Types of Procurement in Supply Chain Management
What is Procurement?
Procurement refers to all the aspects that constitute an organization’s purchasing process. The process involves buying physical products but to make it successful, one has to focus on strategic planning, and supply chain management and ensure that the objectives are achieved. The procurement process requires monitoring at every level, hence procurement teams are specifically created for this purpose.
Types of Procurement
1) Direct Procurement
This is one of the most important types of procurement in supply chain management that affects the direct material used for manufacturing the product. It involves sourcing the raw material that helps to create the finished product. For instance, an airplane manufacturer will have to procure different types of raw materials such as electronics and steel to start the production process. Your core business processes are wholly dependent on direct procurement.
Material procurement plays an important role in the success of your business. Procurement of high-quality materials will give your business a competitive edge. On the other hand, failure to procure the right material can have disastrous consequences on your business operations.
Also, referred to as direct sourcing, it plays a crucial role in the management of raw materials. The various departments that are involved in the direct procurement process include logistics, procurement, accounts payable, etc. Some of the instances of direct procurement are bakeries procuring the flour for bread preparation. Real estate developers buying cement for constructing buildings is another example. You need to connect and establish business partnerships with appropriate suppliers to ensure there are no obstacles in the indirect procurement process.
2) Indirect Procurement
It consists of purchasing goods and services that help in running your business efficiently. Although raw material is necessary for product development, you have to depend on a specific set of essential things for the smooth functioning of your business operations.
Office supplies and stationery are the best examples of indirect procurement without which it is not possible to conduct day-to-day transactions in your office. Can you think of starting an IT corporate office without having personal computers? Other examples include acquiring infrastructure and hiring manpower.
The indirect procurement process was severely compromised during the COVID-19, with offices taking the ‘work-from-home’ route. As a result, the employees had to rely on new infrastructure like Internet connectivity so that their businesses could operate effectively. This type of procurement does not have a direct impact on finished products, yet it plays a crucial role in delivering the desired business output.
3) Goods Procurement
Goods procurement process management refers to buying of physical as well as software products. In this type, the software is usually sold on a monthly subscription basis. Good procurement comes under both direct and indirect procurement.
4) Services Procurement
As the name suggests, it involves hiring professionals who will serve your business needs. The people are usually hired on a contract basis and are often considered as temporary staffers. Leasing software is another example of services procurement in which the software owner allows the user to incorporate the software into their business.
The Constituents of Procurement
1) Employees
Is it possible to manage the procurement cycle without the staff? Absolutely not! The employees of any organization are an integral part of the process and track it effectively from the start to finish.
2) Processes
Procurement is a complicated process but it is necessary to streamline operations which will help to make your business run smoothly. Bringing efficiency into the purchasing activity is the ultimate goal of every organization. This can become a reality only if appropriate software such as the PunchOut catalog is used to automate the process.
3) Documents
Documents are records that will enable you to monitor and analyze every step of your purchasing procurement process. All the records can be easily accessed as they are centrally located. By analyzing these documents, one can identify whether the purchasing goals have been accomplished.
Different Aspects of the Procurement Cycle
1) Understanding the Procurement Needs — The procurement team cannot purchase products unless they are fully aware of their organization’s needs. Before finalizing any products, the team has to ensure that the decision aligns with the organization’s business goals.
2) Build an Effective Procurement Strategy — What procurement strategy will you adopt to ensure process improvement, cost efficiency and provide customer satisfaction? To manage procurement activities, you need to have a comprehensive plan in place.
3) Find and Evaluate Prospective Suppliers — For efficient procurement, it is necessary to identify the right suppliers and maintain healthy relationships with them.
Conclusion
The success of your procurement process depends on how efficient your supply chain is. Most companies use procurement software to automate and streamline their purchasing activity, however, hiring professionals is equally important to supervise the operations. These software tools allow companies to evaluate and approve purchase requests coming from various departments. Creating purchase orders and making payments in a timely manner is also an integral part of procurement.
