What is Procurement, how is it different from Purchasing and Supply Chain, and how has it evolved? Let’s get started.
In literal, procurement can be defined as:
- the act of procuring
- the purchasing, leasing, renting, or selling of materials, services, equipment, or construction
In principle, the act of procuring is straightforward. Procurement’s job, on the other hand, is far from it. The primary goal of procurement is to obtain the appropriate product or service:
✅ At the right quality*
✅ In the right quantity
✅ At the right time
✅ At the best possible price
*Note that the quality is not the greatest because anything more than the consumer is willing to pay for or what is necessary for is wasteful.
Depending on the company, this list of items to procure may include (but is not limited to):
- Raw materials (materials directly required for the manufacturing of an item)
- Indirect materials (materials required for production that do not make it into the final product)
- Maintenance, Repair and Operations (MRO) items
- Office supplies
- Cleaning supplies
- Transportation and third-party logistics
- Services (such as cleaning, landscaping, marketing, quality testing)
- Subcontracting subcomponents
- Contingent labour
- Travel and related services
- Company insurance
Simply put, if a company is required to pay for it, it falls to procurement to manage it.
Why does it matter so much?
According to CIPS, procurement accounts for up to 70% of a company’s income, thus even minor cost savings may have a big influence on profitability. Procurement has a significant influence on operational efficiencies and your capacity to service consumers. However, because to limited resources and skills, many procurement departments are still struggling to acquire control over all areas of expenditure while simultaneously attempting to synergize their efforts and better leverage their funds.
Many organizations are facing the limits of fragmented systems as they develop via acquisitions, preventing the standardisation of raw materials and the move to more mature and strategic procurement procedures. As a result, the sector is being transformed by new technologies such as cloud-based software and data analytics (albeit perhaps more slowly than all the buzzwords and tech talk would have us believe).
However, when these new technologies became more widely used, the entire world appeared to shift. When the Covid epidemic struck, companies had only recently begun to realize the power of procurement to increase profitability and fuel growth, increasing procurement teams and bringing CPOs into the fold, eventually putting them at the top of the table with the rest of the CSuite.
But it wasn’t only the pandemic and its impacts across the supply chain, or even the rapid move to eCommerce, that shifted things for Procurement— it seemed that the world now cared about sustainability and ethical, varied procurement, and not just through virtual signaling.
Consumers were immediately on TikTok, discussing their companies’ wrongdoings, from how they treat their staff to how they dispose of returned items. Those who are new to the workforce have talked about asking their employers for their sustainability goals, and they are now doing so.
But what’s the big deal if all you’re doing is purchasing stuff? That is the distinction between procurement and purchase.
- Identifying logistical, technical, quality and regulatory requirements
- Sourcing and vetting suppliers
- Forecasting upcoming requirements and capacity planning
- Setting supplier and product approval processes to mitigate risks and ensure all requirements are met
- Negotiating pricing and terms, perhaps through a bidding processes
- Contract management
- Supplier management (supply chain management), including ensuring regulatory compliance, supplier evaluations and audits
- Supplier selection and procurement strategy (part of risk management and cost reductions)
- Resolving invoice discrepancies, quality and delivery issues
- Raw material inventory management (depending on the company this could fall under an inventory or supply chain manager)
- Logistics management (inbound and outbound, unless it falls u)
- And finally, purchasing/ buying, which includes issuing purchase orders, monitoring confirmations and delivery
Today, however, procurement does not stop there. As we have mentioned, the world has changed. Procurement is now responsible for ensuring ethical purchasing and is entrusted with achieving environmental goals.
The primary goal of procurement is to obtain the appropriate product or service:
✅ At the right quality
✅ In the right quantity
✅ At the right time
✅ At the best possible price (while balancing the need for all other requirements)
We must foster innovation, prioritize collaborative long-term partnerships, and utilize technology in order to build sustainable, ethical, and resilient supply chains.
Tactical risk management may include:
- Mapping your supply chain beyond tier-1
- Identifying and evaluating all areas of risk
- Sourcing, testing and approving alternative suppliers
- Sourcing, testing and approving alternatives shipping and packaging methods
- Sourcing, trialling and approving alternative logistics providers
- Building internal and external (held by suppliers or 3PLs) safety stocks
Historically, risk management was mostly intuitive, and for many people, it still is. However, there are cloud-based risk management solutions available today that allow you to monitor your supply chain in real-time and issue risk warnings.
Procurement vs Supply Chain
While we have your attention, let us attempt to clarify the ambiguity that exists between procurement and supply chain management.
CSCMP’s Definition of Supply Chain Management:
Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, supply chain management integrates supply and demand management within and across companies.
SCM synergises efforts that are otherwise often performed in silos, ensuring alignment of efforts across departments and organisations so you can realise objectives and find the market and economic value that affords you competitive advantage.
In other words, supply chain management encompasses a broader range of activities. Procurement usually does not get involved in conversion (manufacturing/assembly—unless it includes external subcontracted vendors), demand planning, or outbound logistics management (accept for perhaps selecting and managing the suppliers).
Finally, keep in mind that, while procurement and supply chain are almost as old as the soil beneath our feet (the first indications of procurement can be found in ancient history, including the Egyptians around 3,000 BC), the words are modern and have changed through time. In addition, they cover every industry on the world (even the ones who work on launching us out of it).
As a result, it’s unlikely that every business or procurement and supply chain expert agrees on the specific activities and goals that belong under procurement or supply chain, and the words are frequently used interchangeably. As a result, the ambiguities start…