What is Procurement? (Supply Chain Basics)

Summary

This 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

00:00

📚 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).

05:01

🛍️ 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.

Keywords

💡Procurement

Procurement is defined as the act of obtaining goods and services typically for business purposes. It is the final act of purchasing but can also encompass the overall process leading up to the purchase decision. In the context of the video, procurement is a critical function within a company that secures the necessary materials or services for manufacturing or resale. The procurement process is highlighted as a key part of a company's strategy, impacting profitability and operations.

💡Supply Chain Management

Supply Chain Management (SCM) refers to the oversight of materials, information, and finances as they move from supplier to manufacturer to wholesaler to retailer to consumer. The video emphasizes procurement's integral role in SCM, particularly in finding reliable suppliers that can provide goods and services at competitive prices. Effective SCM ensures that a company's supply chain is efficient and responsive to changes in demand.

💡Logistics

Logistics is the detailed organization and implementation of a complex operation. In the video, logistics is mentioned in the context of defining procurement's role and the process of converting purchase requisitions into purchase orders. It is about managing the procurement process efficiently, ensuring that materials and products are available when needed for manufacturing or resale.

💡Purchase Requisition

A purchase requisition is a request for a good or service that a company needs to buy. In the video, it is mentioned that the procurement team is dependent on procurement requisitions, which are generated by the demand planning team. These requisitions signal to the procurement team what needs to be purchased and are crucial for initiating the purchasing process.

💡Purchase Order

A purchase order is a commercial document and a legally binding agreement between a buyer and a seller, specifying the terms of the transaction, including the products, quantities, and agreed prices for goods or services. The video describes the process of converting purchase requisitions into purchase orders, which is a key step in the procurement process.

💡ERP System

ERP stands for Enterprise Resource Planning, which is a system used by businesses to manage day-to-day business activities such as accounting, procurement, project management, risk management, and operations. The video mentions that procurement requisitions are transmitted through an ERP system, illustrating how technology plays a role in modern procurement processes.

💡Demand Planning

Demand planning is the process of forecasting and shaping customer demand for products and services. The video uses the analogy of a party planner to explain demand planning, where the planner (demand planning team) determines the details of what, when, and where products or materials are needed. This information is then used by the procurement team to initiate purchases.

💡Lead Time

Lead time is the time it takes for a supplier to deliver goods after an order is placed. The video uses the example of baking a cake to explain the concept of lead time, emphasizing the importance of knowing when items are needed in inventory against the supplier's lead time to ensure timely delivery.

💡Accounts Payable

Accounts payable refers to the debts a company owes to its creditors. In the video, it is mentioned that procurement processes are often dictated by company standards, which are centralized by controls from the accounts payable division of accounting. This indicates that procurement is not only about acquiring goods and services but also about managing the financial aspects of those transactions.

💡Direct Procurement

Direct procurement refers to obtaining items that are required to produce an end product. The video explains that for a manufacturing company, this includes raw materials and components, while for a retailer, it includes items purchased from a wholesaler to resell to customers. Direct procurement is a critical aspect of a company's operations, directly contributing to the final product.

💡Indirect Procurement

Indirect procurement involves purchases of items essential for day-to-day operations but that do not directly contribute to a company's bottom line or go into the final product. The video gives examples such as office supplies, furniture, advertising campaigns, and consulting services. Indirect procurement is important for maintaining business operations but is not directly tied to the production of goods or services.

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