Written by Marijn Overvest | Reviewed by Sjoerd Goedhart | Fact Checked by Ruud Emonds | Our editorial policy
Procurement Definition — Everything You Should Know
Key takeaways
- Procurement is about getting goods and services. It plays a pivotal role in organizational operations and profitability.
- The difference between procurement from sourcing and purchasing is that the first involves the acquisition process and the latter includes supplier selection.
- Sustainable procurement prioritizes environmental, social, and governance factors in material acquisition for responsible business practices.
We know that you have come here in hopes of finding the official definition of procurement. Do not worry because we are here for you to tell the official procurement definition.
For this article, we will discuss the common procurement definition from each organization. Also, we will explore the world of procurement thoroughly.
After you finish reading this article, you will be guided by the definition of procurement in your field. Additionally, you will have an in-depth knowledge of procurement that you can apply in your business or profession. So without further ado, let’s now define what procurement is.
I have created a free-to-download editable procurement process: 7 steps template. It’s a PowerPoint file, together with an Excel file, that can help you with your procurement process. I even created a video where I’ll explain how you can use this template.
Procurement Definition
According to the Oxford learner’s dictionary, procurement is the possession of obtaining suppliers, especially the government and private organizations.
As we know it, procurement is the overall process of acquisition of needed goods or services for it to operate. To simplify, it is what makes the organization move.
For some, procurement is the act of obtaining goods or services, commonly for business purposes. Basically, many people associate it with business matters as it is crucial for its profitability.
Nonetheless, we can get the very essence of procurement with these definitions which is the acquisition of goods or services.
The procurement definition of an organization is linked with how they do its procurement processes.
How Does Procurement Work?
Procurement and its process require a substantial portion of the organization’s resources to manage.
Procurement usually has a specific budget they can spend to procure the goods or services. This allows the organization to cut unnecessary costs.
Usually, the procurement process is dictated by the organization’s standards typically centralized by controls of the accounting department.
Why Does Procurement Matter?
Many decisions by different departments have procurement implications that may impact the overall costs and profitability of a company. Procurement at its core is the act of obtaining goods or services for your business needs. Thus, it ensures that the company is getting what it needs to do its daily operation.
With procurement, businesses can acquire goods and services at the best possible price which leads to cost savings. Procurement professionals can secure favorable terms with their suppliers to reduce the operating costs of the company.
Additionally, procurement is responsible for ensuring that the quality of all goods and services meets the necessary quality standards. It also helps the company to manage risks associated with acquiring the necessary goods and services for the company.
Moreover, procurement is crucial to the success of any business by ensuring that the company obtains high-quality materials or services at the best possible price.
The Difference Between Procurement and Sourcing
Procurement and sourcing are often used interchangeably. However, they are different from each other.
Procurement, in general, is made of different systems that work to acquire the necessary materials and services that the company needs for its daily operation. Additionally, it takes to focus on the “what” of supplies and guarantees the smooth flow of inputs and supplies.
Sourcing, on another hand, is part of the procurement process itself. In sourcing, you identify and select the best supplier that meets your company’s requirements. It focuses on who is making or providing the supplies for the supplier. Furthermore, it makes the procurement process easier.
To know more about the difference between procurement and sourcing, then check it out here.
DifferenceBetween Procurement and Purchasing
Many people use procurement and purchasing synonymously without them knowing that it is different from one another.
Many people use it interchangeably as both are associated with buying the supplies or services. That is probably the reason why no one bothers to define both terms properly.
The main difference between procurement and purchasing is that procurement is the whole process. Procurement includes the process of identifying, shortlisting, selecting, and acquiring the needed goods or services,
On the other hand, purchasing means a set of functions that are associated with buying goods or services that the organization requires. Furthermore, purchasing is just a part of the procurement process.
Below is the table that can give you a clearer view of their differences:
The Steps of the Procurement Process
Every organization has different processes in procurement. Some are oversimplified, while some are too complicated due to the abundance of procedures.
However, there are some processes in an organization that are similar to others. The following are the steps in the procurement process that are similar in each organization:
1. Market research
It is the procurement manager’s responsibility to recognize the need for supplies and develop market research for it.
The market research will allow the organization to forecast the needs of its departments’ supplies.
The market research should cover sourcing new potential suppliers. Sourcing specialists can greatly help the procurement department or manager to identify new sources of supply.
Furthermore, market research aids in finding the key information of the next steps in the procurement process.
2. Request for information
The second step is asking for information not just from suppliers but also from the departments that need the supplies.
Before you create a purchase order, you will need to know the exact number of supplies needed. Information such as the quantity and pricing per supply are some of the things you can ask when making requests.
This is why the first process is market research to give you information about the supplies that you need.
Once there is enough data a purchase request is sent to the higher management for approval. Usually, this is where the company decides how much budget will be given to the procurement manager or department.
3. Request for quotation
This is the process where the organization asks suppliers for their initial pricing for the supplies needed. This process is usually done by emails or letters
Once a reply from the supplier is received, the procurement manager should discuss the quotes given.
A detailed analysis of each pricing is considered. On the other hand, the market research that is conducted first will make them see the pricing in the market.
4. Negotiation phase
The negotiation phase is the most challenging yet fulfilling part of the procurement process.
This is where procurement managers try to acquire the goods at a reasonable price by negotiating.
In addition, it is where the talent in the negotiation of procurement managers shines. If the negotiation is successful, then they can call themselves a master negotiator.
During this phase, the information you have gathered must always be ready.
5. Contracting phase
Of course, this is where the procurement managers take care of all contracts, receipts, invoices, and documents.
The documents that were signed are needed before, during, and after the entire procurement process.
The contracting phase is important because it can be used for market research once more.
Typesof Procurement Process
Procurement processes are integral to organizational operations, with three key types playing distinct roles.
1. Direct procurement process
The direct procurement process refers to purchasing materials that are needed to create the end product of the organization.
2. Indirect procurement process
The indirect procurement process refers to the materials that are not directly part of the end product.
However, these materials are needed to manufacture the end product of the organization. This includes equipment, office supplier, and utilities.
3. Service procurement process
The service procurement process involves obtaining an outside workforce or consulting services. This includes professional services and software subscriptions.
What is Sustainable Procurement?
Many businesses are continuously embracing sustainable procurement in their operation. However, many are still wondering what it is.
Well, sustainable procurement refers to the approach of adopting environmental, social, and governmental factors while also considering the price and quality of the materials acquired by a company for its daily operations.
To simplify, sustainable procurement refers to how businesses can identify and lower their environmental and social impacts in their supply chain.
If you want to know more about sustainable procurement, then check here.
Conclusion
In conclusion, understanding the procurement definition is essential for any individual or organization involved in acquiring goods and services.
By exploring the world of procurement thoroughly, readers are equipped with knowledge that extends beyond a mere definition.
Recognizing how procurement works, its impact on costs and profitability, and distinguishing it from related terms like sourcing and purchasing contributes to informed decision-making.
Thus, a solid understanding of the procurement definition serves as the cornerstone for effective and strategic procurement management in both business and professional realms.
Frequentlyasked questions
What is the procurement definition?
A procurement definition is how procurement is interpreted in an organization.
What is the difference between procurement and purchasing?
To simplify, procurement is the whole process while purchasing is just a part of it.
What are the types of procurement process?
The types of procurement processes are direct, indirect, and service procurement processes.
About the author
My name is Marijn Overvest, I’m the founder of Procurement Tactics. I have a deep passion for procurement, and I’ve upskilled over 200 procurement teams from all over the world. When I’m not working, I love running and cycling.
