Procurement generally involves making buying decisions under conditions of scarcity. If sound data is available, it is good practice to make use of economic analysis methods such as cost-benefit analysis or cost-utility analysis.
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. 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 price fluctuations. 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.
Formalized acquisition of goods and services has its roots in military logistics, where the ancient practice of foraging and looting was taken up by professional quartermasters, a term which dates from the 17th Century. The first written records of what would be recognized now as the purchasing department of an industrial operation is in the railway companies of the 19th Century.
"The intelligence and fidelity exercised in the purchase, care and use of railway supplies influences directly the cost of construction and operating and affect the reputations of officers and the profits of owners."
An early reference book from 1922 explains that
"The modern purchasing agent is a more important man [sic] by far than he was in older days when purchasing agents were likely to be rubber stamps or bargainers for an extra penny. A Purchasing agent of the modern breed is a creative thinker and planner and now regards his work as a profession."
An important distinction should be made between analyses without risk and those with risk. Where risk is involved, either in the costs or the benefits, the concept of best value should be employed.
Procurement activities are also often split 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 material, 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: obtaining "operating resources" which a company purchases to enable its operations. Indirect procurement comprises a wide variety of goods and services, from standardized items like office supplies and machine lubricants to complex and costly products and services like heavy equipment, consulting services, and outsourcing services.
|Direct procurement and indirect procurement|
|Direct procurement||Indirect procurement|
|Raw material and production goods||Maintenance, repair, and operating supplies, outsourcing||Capital goods and services|
F E A T U R E S
|Examples||Crude oil in petroleum industry||Lubricants, spare parts||Crude oil storage facilities|
Procurement vs. sourcing vs. acquisition
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.
The Institute of 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. ISM defines procurement as an organizational function that includes specifications development, value analysis, supplier market research, negotiation, buying activities, contract administration, inventory control, traffic, receiving and stores. Purchasing refers to the major function of an organization that is responsible for acquisition of required materials, services and equipment.
The United States Defense Acquisition University (DAU) defines procurement as the act of buying goods and services for the government. DAU defines acquisition as the conceptualization, initiation, design, development, test, contracting, production, deployment, Logistics Support (LS), modification, and disposal of weapons and other systems, supplies, or services (including construction) to satisfy Department of Defense needs, intended for use in or in support of military missions.
There is also an important distinction between the terms Procurement and Purchasing and the clear distinction between the two is often lost amidst the ambiguities of international english. As a broad definition, “Procurement” is the overarching function that describes the activities and processes to acquire goods and services. Importantly, and distinct from “purchasing”, it involves the activities involved in establishing fundamental requirements, sourcing activities such as market research and vendor evaluation and negotiation of contracts. It can also include the purchasing activities required to order and receive goods.
Acquisition and sourcing are therefore much wider concepts than procurement.
Multiple sourcing business models exist, and acquisition models exist.
A linear acquisition process used in industry and defense is shown in the next figure, in this case relating to acquisition in the technology field. The process is defined by a series of phases during which technology is defined and matured into viable concepts, which are subsequently developed and readied for production, after which the systems produced are supported in the field.
The process allows for a given system to enter the process at any of the development phases. For example, a system using unproven technology would enter at the beginning stages of the process and would proceed through a lengthy period of technology maturation, while a system based on mature and proven technologies might enter directly into engineering development or, conceivably, even production. The process itself includes four phases of development:
- Concept and technology development is intended to explore alternative concepts based on assessments of operational needs, technology readiness, risk, and affordability.
- The concept and technology development phase begins with concept exploration. During this stage, concept studies are undertaken to define alternative concepts and to provide information about capability and risk that would permit an objective comparison of competing concepts.
- The system development and demonstration phase could be entered directly as a result of a technological opportunity and urgent user need, as well as having come through concept and technology development.
- The last, and longest phase is the sustainable and disposal phase of the program. During this phase all necessary activities are accomplished to maintain and sustain the system in the field in the most cost-effective manner possible.
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 an 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.
Sourcing business model
Procurement officials increasingly realize that their make-buy supplier decisions fall along a continuum from simple buying transactions to more complex, strategic buyer-supplier collaborations. It is important for procurement officials to use the right sourcing business model that fits each buyer-seller situation. There are seven models along the sourcing continuum: basic provider, approved provider, preferred provider, performance-based/managed services model, vested business model, shared services model and equity partnerships.
