Procurement for Beginners - What is Procurement & The Procurement Process

Summary

Procurement is the process of acquiring goods and services to help a business operate and meet its goals. It includes indirect procurement, like office supplies, and direct procurement for goods or services that contribute to the final product. The procurement process involves phases such as identifying needs, specifying requirements, engaging suppliers, negotiating contracts, and ensuring quality control. Key strategies include cost reduction, quality improvement, supply relationship management, and risk management. Effective procurement adds value by saving costs, enhancing profitability, and mitigating risks, while adapting to the fast-paced environments of sectors like fintech and software.

Takeaways

• 😀 Procurement is the process of acquiring goods and services to enable businesses to operate and meet their goals.
• 😀 Indirect procurement involves back-end goods and services, like office rental, IT equipment, and anything that supports employees.
• 😀 Direct procurement involves sourcing goods and services that go directly into the end product, such as components for machines or systems.
• 😀 Procurement can be split into traditional and agile methodologies. Traditional procurement follows a sequential, slower approach, while agile procurement is faster and more flexible.
• 😀 The procurement process typically starts with identifying the need, followed by specifying requirements, engaging suppliers, evaluating proposals, and negotiating contracts.
• 😀 Key phases in procurement include need identification, specification creation, supplier evaluation, contract negotiation, ordering, and delivery inspection.
• 😀 Agile procurement emphasizes quicker, simultaneous contract negotiations and continuous relationship management with suppliers.
• 😀 Four common procurement strategies are cost reduction, quality improvement, supply relationship management, and risk management.
• 😀 Cost reduction and cost control are crucial in procurement for saving money and maintaining profitability.
• 😀 Quality improvement in procurement is especially important in sectors like Aerospace and Manufacturing, where high-quality components are necessary.
• 😀 Supply relationship management is a strategy that treats key suppliers as partners to innovate, reduce costs, and improve profitability together.
• 😀 Risk management in procurement is focused on preventing and mitigating risks in the supply chain that could affect the business.
• 😀 Effective procurement adds significant value to a business by reducing costs, managing risks, and ensuring smooth supplier relationships, but poor procurement practices can diminish its value.

Q & A

What is procurement?

Procurement is the process of acquiring or purchasing goods and services to enable a business to operate, function, and meet its goals and objectives.

What is the difference between indirect and direct procurement?

Indirect procurement refers to goods or services that are needed to support the business but do not directly go into the final product, such as office rental, IT equipment, or facilities management. Direct procurement involves sourcing goods or services that are integral to the final product, such as components that go into manufacturing like computer chips or antennas.

Can you give an example of direct procurement?

An example of direct procurement is sourcing components for a washing machine, such as the concrete block or the computer chip that enables the machine to function.

What role does procurement play in fast-moving industries like fintech or software?

In industries like fintech and software, procurement needs to adapt to faster-moving environments, requiring more agile approaches rather than traditional sequential methods. This often involves engaging with multiple suppliers and negotiating contracts quickly to meet fast-changing business needs.

What are the traditional phases of procurement?

The traditional phases of procurement include identifying a need, defining specifications, engaging suppliers, evaluating proposals, selecting a supplier, negotiating contracts, placing orders, inspecting or reviewing the delivered goods or services, and making payments.

What is a request for information (RFI) in procurement?

A request for information (RFI) is a process where businesses reach out to suppliers to gather information about their capabilities before proceeding to formal requests for proposals (RFP) or quotations (RFQ).

Why is contract negotiation a critical phase in procurement?

Contract negotiation is crucial because it ensures the terms of the agreement are clear and favorable to both parties, particularly around pricing, delivery, and other key conditions that affect the procurement process and future relationships.

What are the key procurement strategies mentioned in the video?

The key procurement strategies mentioned include cost reduction, quality improvement, supply relationship management, and risk management. These strategies focus on optimizing cost, ensuring high quality, fostering strong supplier relationships, and mitigating risks within the supply chain.

What is supply relationship management, and why can it be difficult to implement?

Supply relationship management involves treating key suppliers as partners, working together to innovate, reduce costs, and profit from mutual success. It can be difficult to implement because it requires strong collaboration and long-term commitment from both parties, which some businesses fail to establish.

How does procurement add value to a business?

Procurement adds value by reducing costs, ensuring quality, managing risks, and fostering positive relationships with suppliers. When done right, it enhances the overall profitability and operational efficiency of the business.