What is Procurement? (Supply Chain Basics)
Summary
TLDRThis video script explains procurement's role in supply chain management and logistics. It defines procurement as the act of obtaining goods and services for business purposes, detailing the process from purchase requisitions to orders. The script emphasizes procurement's strategic importance in securing materials and services that impact profitability. It also illustrates procurement's connection to demand planning and the types of procurement, including direct, indirect, goods, and services.
Takeaways
- 🛒 Procurement is the act of obtaining goods and services for business purposes, often involving the final act of purchasing but also includes the overall process leading up to it.
- 🔍 The procurement team plays a critical role in converting purchase requisitions into purchase orders, ensuring the company has the necessary materials and products for manufacturing or resale.
- 📈 Procurement is a key part of a company's strategy, as it can determine the profitability of operations by securing materials or services at competitive prices.
- 💼 Companies can be both buyers and sellers in the procurement process, affecting their resource management and budget allocation.
- 📑 Procurement requisitions are essential for the procurement team, as they signal the need to initiate purchasing based on the demand plan.
- 📊 The demand plan is crucial for procurement, as it considers inventory needs against supplier lead times to ensure timely acquisition of items.
- 🎂 An analogy to baking a cake is used to explain the connection between demand planning and procurement, emphasizing the importance of knowing the details of what, when, and where products are needed.
- 🏢 Procurement processes are dictated by company standards and are often centralized by controls from the accounts payable division of accounting.
- 💡 Procurement is important for understanding supply chains as it helps find reliable suppliers that can provide goods and services at competitive prices, saving the company time, money, and resources.
- 📋 Procurement can be categorized as direct or indirect, depending on how the company will use the items procured, and as goods or services procurement based on the nature of the items being procured.
Q & A
What is procurement?
-Procurement is the act of obtaining goods and services typically for business purposes. It generally refers to the final act of purchasing but can also include the overall procurement process leading up to the final purchase decision.
What is the role of the procurement team in a company?
-The procurement team is responsible for researching and improving suppliers as qualified bidders who can provide materials and products used in manufacturing and for resale to customers. They also convert purchase requisitions into purchase orders.
How does procurement relate to supply chain management?
-Procurement is an important step in understanding supply chains as a whole because it helps a company find reliable suppliers that can provide competitive price goods and services that match the company's needs.
What is the difference between direct and indirect procurement?
-Direct procurement refers to obtaining anything required to produce an end product, such as raw materials and components for a manufacturing company or items purchased from a wholesaler for resale. Indirect procurement involves purchases of items essential for day-to-day operations but that don't directly contribute to the company's bottom line or go into the final product, like office supplies or consulting services.
How does the demand planning team influence procurement?
-The demand planning team signals the procurement team to initiate the purchasing of what is needed by listing what is required. This is done using technology like an ERP system, which helps the procurement team know what to buy and when to buy it based on the demand plan.
What is the significance of lead time in procurement?
-Lead time is the time it takes for a supplier to deliver goods after an order is placed. It is significant because it helps procurement teams plan when to order items to ensure they arrive in time for production or use without spoiling or causing delays.
Why is it important for procurement to have a connection to the demand plan?
-Without the connection to the demand plan, procurement would not know what to buy or when to buy it. The demand plan helps procurement teams understand when items are needed in inventory against the supplier's lead time.
What are some of the key aspects involved in the procurement process?
-The procurement process includes purchase planning, standards determinations, supplier research, selection, financing, price negotiation, and even inventory control.
How does procurement help a company save resources?
-By helping the business find reliable suppliers that provide competitively priced goods and services that match the company's needs, procurement helps save time, money, and valuable resources by minimizing costs and avoiding dealing with inadequate suppliers.
What types of procurement are there besides direct and indirect?
-Procurement can also be categorized based on whether the items being procured are goods or services. Goods procurement largely refers to the procurement of physical items, while services procurement focuses on procuring people-based services.
Why is it important for procurement to identify suppliers with a proven track record?
-Identifying suppliers with a proven track record ensures that the company receives goods and services of the required quality and that the suppliers can deliver reliably, which is vital for the company's operations and reputation.
