of the benefits of procurement:
Profitability and procurement go hand in hand. A high percentage of a company’s expenses go toward supply chain management.
In year one, retail businesses spend 31% of their budgets on raw materials, inventory, and suppliers alone.
By negotiating deals and creating supplier relationships, procurement managers can help lower costs. They can also alleviate tail spend problems, which arise when you have too many suppliers and miss out on volume discounts.
💡 PRO TIP: With Shopify, it’s easy to know your cost of goods sold, gross and net revenue, and other important financial data for the fiscal year. To get started, view the Finances summary page in Shopify admin.
In addition to cost and margin, procurement specialists focus on speed. Inefficient supply chains slow down your business and cut into profits. By gaining a clear understanding of your procurement process, you can identify blockers and increase efficiency.
For example, you might need to upgrade to a modern software solution if you are currently working off paper and spreadsheets. Perhaps you are working with suppliers who aren’t truly invested in your success, rather than exploring other, more affordable alternatives.
Bringing in a procurement specialist can help you focus on details and address small issues before they become major issues.
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Find the right suppliers
As noted above, learning how to procure products and services makes it easier to find suppliers who can provide you with competitively priced products and services. Whether you are procuring raw materials or manufactured products, the process is the same.
This is particularly important when you need a key supplier, such as a fabric vendor for your most popular product line. The procurement process can help you find the right supplier at the right price.
When you’re growing a commerce business, it’s crucial to have the right products, in the right places, at the right time. That way you never miss a sale
Choosing a supplier is table stakes when it comes to getting products that meet your customers’ expectations and staying profitable in the long term. A good supplier relationship can often be the difference-maker in staying competitive.
What are the 3 types of procurement?
There are three types of procurement: direct procurement, indirect procurement, and services procurement. Let’s take a closer look at each of them to learn more:
- Direct procurement.Purchasing raw materials, machinery, and wholesale items directly related to a company’s end product is known as direct procurement. Contract suppliers and procurement officers play the most prominent roles in the process.
- Indirect procurement.The purchase of goods that do not directly affect the end product or the bottom line of a company is known as indirect procurement. These purchases, such as office supplies, are important to keeping the business running smoothly. The office manager of a small firm might be assigned indirect procurement activities, while for a large corporation, a facilities management firm may be hired to oversee those purchases.
- Services procurement.In services procurement, a company identifies, analyzes, and procures different types of services it needs. As a business, you might require a variety of services in order to be able to operate effectively, including law firms, contractors, on-site security, and other people-based services.
Optimize your procurement process
It’s clear that procurement is something you cannot ignore. Do everything you can to set up a system that lowers costs and builds sustainable supplier relationships.
Remember that it’s an ongoing process. Sometimes a supplier will shut down or not work in your favor anymore. That’s OK. With a procurement strategy in place, you’ll be able to continue working with suppliers that best meet the needs of your company.
Additional research and content from Alexis Damen.
What is procurement FAQ
What is procurement in simple terms?
What are the 4 main roles of procurement?
- Source and select suppliers. This involves researching and evaluating potential suppliers to ensure that the most suitable and cost-effective ones are chosen.
- Negotiate and manage contracts. This means negotiating terms and conditions with suppliers to guarantee quality, price and delivery of goods or services.
- Monitor performance. Procurement professionals must continually monitor supplier performance to ensure contracts are being fulfilled and that any issues are dealt with promptly.
- Manage supplier relationships. This involves building strong relationships with suppliers and working with them to ensure that all needs are met.