Procurement is the process of locating and agreeing to terms and purchasing goods, services, or other works from an external source, often with the use of a tendering or competitive bidding process.[1] The term may also refer to a contractual obligation to "procure", i.e. to "ensure" that something is done. When a government agency buys goods or services through this practice, it is referred to as government procurement or public procurement.[2]
Procurement as an organizational process is intended to ensure that the buyer receives goods, services, or works at the best possible price when aspects such as quality, quantity, time, and location are compared.[3] Corporations and public bodies often define processes intended to promote fair and open competition for their business while minimizing risks such as exposure to fraud and collusion.
Almost all purchasing decisions include factors such as delivery and handling, marginal benefit, and fluctuations in the prices of goods. Organisations which have adopted a corporate social responsibility perspective are also likely to require their purchasing activity to take wider societal and ethical considerations into account.[4] On the other hand, the introduction of external regulations concerning accounting practices can affect ongoing buyer-supplier relations in unforeseen manners.[5]
The Institute for Supply Management (ISM) defines procurement as an organizational function that includes specification development, value analysis, supplier market research, negotiation, buying activities, contract administration, inventory control, traffic, receiving and stores. Federal US legislation defines procurement as including A company's procurement function, specifically its spending on suppliers, typically accounts for more than half of the company's total budget.[6]
Purchasing is a subset of procurement that specifically deals with the ordering and payment of goods and services. Organizational procurement is also referred to as "organizational buying" or "institutional buying", for example in studies of the buying behaviour of staff involved in purchasing decision-making.[7]
Procurement activities are also often divided into two distinct categories, direct and indirect spend. Direct spend refers to the production-related procurement that encompasses all items that are part of finished products, such as raw materials, components and parts. Direct procurement, which is the focus in supply chain management, directly affects the production process of manufacturing firms. In contrast, indirect procurement concerns non-production-related acquisition: a wide variety of goods and services, from standardized items like office supplies and safety equipment to complex and costly products and services like heavy equipment, consulting services, and outsourcing services.[8] [9]
| Direct procurement | Indirect procurement | |||
|---|---|---|---|---|
| Raw material and production goods | Maintenance, repair, and operating supplies, outsourcing | Capital goods and services | ||
| Quantity | Large | Low | Low | |
| Value | Industry-specific | Low | High | |
| Nature | Operational | Tactical | Strategic | |
| Process | Scheduled | Unscheduled | Capital Project | |
| Examples | Steel, Resin, Rubber | Safety Equipment, spare parts, IT | Warehouses, Vehicles, Oil Wells | |
The first record of procurement activities dates back to 3,000 BC when the Egyptians managed materials and labor for the pyramids using scribes. The scribes recorded how much material and how many workers were needed for different tasks.[10] [11]
Formalized acquisition of goods and services has its roots in military logistics. The Romans developed a system of supply depots that were located throughout their empire. These depots were stocked with food, weapons, and other supplies that could be quickly distributed to troops in the field. This system helped to ensure that the Roman army was always well-supplied, even when it was fighting far from home. [12]
The first record of what would be recognized now as the purchasing department of an industrial operation relates to the railway companies of the 19th century:
Procurement is one component of the broader concept of sourcing and acquisition. Typically procurement is viewed as more tactical in nature (the process of physically buying a product or service) and sourcing and acquisition are viewed as more strategic and encompassing. Multiple sourcing business models and acquisition models exist.
The Institute for Supply Management (ISM) defines strategic sourcing as the process of identifying sources that could provide needed products or services for the acquiring organization. The term procurement is used to reflect the entire purchasing process or cycle, and not just the tactical components.
Procurement software (often labeled as e-procurement software) manages purchasing processes electronically or via cloud computing.
Some aspects of a procurement process may need to be initiated ahead of the majority of the project, for example where there are extensive lead times. Such cases may be referred to as "advance procurement".[13] [14]
Many writers also refer to procurement as a cyclical process, which commences with a definition of business needs and develops a specification, identifies suppliers and adopted appropriate methods for consulting with them, inviting and evaluating proposals, secures on contract and takes delivery of a new asset or accepts performance of a service, manages the ownership of the asset or the delivery of the service and reaches an end-of-life point where the asset becomes due for replacement or the service contract terminates. At this point the cycle would recommence.[15] [16]
The Chartered Institute of Procurement & Supply (CIPS) recommends involvement of procurement staff and skills from an early stage in the cycle, noting that such "early procurement involvement" can have a beneficial impact on the nature and timing of any approach to market, the specification and the sourcing strategy and supplier selection approach adopted.[17]
Procurement decisions fall along a continuum from simple buying transactions to more complex buyer-supplier collaborations. There are a number of models along the sourcing continuum: basic provider, approved provider, preferred provider, performance-based contracting, managed services model, vested business model, shared services model and equity partnerships.