- A basic provider model is transaction-based; it usually has a set price for individual products and services for which there are a wide range of standard market options. Typically these products or services are readily available, with little differentiation in what is offered.
- An approved provider model uses a transaction-based approach where goods and services are purchased from prequalified suppliers that meet certain performance or other selection criteria.
- The preferred provider model also uses a transaction-based economic model, but a key difference between the preferred provider and the other transaction-based models is that the buyer has chosen to move to a supplier relationship where there is an opportunity for the supplier to add incremental value to the buyer's business to meet strategic objectives.
- A performance-based (or managed services model) is generally a formal, longer-term supplier agreement that combines a relational contracting model with an output-based economic model. It seeks to drive supplier accountability for output-based service-level agreements (SLAs) and/or cost reduction targets.
- A vested sourcing business model is a hybrid relationship that combines an outcome-based economic model with a relational contracting model. Companies enter into highly collaborative arrangements designed to create and share value for buyers and suppliers above and beyond.
- A shared services model is typically an internal organization based on an arm's-length outsourcing arrangement. Using this approach, processes are often centralized into an SSO that charges business units or users for the services they use.
- An equity partnership creates a legally binding entity; it can take different legal forms, from buying a supplier (an acquisition), to creating a subsidiary, to equity-sharing joint ventures or entering into cooperative (co-op) arrangements.
Roles in procurement
Personnel who undertake procurement on behalf of an organisation may be referred to as procurement officers, professionals or specialists, buyers or supply managers. The US Federal Acquisition Regulation refers to Contracting Officers. Staff in managerial positions may be referred to as Purchasing Managers or Procurement Managers.
A Purchasing or Procurement Manager's responsibilities may include:
- approving orders
- seeking reliable vendors or suppliers to provide quality goods at reasonable prices
- negotiating prices and contracts
- reviewing technical specifications for raw materials, components, equipment or buildings
- determining and monitoring quantity and timing of deliveries (more commonly in small companies)
- forecasting upcoming demand
- supervision of other procurement staff and agents.
Independent or third party personnel who undertake procurement or negotiate purchases on behalf of an organization may be called purchasing agents or buying agents. A commercial agent may both purchase and sell on behalf of a third party.
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. 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  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'".
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 of the available tools and techniques".
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. 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. Right source is added as a sixth right in CIPS' 2018 publication, Contract Administration.
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". Examples of savings as a beneficial outcome include:
- agreeing a reduction in price, obtaining the same item for less cost
- sourcing, or developing a supply of, a lower quality item at a reduced cost, where the item is still fit for purpose
- obtaining added value for the same cost, e.g. negotiating extended warranties, additional spare parts etc.
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 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. 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%.
Spend under management also contributes to an additional measure of procurement performance or procurement efficiency: procurement operating expense as a percentage of managed spend.
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. Kamann, van der Vaart and de Vries propose a "theoretical frame of reference" to explain various approaches to understanding "why would companies work together in the first place?"
- a transaction cost economics approach, where the total transaction costs of the actors involved are lower when they work together
- a resource dependence approach, and the resource based view, where the group of actors is able to create a resource, market power, which they would be unable to exercise independently
- neo-classical economics' case, arguing that certain functions become separate, specialised units in order to obtain scale effects
- neo-institutionalism - the argument that actors work together because it is the thing to do these days.
They note also that many large and powerful companies "do not have - nor feel - the need to go together".
Relationship with Finance
Procurement and Finance have, as functions within the corporate structure, been at odds. The contentious nature of their relationship can perhaps be attributed to the history of procurement itself. Historically, Procurement has been considered Finance's underling. One reason behind this perception can be ascribed to semantics. When Procurement was in its infancy, it was referred to as a "commercial" operation. And so the procurement department was referred to as the commercial department rather than the procurement department: the word "commercial" was understood to be associated with money. And so it was obvious that Procurement would become directly answerable to Finance. Another factor, equally grounded in semantics, was that procurement departments (or rather, commercial departments) were always seen as "spending the money". This impression was enough to situate Procurement within the Finance function. It's easy to see why Procurement and Finance are functions with interests that are mutually irreconcilable. Whereas Procurement is fundamentally concerned with the spending or disbursal of money, Finance, by its very nature, performs a cost-cutting role. That is fundamentally the reason why Procurement's aspirations have been constantly checked by Finance's cost-cutting imperatives. This notion, however, has been changing as more chief procurement officers have begun to argue for more autonomy and less interference from Finance departments.
