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.