See main article: E-procurement. Electronic procurement is the purchasing of goods by businesses through the internet or other networked computer connection. Electronic data interchange (EDI) was a forerunner to electronic procurement, this consisted of standardized transmission of data such as inventories and good required electronically. Schoenherr argues that EDI developed from standardized manifests for deliveries to Berlin during the Berlin Airlift which were applied by DuPont in the 1960s and argues that Material requirements planning and Enterprise resource planning were both forerunners to electronic procurement.
See also: Joint venture. Joint procurement takes place when two or more organisations share purchasing activities, and therefore has a more specifically buyer-side focus than many examples of collaborative buyer-seller relationships. Companies may decide to work together for the following reasons:[18]
Joint or collaborative procurement is a common practice within public sector procurement. There are central purchasing bodies in many countries which coordinate joint purchasing activities for public sector organisations. A report commissioned by the European Parliament's Committee on the Internal Market and Consumer Protection (IMCO) has recommended that EU Member States "should consider creating Central Purchasing Bodies (CPBs)" in order to secure "coherent and coordinated procurement".[19]
On a trans-national scale, Guyana, Barbados and Rwanda announced "a programme of mutual support for the local manufacturing of vaccines and medicines" in July 2023 for which a "pooled procurement mechanism" would be required.[20]
The Chartered Institute of Procurement & Supply (CIPS) promotes a model of "five rights", which it suggests are "a traditional formula expressing the basic objectives of procurement and the general criteria by which procurement performance is measured", namely that goods and services purchased should be of the 'right quality', in the 'right quantity', delivered to the 'right place' at the 'right time' and obtained at the 'right price'.[21] CIPS has in the past also offered an alternative listing of the five rights as "buy[ing] goods or services of the right quality, in the right quantity, from the right source, at the right time and at the right price.[22] 'Right source' is added as a sixth right in CIPS' 2018 publication, Contract Administration.[23]
Delivery on savings goals is an important part of the procurement function, but this objective is generally seen as value generation rather than cost reduction.[24] CIPS also notes that securing savings is "one measure of purchasing performance", but argues that savings should only be used as a measure of performance where they are "a reflection of the [organisation]'s ... expectations of the purchasing and supply management function". CIPS distinguishes between "savings", which can reduce budgets, and "cost avoidance", which "attempts to thwart price increases and to keep within budget".[25] Examples of savings as a beneficial outcome include:
Ardent Partners published a report in 2011 which presented a comprehensive, industry-wide view into what was happening in the world of procurement at that time by drawing on the experience, performance, and perspective of nearly 250 chief procurement officers (CPOs) and other procurement executives. The report included the main procurement performance and operational benchmarks that procurement leaders use to gauge the success of their organizations. This report found that the average procurement department manages 60.6% of total enterprise spend. This measure, commonly called "spend under management" or "managed spend", refers to the percentage of total enterprise spend (which includes all direct and indirect spend) that a procurement organization manages or influences. Alternatively, the term may refer to the percentage of addressable spend which is influenced by procurement, "addressable spend" being the expenditure which could potentially be influenced.[26] The average procurement department also achieved an annual saving of 6.7% in the last reporting cycle, sourced 52.6% of its addressable spend, and has a contract compliance rate of 62.6%.[27] A more restrictive definition of "spend under management" includes only expenditure which makes use of preferred supplier contracts and negotiated payment rates and terms.[28]
Consultants A.T. Kearney have developed a model for assessing the performance of a procurement organisation or the procurement function within a wider organisation, known as ROSMASM (Return on Supply Management Assets).[29] According to the 2016 ROSMA Performance Check Report, What Good Looks Like,
CIPS promotes organisational self-assessment using the ROSMA Performance Check, arguing that it enables a procurement department to "measure and explain procurement and supply's value in terms your CFO and CEO will understand, using a common financial standard". Findings in 2020 suggested that "top quartile procurement performers have ROSMA scores two to three times higher than those in the middle two quartiles".[30] A.T. Kearney's report suggests a close match between the self-reported performance of CPOs in the best performing departments and the view of procurement held by the CFO and the organisation more widely, and also notes that weaker performers or "inconsequentials" share a distinct profile marked by lack of "identifiable leadership accountable for procurement's performance.