Outlines
📚 Introduction to Procurement and Supply Chain Management
This paragraph introduces the concept of procurement and its significance in supply chain management. It defines procurement as the act of obtaining goods and services for business purposes, often associated with the final act of purchasing but also includes the overall process leading up to the purchase decision. The paragraph emphasizes the procurement team's role in converting purchase requisitions into purchase orders and their responsibility for researching and improving suppliers. It also highlights the importance of procurement in a company's strategy, as it can determine the profitability of operations by securing necessary materials or services. The procurement process is described as a substantial part of a company's resources, with budgets allocated for purchasing goods or services. The connection between procurement and demand planning is also discussed, using the analogy of baking a cake for a party to illustrate the need for coordination between knowing the requirements (demand planning) and making the purchase (procurement).
🛍️ The Procurement Process and Its Importance
The second paragraph delves into the procurement process, which is dictated by company standards and involves the preparation and processing of a demand, as well as the end receipt and approval of payment. It encompasses purchase planning, specification determinations, supplier research, selection, financing, price negotiation, and inventory control. The paragraph underscores the importance of procurement in understanding supply chains, as it helps companies find reliable suppliers that can provide competitively priced goods and services that meet the company's needs. It also discusses the types of procurement, which can be categorized as direct or indirect based on how the company will use the items procured, and further as goods or services procurement. Direct procurement is for items that contribute to the end product, while indirect procurement is for items essential for day-to-day operations but not contributing to the final product. Goods procurement involves physical items and software, whereas services procurement focuses on people-based services. The paragraph concludes by emphasizing the importance of procurement in saving time, money, and resources by dealing with reliable suppliers and minimizing costs.
Mindmap
Keywords
💡Procurement
💡Supply Chain Management
💡Logistics
💡Purchase Requisition
💡Purchase Order
💡ERP System
💡Demand Planning
💡Lead Time
💡Accounts Payable
💡Direct Procurement
💡Indirect Procurement
Highlights
Procurement is defined as the act of obtaining goods and services typically for business purposes.
Procurement is responsible for researching and improving suppliers as qualified bidders.
Procurement leads up to the final purchase decision making in a company's strategy.
Companies can be on both sides of the procurement process as buyers or sellers.
Procurement budgets provide managers with a specific value they can spend to procure goods or services.
Procurement requisitions are essential for the procurement team, coming from the demand planning team.
ERP systems are used to transmit procurement requirements, linking demand planning to procurement.
Lead time is the time it takes for a supplier to deliver goods after an order is placed.
The demand plan and procurement are connected, similar to a party planner and cake baker needing to coordinate.
Procurement processes are dictated by company standards, often centralized by accounting controls.
Procurement includes preparation, processing of demand, receipt, and approval of payment.
Procurement helps find reliable suppliers that can provide competitively priced goods and services.
Minimizing cost is a crucial aspect of improving procurement processes.
Procurement can be categorized as direct or indirect, depending on how items will be used.
Direct procurement refers to obtaining items required to produce an end product.
Indirect procurement involves purchases essential for day-to-day operations but not contributing to the bottom line.
Goods procurement refers to the procurement of physical items, including software and subscriptions.
Services procurement focuses on procuring people-based services, such as contractors or security services.
Procurement's role in the supply chain helps understand the whole process and its importance.
Transcripts
in this video i will talk about what is
procurement and some important key
concepts you need to know about supply
chain management logistics and the world
of procurement
are you ready let's learn logistics
[Music]
today we will define the role of
procurement and the procurement team in
a company and describe the process of
converting purchase requisitions into
purchase orders
it is important to keep in mind that
procurement is also responsible for
researching and improving suppliers as
qualified bidders who can provide
materials and products used in
manufacturing and for resale to
customers
now as usual let's start with the
textbook definition procurement is
defined as the act of obtaining goods
and services typically for business
purposes
procurement is most commonly associated
with businesses because companies need
to secure services and purchase goods in
order to sell a product or provide a
service themselves procurement generally
refers to the final act of purchasing
but it can also include the overall
procurement process
this is particularly important for
companies because it leads up to the
final purchase decision making please
note that companies can be on both sides
of the procurement process as buyers or
as sellers
next let's see how procurement works
procurement and procurement processes
can require a substantial portion of a
company's resource to manage procurement
budgets typically provide managers with
a specific value they can spend to
procure the goods or services they need
the process of procurement is often a
key part of a company's strategy
this is because
that provides the ability to purchase
certain materials or services that can
determine if your operations will be
profitable
now the procurement team is dependent on
procurement requisitions let me say that
again the procurement team is dependent
on procurement requisitions