Green public procurement
In public procurement, contracting authorities and entities take environmental issues into account when tendering for goods or services. The goal is to reduce the impact of the procurement on human health and the environment.
In the European Union, the Commission has adopted its communication on public procurement for a better environment, where proposes a political target of 50% Green public procurement to be reached by the Member States by the year 2010. The European Commission has recommended GPP criteria for 21 product/service groups which may be used by any public authority in Europe.
Social and environmental considerations can be applied to contracts both above and below the threshold for application of the EU Procurement Directives. The 2014 Procurement Directives enable public authorities to take environmental considerations into account. This applies during pre-procurement, as part of the procurement process itself, and in the performance of the contract. Rules regarding exclusion and selection aim to ensure a minimum level of compliance with environmental law by contractors and sub-contractors. Techniques such as life-cycle costing, specification of sustainable production processes, and use of environmental award criteria are available to help contracting authorities identify environmentally preferable bids.
The United States Section 508 and European Commission standard EN 301 549 require public procurement to promote accessibility. This means buying products and technology that have accessibility features built in to promote access for the around 1 billion people worldwide who have disabilities.
Alternative competitive bidding procedures
This section possibly contains original research. (October 2016)
There are several alternatives to traditional competitive bid tendering that are available in formal procurement. One approach that has gained increasing momentum in the construction industry and among developing economies is the selection in planning (SIP) process, which enables project developers and equipment purchasers to make significant changes to their requirements with relative ease. The SIP process also enables vendors and contractors to respond with greater accuracy and competitiveness as a result of the generally longer lead times they are afforded. University of Tennessee research shows that Request for Solution and Request for association (also known as request for partner or request for partnership) methods are also gaining traction as viable alternatives and more collaborative methods for selecting strategic suppliers – especially for outsourcing.
Procurement fraud can be defined as dishonestly obtaining an advantage, avoiding an obligation or causing a loss to public property or various means during procurement process by public servants, contractors or any other person involved in the procurement. An example is a kickback, whereby a dishonest agent of the supplier pays a dishonest agent of the purchaser to select the supplier's bid, often at an inflated price. Other frauds in procurement include:
- Collusion among bidders to reduce competition.
- Providing bidders with advance "inside" information.
- Submission of false or inflated invoices for services and products that are not delivered or work that is never done. "Shadow vendors", shell companies that are set up and used for billing, may be used in such schemes.
- Intentional substitution of substandard materials without the customer's agreement.
- Use of "sole source" contracts without proper justification.
- Use of prequalification standards in specifications to unnecessarily exclude otherwise qualified contractors.
- Dividing requirements to qualify for small-purchase procedures to avoid scrutiny for contract review procedures of larger purchases.
Integrity Pacts are one tool to prevent fraud and other irregular practices in procurement projects. The G20 has recommended their use in their 2019 Compendium of Good Practices for Promoting Integrity and Transparency in Infrastructure Development. A major European Commission pilot project entitled Integrity Pacts - Civil Control Mechanism for Safeguarding EU Funds is seeking to evaluate the effectiveness of Integrity Pacts in reducing corruption in 17 EU-funded projects in 11 Member States with a total value of over EUR 920 million.
- Agreement on Government Procurement
- Audit software in governmental procurement
- Bidder conferences
- Buyer leverage
- Call for bids
- Contract management
- Global sourcing
- Group purchasing organization
- National Association of State Procurement Officials
- Procurement outsourcing
- Performance Based Contracting
- Preferred Partnership
- Purchase order
- Purchasing Managers' Index
- Rate contract
- Reverse auction
- Low-carbon tenders
- Selection in planning
- Spend analysis
- Strategic sourcing
- Tender notification
- Total cost of acquisition
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|Look up procurement in Wiktionary, the free dictionary.|
- Federal Procurement Data System (United States)
- Green public procurement (European Commission)
- Systems Engineering Fundamentals. Defense Acquisition University Press, 2001
- Disability:INclusive Workplaces – Accessible Technology Procurement Toolkit