What is Procurement?

Procurement topics in a nutshell – Part 1

The procurement ensures within enterprises the constant supply with goods from external sources. Negotiated prices and conditions as well as the need-based purchase of products and services play a central role here.

04. May 2021 | Blog

Procurement simply explained – a definition

The procurement within enterprises describes all processes and activities, which ensure the constant supply of the demand carriers with goods at negotiated prices and conditions. To these goods, which are not manufactured and must therefore be procured or purchased, belong for example:

    • Materials for production and resale
    • Services
    • Operating and work equipment

In practice, purchasing and procurement are often used synonymously and in connection with materials management.

Procurement objectives

The focus of procurement is quite clearly on the long-term assurance of company-wide supply at the best possible conditions.

In order to achieve this superordinate goal constantly, different measures are necessary within procurement organizations. In addition to constant cost optimization and reduction, these include quality assurance, ensuring a flexible supply chain, and security of supply.

In addition, the following of market trends – such as sustainability or artificial intelligence – must also be incorporated into the objectives of procurement.

Only by means of the implementation of these goals can the competitiveness of companies be ensured.

Tasks of procurement organizations

Within the purchase can be differentiated between the strategic and the operational procurement. Partly additionally still the tactical purchase is delimited.

Strategic procurement (vision to strategy)

This sub-process of the purchase deals with the derivative of the lasting procurement strategy on basis of the total enterprise goal. Within the three organization fields of the supplier, material and innovation management strategies are derived, which are to contribute in the long term to the fulfillment of the procurement and thus the enterprise goal.

Tasks of the strategic procurement:

    • Determination of the procurement policy (central or decentralized procurement)
    • Procurement market research and/or market analysis
    • Supplier management (analysis, evaluation and selection)
    • Contract negotiations, for example, design of framework agreements
    • Planning and implementation of strategic decisions regarding innovations and digitalization (e.g. introduction of supplier relationship management (SRM) systems, e-procurement, etc.)

The primary objective of the strategic procurement process is to sustainably increase the effectiveness of purchasing through strategic guidelines and long-term goals.

Tactical purchasing (source-to-contract)

The tactical purchasing process comprises the sub-process steps of determining requirements, conducting tenders and procurement auctions, and concluding contracts. In the process, measures are implemented that are intended to help realize the long-term procurement strategies in the medium term.  The primary goal of the tactical purchase process is the increase of the effectiveness of the purchase by the conversion of measures, which contribute medium-term to the fulfillment of the procurement goals.

Operative procurement (Procure to Pay)

This purchasing process starts in the acute case of need and includes the sub-processes of the purchase requisition of the requirement requester up to the invoice payment to the supplier. Differently than with the strategic and tactical process some partial process steps can be accomplished by the demand requester, who can cover its need on basis of the assortments and agreements defined in the tactical process.

Tasks of the operational procurement:

    • Requirement determination and order quantity planning
    • Supplier selection
    • Ordering
    • Order monitoring
    • Completion of the purchase order process including invoice payment (in cooperation with the finance department) to the supplier
    • Procurement logistics: possible cooperation with logistics

The primary objective of the operational purchasing process is the efficient handling of repetitive procurement processes to save process costs.

Making procurement efficient using e-procurement

Electronic procurement or e-procurement enables the purchase of products and services through the use of digital systems and networks. In simplified terms, it therefore forms the B2B equivalent of B2C online trading. It involves business relationships between companies that can be managed digitally and automatically using sophisticated e-procurement systems.

Electronic purchasing replaces telephone-, fax- or paper-based procurement and significantly simplifies and activities in this area. The majority of all procurement processes can be made much more efficient through e-procurement, which leads to significant cost reductions for companies. The integration of ERP systems into electronic procurement is also possible and necessary for effective purchasing processes. With e-procurement, all areas of procurement, such as source-to-contract, supplier management and procure-to-pay, can be mapped digitized and automated.

The main advantages of e-procurement summarized:

  • achieve cost reductions
  • Optimize processes
  • Avoiding maverick buying (unstructured buying within companies where purchasing is not involved)
  • Compliance-compliant procurement
  • Creating transparency
  • Integration of targeted procurement analyses

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