In your supply chain, ordering more raw materials and components is a key step in the production process. Procurement and purchasing are often used interchangeably to describe the role of procurement. And while there are some overlapping responsibilities, there are also clear distinctions and it is important to understand the differences.
What is procurement?
Procurement is the process of purchasing a service or a good, usually on a large scale and for commercial purposes. The role of procurement includes the process of identifying a business need, undertaking market analysis to find a supplier, preparing to purchase the required goods or services, negotiating with the chosen supplier and maintaining oversight of the transaction. Bringing such a transaction to fruition can be complex, and as such procurement teams are generally highly valued within a company.
What are the steps in the procurement process?
The procurement process has several steps:
- Recognising a busienss need for goods/services
- Analyse and develop a list of suppliers
- Choose the best supplier
- Finalise the purchase, arrange delivery, and make payment
The first step is recognising a business need for certain goods or services. This can come about in different ways. The procurement team may proactively identify what the business requirements are and begin the procurement process. Alternatively, another team in the company may identify a need and put in a request to the procurement team to consider a purchase. Any requests would likely have to include a justification for the expenditure.
Once the business identifies a need for certain goods or services, the procurement team will undertake market analysis to develop a list of suppliers. This includes considering existing commercial relationships, alongside researching other suppliers in the market. The best supplier is then chosen, based on criteria including value and capacity to deliver.
Both parties negotiate and confirm the contract and finalise the purchase, and arrange for delivery. Each delivery will likely undergo auditing and quality control checks to ensure the goods are being delivered to the standard agreed.
After the successful delivery, payment will need to be made, and records of the transaction recorded accurately to ensure it can be easily audited and referenced as required in the future.
Whether raw materials or office supplies, the right procurement process will make sure your business gets the right goods at the right time for a reasonable price.
The role of procurement in a business
The role of procurement is as strategic as it is practical, driving deals and negotiations that support the business’ broader aim, while also being able to identify and respond to specific commercial needs.
Any successful business keeps a tight lid on its expenditure, and the procurement team is central to this. As a result, the role has evolved to become more proactive, with procurement managers constantly looking for the best ways to manage costs, create savings and build beneficial business relationships, both externally and internally. Due to its increasing strategic importance, the industry has been growing with opportunities at senior levels of business
What does a procurement manager do?
The procurement manager oversees the procurement process. This involves managing the strategic and practical steps of the procurement process. Beyond this, the procurement manager builds and develops relationships with internal and external stakeholders.
The procurement manager may also oversee a team of staff and be involved in recruitment, remuneration decisions, training, and ongoing management support. The procurement manager will also be expected to attend industry events, so as to be informed about trends in the industry and innovations that may support business aims. Attending industry events also creates opportunities to build strong commercial relationships.
In terms of day-to-day activities, the procurement manager will be expected to participate in strategic decisions around the company’s direction and commercial needs. This could well involve proactively seeing opportunities for efficiencies or a need for expenditure and raising it with the appropriate executives.
The manager will also oversee quality control and making sure auditing checks are completed, and all the paperwork is in place for the transaction. If there are any supply issues or contractual hiccups, the manager will be expected to resolve this.
Procurement is a growing industry, and there are recognised qualifications for entry. In New Zealand, the most popular qualification is through the Chartered Institute of Procurement Specialists.
What is purchasing in business?
Procurement is the overarching responsibility for ensuring a business’s needs for particular goods and services are met. Purchasing is a subset of this broader responsibility and is focused on the more practical aspects of the process such as the transaction. It is centered on the nuts and bolts of the deal, rather than the strategic aims or long-term commercial relationships.
What are the steps in the purchasing process?
The purchasing process is focused on the tail end of the broader procurement process and is far more granular. There are several steps involved in the purchasing process. Firstly, the purchasing process is triggered by a formal request for a good or service, known as a requisition order.
At this point, the purchasing team will evaluate the suppliers and quotes provided for delivery of the goods or services. The team will then place a purchase order with the chosen supplier, which will include all the details of the purchase including quantity, price and delivery requirements.
The team will then need to ensure payment is arranged for the goods, and oversee the delivery and quality control checks. It will need to ensure all the proper paperwork is completed on delivery, including acknowledgement of receipt. On full completion of the transaction, the purchasing team will need to ensure the delivery has been appropriately documented for the company’s records and for future reference.