Spend under management also contributes to an additional measure of procurement performance or procurement efficiency: procurement operating expense as a percentage of managed spend.[31]
See also: Fashion buyer, Construction buyer and Broker. Personnel who undertake procurement on behalf of an organization may be referred to as procurement officers, professionals or specialists, buyers or supply managers.[32] The US Federal Acquisition Regulation refers to Contracting Officers.[33] Staff in managerial positions may be referred to as Purchasing Managers or Procurement Managers. The ISM refers to "the supply profession".[34]
A Purchasing or Procurement Manager's responsibilities may include:
Category management represents a system of organising the roles of staff within a procurement team "in such a way as to focus ... on the [external] supply markets of an organisation", rather than being organised according to the organisation's internal departmental structure.[35]
Specialist procurement roles include construction buyers and travel buyers.[36] Part of the work of a corporate travel buyer is the formulation and implementation of a corporate travel policy.
In many larger organizations the procurement and supply function is led by a board-level or other senior position such as a Director of Supply Chain [37] or a Chief Procurement Officer (CPO). In other cases, procurement is overseen by the Chief Financial Officer (CFO) or Director of Finance, or the growing need for liaison between the CFO and the procurement function has been recognised. A 2006 report by the National Audit Office in the UK commented that in the further education sector, where procurement practice was not well developed and college organisations were relatively small, oversight of procurement by the Director of Finance was a typical arrangement.[38]
Independent or third party personnel who undertake procurement or negotiate purchases on behalf of an organization may be called purchasing agents or buying agents, although the term "purchasing agent" has a longer and broader history: the Institute for Supply Management in the United States was originally called the National Association of Purchasing Agents from its formation in 1915.[39] A commercial agent may both purchase and sell on behalf of a third party.[40]
US Bureau of Labor Statistics research found that there were 526,200 purchasing manager, buyer and purchasing agent positions in the United States in 2019.[41] Various writers have noted that businesses may reduce the numbers of purchasing staff during a recession along with staff in other business areas, despite a tendency to become more dependent on bought-in goods and services as operations contract. For example, US business executive Steve Collins observed that in one major company the purchasing staffbase "was downsized some 30% during the [2010] recession, 'but the expectations for the remaining employees remained unchanged ... The additional workload placed on the remaining employees following the downsizing created a much more challenging environment.[42] In 2021 the Australasian Procurement and Construction Council (APCC) put forward an appeal asking everyone working in the procurement profession in Australia to include the term in their occupational title when completing their August 2021 census return.[43]
The European Commission issued a recommendation in October 2017 directed towards the "professionalisation of public procurement" so that Member States could "attract, develop and retain" staff in public purchasing roles, focus on performance and "make the most out of the available tools and techniques".[44] Research undertaken in 2020 highlighted the importance of social or "soft" skills within the skill sets of professional procurement staff.[45]
Some writers have observed that there is limited opportunity for women to enter procurement because of stereotypes viewing some roles as not appropriate for women.[46]
Management consultants Oliver Wyman reported in 2019 that, based on a survey of over 300 CPOs in Europe, US, and Asia working across 14 industries, 38% of the staff in the procurement organizations surveyed were women: 60% of CPOs stated that there were more women in their organization than three years previously, while 6% said that the number of women had decreased. The effect of this growing involvement of women in procurement was recognised in the form of "more creativity and innovation", acknowledged by 76% of the CPO's surveyed.[47]
A contractual obligation to procure refers to an absolute obligation to ensure that the action is done or the condition is met,[48] for example a contract with a principal supplier may include a clause requiring the company to "procure" that its subsidiaries, holding companies and other associated businesses undertake the same commitments as those contractually imposed on the principal.[49]
The use of the word "procure" in a joint venture agreement between Nearfield Ltd., Lincoln Nominees Ltd., and other partners, in relation to the utilisation of a bank loan, gave rise to a dispute between the parties regarding the meaning of the word "procure", which was resolved in 2006 by the judge, Peter Smith, confirming that the "normal meaning of the word" is clear and well understood:"I do not see that procure means anything other than as Nearfield [the claimant] puts it 'see to it'".[50] In this case, the obligation to "procure the payment" of the loan amounted to a guarantee of that loan.[51]
Various commentators have made projections regarding the future of procurement.[52] Charlotte Payne, general manager of CIPS in Australia and New Zealand, suggests that "procurement's role in sustainability is going to be massive", while a CIPS general overview anticipates that "there is little chance that procurement and supply will enter a period of calm any time soon".