Monday, December 13, 2010

What is Procurement?

Procurement is the process by which a company’s needs for products, software or services are contracted for and delivered:
1.     When needed;
2.     At the price and terms for those purchases that represent the best life cycle cost;
3.     With sharing of indirect costs and risks that are appropriate for the circumstances and leverage available to the negotiator at the time of negotiation.

Procurement is different from the practice of haggling over a price.  Hagglers negotiate many times only negotiate price. They don’t need to make the purchase and can wait to see if time and circumstances will change the Supplier’s need or desire to make the sale.  The vast majority of Procurement purchases are based upon the Buyer needing to make the purchase because internal demand is immediate or there is a problem the Buyer’s company needs to solve where delays will cost the company money.  
Each company organizes their Procurement function differently, but most companies will have:
·      Direct procurement for all materials where there is value added or transformation to be performed to make the product or perform the service.
·      Indirect procurement or MRO (Maintenance, repair, and operating supplies) supported all items that were required to support the non-production operations of the company
·      Services and General procurement who would manage services and goods to be used in operating the company
·      Repair Services procurement would normally purchase spare parts, repairs, maintenance of any Buyer sold equipment, training and subcontracted services required by the services operation.
·      Software procurement would manage the licensing of software for both internal, and
·      Specialized procurement operations such as those that focus on Capital Equipment (for companies that are highly process oriented) or Facilities where companies have a large number of facilities to support and maintain or expand operations

With the amount of outsourcing that has occurred over the last 25 years, the dynamics of what is being purchased has changed Procurement dramatically. More companies are relying on Suppliers to meet needs that the company once may have managed internally. With that increase in outsourcing, the nature of procurement documents has changed from making simple purchases that the company used to perform the work themselves (many times by Purchase Orders) to contracting with a Supplier to perform the entire operation (which frequently requires contracts.  Outsourcing has significantly and forever changed what’s referred to as “Procurement”.

No comments:

Post a Comment