these procurement requisitions are fed
from the demand planning team
now quick side note if you haven't
already check out our other video on
demand planning so you know exactly what
it is and how it relates to our topic
today
the demand plan tells or signals the
procurement team to initiate the
purchasing of what is needed by listing
what is required
with the use of technology nowadays this
is done by transmitting these
requirements in an erp system that
stands for enterprise resource planning
system
now this is important to know because
without the connection to the demand
plan procurement would not know what to
buy or when to buy it
the demand plan considers when items are
needed in inventory against the
supplier's lead time lead time is the
time it takes for a supplier to deliver
goods after you place an order
an easier way to look at this is with
the example of baking a cake
say you decide to bake a cake for a
friend's birthday party you're excited
to show off your latest cake recipe
which you know will be a total hit
but there are a few things that you need
to know before you start baking your
friend sarah is organizing the party so
she is the party planner in this example
she will have to determine how many
people will attend the party how much
food will be needed and when and where
the party will take place
now once sarah has determined all of
these details she will have to inform
everyone else what the final plans will
be
this is where you the cake maker can
start making some decisions on your cake
plans
now why now and not before
well you need to know how many people
will attend so you know how many
ingredients you need to make enough cake
for everyone
you also need to know when the party
will be so you can prepare the cake in
time for the party but not too far in
advance that it spoils
you also need to know where it will be
so you can get the cake to the party's
location
this is an easier way to look at the
connection between the demand plan and
procurement sarah is the party planner
in this example she is part of the
demand planning team in the company she
tells everyone the details of what when
and where products materials and parts
are needed to be secure for our
production to take place
you are the cake baker
and you are the procurement team in this
example
also the production team because you're
making the cake
as part of the procurement your demand
planning team
aka sarah
tells you the final details of the party
so you can go ahead and buy the
ingredients for the cake based on the
number of party goers attending here you
make the choices to where to buy those
ingredients and when to have them ready
for the production of your cake
finally as a production team you're also
responsible for making the cake
and transporting it to the right place
at the right time of the party
now we have to understand that
procurement processes will be dictated
by company standards which are often
centralized by controls from the
accounts payable division of accounting
the procurement process includes the
preparation and processing of a demand
as well as the end receipt and approval
of payment
comprehensively this can also involve
purchase planning standards
specification determinations supplier
research selection financing price
negotiation and even inventory control
finally let's discuss why is procurement
important and what are the types of
procurement
now procurement is an important step in
understanding supply chains as a whole
because it helps a company find reliable
suppliers that can provide competitive
price goods and services that match the
company's needs
that's the case whether the company is
seeking raw materials for manufacturing
or an internet service providers or even
new office supplies
for example if a company needs a new
supplier to provide an ongoing service
for an indefinite period of time such as
an internet service provider the
procurement process helps the company
choose the supplier that best meets all
of the business requirements at a
reasonable price what this really does
is help the business save time
money and valuable resources by not
having to deal with any inadequate
suppliers
minimizing cost is also one of the most
important aspects of improving your
procurement processes
but it is also vital to identify
suppliers that provide the quality of
goods and services that the company
needs and have the capacity to deliver
reliably and have a proven track record
of doing so now let's look at the types
of procurement
now procuring can be categorized in
several ways and it can really be
modified to fit each company
individually
however generally procurement can be
classified as direct or indirect
that's depending on how the company will
use the items being procured
it can also be further categorized as
goods or services procurement depending
on the items that are being procured
direct procurement refers to obtaining
anything that's required to produce an
end product
for a manufacturing company this
includes raw materials and components
for a retailer it includes any items
purchased from a wholesaler to resell to
customers
indirect procurement typically involves
purchases of items that are essential
for day-to-day operations but don't
directly contribute to a company's
bottom line or go directly into the
final product
this can include anything from office
supplies and furniture to advertising
campaigns consulting services and even
equipment maintenance
goods procurement largely refers to the
procurement of physical items but it can
also include items like software
subscriptions
effective goods procurement generally
relies on good supply chain management
practices and it may include both direct
and indirect procurement now services
procurement focuses on procuring
people-based services
depending on the company this may
include hiring individual contractors
contingent labor law firms or on-site
maybe security services
it may also include both direct and
indirect procurement
well that was a lot of information and i
hope it helped you understand
procurement and its role in the supply
chain a little bit better
feel free to give us a like subscribe to
our channel for more videos like these
i'm professor rodriguez thanks for
watching and until the next time
you
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