Understanding Procurement: Definition, Principles, Processes, and Components

Procurement is an important process in business that involves purchasing goods and services. It is not just about buying, but also managing how the goods or services are obtained and used.

In this article, we will discuss procurement, the basic principles to follow, the steps in the process, and the important components involved.

The goal is to help you understand how procurement plays a role in supporting the success and efficiency of a company.

What is Procurement?

According to Investopedia, procurement is the process of obtaining or purchasing goods or services, usually for business purposes.

This process includes steps such as determining needs, planning purchases, finding and selecting suppliers, and negotiating prices and terms of purchase.

In addition, procurement also involves inventory control to ensure that the goods obtained are used efficiently.

In short, procurement is not just about buying goods or services, but to ensure that the organization gets what it needs in the most efficient and effective way.

Procurement Principles

To ensure that the procurement process runs smoothly, there are several principles that need to be considered.

Here are the main principles of procurement:

Accountability

This principle means that everyone involved in the procurement process must be held accountable for their actions. This includes:

• Establishing clear rules and procedures for how procurement should be carried out.
• Providing consequences if these rules are broken.

For example, if an employee makes a mistake in selecting a supplier, they must explain the reasons and resolve the issue in accordance with applicable regulations.

Consistency

Consistency means that the procurement process must be carried out in the same way every time. This includes:

• Following established rules and procedures.
• Ensuring that the quality of the goods or services obtained remains the same.

For example, if a company buys computers from the same supplier. Then, they must ensure that the specifications and quality of the computers received are in accordance with what was previously promised.

Value for money

This principle requires that every expenditure must provide maximum benefits. This means:

• Choosing goods or services that offer the best combination of price, quality, and long-term benefits.
• Not only choosing the cheapest, but also considering the quality and effectiveness of the product.

For example, if buying a machine, it is better to choose a machine that may be more expensive but has a longer life and lower maintenance costs.

Fair dealing

Fair dealing means that all suppliers must be treated equally, without discrimination or favoritism. This includes:

• Giving all suppliers an equal opportunity to participate in tenders or offers.
• Maintaining confidentiality of information when necessary.

For example, if there are several suppliers offering prices for a contract, all must be considered fairly and none are given privileges without clear reasons.

Informed decision making

Decisions in procurement must be based on accurate and up-to-date information. This includes:

• Collecting and analyzing all relevant information before making a decision.
• Monitoring and ensuring that all obligations in the contract are met.

For example, before purchasing new equipment, an organization must assess various options, compare prices, and review product reviews to make the right decision.

Procurement Process

Procurement is a process that consists of several stages. The following are the stages in the procurement process:

1. Identification of company needs
2. Purchase authorization
3. Purchase approval
4. Opening tenders to suppliers
5. Identification and analysis of suppliers
6. Offering of goods and services
7. Negotiation process
8. Determination of suppliers
9. Purchase order
10. Quality inspection of goods and services

Each stage in this process plays an important role in ensuring that the company gets the goods or services it needs.

Of course, at the best price and from the right supplier.

Procurement Components

Procurement is a complex process that consists of several important components. There are three main components in procurement:

People

This component refers to the number of people involved in the company's procurement process. The number can vary depending on the scale of manufacturing and ordering.

Process

The process is a key component in procurement. Without a well-planned process from start to finish, procurement cannot be carried out efficiently.

Paperwork/records

This component includes all the records and documentation required in the procurement process.

The Importance of Procurement in Business

Procurement is a very important part of business. Here are some reasons why procurement plays a very important role:

1. Cost Savings

Procurement helps businesses reduce costs.

By choosing the right suppliers and negotiating good prices, companies can save money and keep cash flow stable.

2. Product Quality

To produce high-quality products, companies need to ensure that the raw materials used are the best and available on time.

Procurement plays a role in selecting and managing the procurement of these raw materials so that the production process runs smoothly and the results are satisfactory.

3. Alignment of Goals

A good procurement process ensures that the purchase of goods and services is in accordance with the company's goals and strategies.

4. Risk Mitigation

Procurement also helps companies identify and mitigate risks that may arise in the supply chain.

Including risks from suppliers, material quality, or disruptions in delivery.

By managing these risks, companies can avoid problems that could disrupt their operations.

5. Sustainability and Ethics

The procurement team must ensure that the purchase of goods and services is carried out with environmental and ethical impacts in mind.

This includes selecting suppliers who follow environmentally friendly and ethical practices, and support the company's commitment to social responsibility and governance.

Procurement is a complex and critical process in business operations.

By understanding the basic principles of procurement, you can better appreciate how strategic this process is in achieving business success.

In addition, improving procurement practices can provide long-term benefits for your company.

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