Purchasing managers are responsible for the operational aspect of procurementm such as signing off delivery paperwork.
What does a purchasing manager do?
The role of the purchasing manager and procurement manager can often be confused. While there are some overlapping responsibilities, they also have distinct roles within the broader procurement process.
The procurement manager oversees the broader strategic role of procurement. Purchasing is a subsector of the procurement process. The role of the purchasing manager begins at the practical end of the procurement process, once the decision to purchase the goods or services has been made.
The purchasing manager then oversees the practical needs of the purchasing process, which is triggered when a requisition order, or formal request for goods or services, is raised. Once the order has been raised the purchasing manager will assess the various quotes that have been provided by suppliers. The purchasing manager will then oversee the placement of an order with the selected supplier, and ensure the transaction can take place. They are also responsible for overseeing quality control of the order once it has been delivered, and arranging payment to the supplier.
The purchasing manager’s role may also include recruiting, training and ongoing management of team members. They are also likely to attend trade shows and conferences as part of the ongoing understanding of market trends and business opportunities.
Digitising the procurement process
Electronic procurement, known as e-procurement, is the process of ordering goods or services, generally for commercial needs, between two businesses electronically. It replaces the manual delivery of documents such as contracts and requests for quotes, instead running the process through online channels or applications.
The e-procurement process automates the procurement process, creating efficiencies across labour, delivery, and auditing. In doing so, it also increases the speed of transactions, lowers overall costs and increases transparency. E-procurement was introduced around 40 years ago when Electronic Data Exchange (EDI) was developed. EDI enabled certain documents to be standardised in an electronic form. Those documents, such as contracts or other transaction records, can then be sent directly between two businesses, and into the right application for processing.
E-procurement has revolutionised the procurement industry by improving systems, increasing speed and lowering cost.
How does e-procurement work?
E-procurement replicates the process of manual procurement through electronic channels and applications. Like procurement, it is overseen by a specialised team who ensure the process runs smoothly. An e-procurement transaction begins with the recognition of a business need for goods and services and the creation of a purchase requisition. The procurement team then sources the best supplier for that need. As is the case with procurement, there may already be a list of preferred suppliers. E-procurement applications offer benefits in that suppliers’ past performances will have been tracked electronically, and therefore the relationship can be assessed through existing data.
Beyond considering previous relationships, the team will likely undertake market analysis to assess if other suppliers may be a better fit for that particular transaction.
As part of this process, they will likely put out a document known as a ‘request for quote’ (RFQ) to assess the value of dealing with each supplier.
Once a supplier has been selected, the procurement team will send the required documentation electronically, likely through applications specifically designed to process such transactions.
Like manual procurement, the supplier then prepares the delivery of the requested goods or services. However, through this stage e-procurement offers the benefits of electronic tracking of the required goods or services, enabling early alerts to any issues with supply and a transparent audit trail.
Once the goods have been delivered, the procurement team undertakes quality control checks and oversees payment to the supplier. E-procurement again offers benefits over manual procurement, with pertinent documentation lodged online.
The electronic tracking of transaction documents vastly increases the efficiency and transparency of the procurement process. It also offers guidance for future transactions, as the procurement team is able to consider past performance of suppliers against the data collected
E-procurement began in the 1990s, with the introduction of the electronic data exchange (EDI). This system enabled the usage of electronic documents to replicate the manual transaction process. This was around the same time of business adoption of email, which also worked to support the online-based process of procurement.
From these beginnings, e-procurement evolved at speed as businesses recognised the many benefits associated with moving from a manual system to an electronic one.
Now, there are numerous e-procurement tools available to businesses wishing to invest in making the procurement process faster and more efficient.
These include basics such as using web-based tools to ensure efficiency, to more sophisticated applications designed specifically to support the procurement process. The various steps of procurement are supported by this process and include, for example, e-tendering, e-auctioning and e-ordering.
Common tools used to process these steps are internal portals, web-based enterprise resource planning (ERP) and Extensible Markup Language (XML).
However as the industry becomes more sophisticated, more apps are coming to market to support what is an increasingly important industry.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.